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FEDERAL DEPOSIT INSURANCE CORPORATION

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ADVISORY COMMITTEE ON COMMUNITY BANKING

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MEETING

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THURSDAY,

OCTOBER 5, 2023

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The Advisory Committee convened at 9:00 

a.m. in the Federal Deposit Insurance Corporation 

Board Room at 550 17th Street NW, Washington, 

D.C., Martin J. Gruenberg, Chairman, presiding.

PRESENT:

THOMAS BATES, President and CEO, Legends Bank 

 Clarksville, Tennessee

MIKE BOCK, CEO, Dairy State Bank, Rice Lake, 

 Wisconsin

TROY CAMPBELL, President and CEO, Altoona First 

 Savings Bank, Altoona, Pennsylvania

ANITA DRENTLAW, President and CEO, New Market 

 Bank, New Market, Minnesota

SUSAN HORTON, President, CEO and Chairman of the 

 Board, Wheatland Bank, Spokane, Washington

HAROLD HORVAT, President, CEO and Chairman of the 

 Board, Centreville Bank, West Warwick, Rhode 

 Island

WARREN HUANG, General Counsel, Amerasia Bank, 

 Flushing, New York
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ROBERT JAMES II, Executive Vice President, Carver

State Bank, Savannah, Georgia

CINDY KITNER, President and CEO, Jefferson 

 Security Bank, Shepherdstown, West Virginia

TREY MAUST, Executive Chairman, Lewis & Clark 

 Bank, Oregon City, Oregon

DOMINIK MJARTAN, President and CEO, OPTUS Bank, 

 Columbia, South Carolina

ARLEN OSTERBUHR, CEO and Chairman of the Board, 

 Minden Exchange Bank and Trust Company, Minden, 

 Nebraska

APRIL PERRY, CEO and Chairman of the Board, 

 Kentucky Farmers Bank Corporation, Ashland, 

 Kentucky

SHANE PILARSKI, President and CEO, Alliance Bank, 

 Francesville, Indiana

KIM REIGELSBERGER, President, Preferred Bank, 

 Rothville, Missouri

TROY RICHARDS, President and COO, Guaranty Bank 

& Trust Company, Delhi, Louisiana

LILLOUS ANN SHOEMAKER, President, Magnolia State 

 Bank, Bay Springs, Mississippi

ALSO PRESENT:

MARTIN J. GRUENBERG, Chairman, Federal Deposit 

 Insurance Corporation

TRAVIS HILL, Vice Chairman, Federal Deposit 

 Insurance Corporation
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C-O-N-T-E-N-T-S

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

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

2022 Financial Institution Diversity 

Self-Assessments............................ 101

Update from the Minority Depository 

Institutions Subcommittee ................... 121

Supervision and Policy Updates .............. 126

Closing Remarks............................. 237
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P-R-O-C-E-E-D-I-N-G-S

(9:07 a.m.)

CHAIRMAN GRUENBERG: It looks like 

everybody's here and ready to go, so I promise to 

be brief. I think we've got an excellent agenda 

planned for today. I think it will be an 

interesting meeting. And candidly, I think we 

particularly welcome your feedback on what seems 

to us to be a pretty uncertain and cloudy economic 

outlook. And any line of sight you can provide 

us in terms of what you're seeing in your -- in 

your communities, I think would be of great 

interest. Our folks are about to lay out our 

take on the state of the financial system. You 

know, if you've read our quarterly banking 

profiles, you know that we've indicated that the 

banking industry is proven quite resilient over 

a pretty challenging period. It remains well 

capitalized with good credit quality. Liquidity 

has stabilized and lending has held out. So,

there's a lot of positives to say about the 
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banking industry right now. 

It's also fair to say that we have an 

uncertain economic outlook. We have a high 

interest rate environment, which I think you're 

about to tell us is placing some pressures on 

your net interest margins and earnings. And also 

creates uncertainty in terms of the performance 

of the economy, which would have a lot of 

relevance to us going forward with underlying 

vulnerabilities that we've been talking about in 

the QBP, including unrealized losses, on assets 

held on the balance sheets of banks, 

concentrations of uninsured deposits, and 

concentrations of commercial real estate. 

So, you put all of that together and 

that raises a lot of questions in regard to what 

we may be looking at over the next three to six 

to twelve months. And I think we'd very much 

welcome your thoughts in terms of what you're 

seeing and how you're viewing the outlook. But 

if I may, let me ask our Vice Chairman, Travis 
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Hill, if he might want to say a few words.

VICE CHAIRMAN HILL: I'll just second 

the Chairman's remarks. Look forward to hearing 

from everyone, hearing feedback about what you're 

seeing in your communities. And thanks everyone 

for being here and look forward to the 

discussion.

CHAIRMAN GRUENBERG: Thank you. And 

now I'll turn the program over to Nikita Pearson,

who's our Deputy for External Affairs and 

Director of our Office of Minority and Women 

Inclusion who will serve as the moderator for 

today. 

MS. PEARSON: Thank you very much, 

Chairman. Before I get started, something I 

would like to do today, we invited students as a 

part of our Diversity Equity Inclusion Strategic 

Plan. Part of our plan includes a section called 

Community and our work here includes inviting 

individuals from minority-serving institutions,

like Hispanic-serving institutions and 
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historically Black colleges and universities, to 

expose them to and invite them to financial 

services and including them into examining 

opportunities in banking careers, including 

regulatory careers. 

So, we have a special guest with us 

today. Her name is Cassia Rodrigues. She's a 

student with the University of Maryland. Cassia? 

Yeah. And so, we also invited students from 

Morgan State University, but you probably saw on 

the news, unfortunately, those students were 

unable to attend. There was a mass shooting at 

Morgan State this week. And we keep them in our

thoughts and prayers. But one of the things that 

FDIC, as a part of our plan, is to make sure that 

we help bridge the gap with minority-serving 

institutions in the financial services industry. 

Now moving on with our program, we 

have today, some colleagues of ours to talk about 

the banking conditions. We have Camille Schmidt 

from our Division of Risk Management Supervision, 
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as well as Krishna Patel and Benjamin -- I'm 

sorry, Benjamin Tikvina from our Division of 

Insurance and Research who will present on 

banking conditions. 

MS. PATEL: Great, thank you. Thank 

you for the kind introduction and it's a pleasure 

to be here. I'm very excited to hear your 

thoughts on conditions in your banks. Let's 

begin the presentation. Do we have a way to --

okay, thank you.

CHAIRMAN GRUENBERG: If you want to 

pull the mic a little closer to you. 

MS. PATEL: Yes, thank you. So let 

me give a brief overview of what we'll talk about. 

We'll keep our remarks brief. We want to hear -

- We want to spend most of the time hearing from 

you. First, I'll talk -- I'll spend a few minutes 

talking about economic conditions more broadly 

just so you'll get a sense for how it might relate 

to banking conditions. And really, we want to 

spend most of our time talking about funding and 
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interest rate risk, as well as credit risk to the 

extent that, that might be challenging in today's 

environment.

So, we will have sort of -- Okay, so 

before I start talking about economic conditions, 

we will spend most of our time talking about 

funding risks first and then credit risks. We'll 

have a short break in between. And you know, Ben 

will talk about funding risks, Camille will talk 

about credit risks. 

So, economic conditions have been 

fairly resilient this year. We've been talking 

about a recession, a slow down for quite some 

time. But despite those concerns, the economy 

has held up quite remarkably. Growth was pretty 

steady this year and is expected to even 

strengthen this quarter. We had resilience in 

business investment spending, as well as 

resilience in the labor market that's helped 

consumer spending all along.

But you know, as you know, interest 
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rates have risen over the past year. We've had 

historically high inflation and so these factors 

weigh on the economy. They continue to weigh on 

the economy. And most forecasters expect a 

recession, maybe not an outright decline in GDP, 

but sort of a slow, you know, zero -- near zero 

growth in the coming quarters. 

Of course, economic conditions have 

varied across the country. So, we have here on 

the map that I've shown here, the dark blue states 

represent states with relatively stronger GDP 

growth, the lighter blue states represent ones 

that were slower. But I think the key thing here 

to see is that all states grew at least earlier 

this year, but you know, credit conditions may 

vary as economic conditions vary in those local 

geographies.

On the next slide, I want to focus on 

sort of interest rate developments. So, this --

this has been a key factor influencing economic 

conditions. You know, interest rates began to 
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rise sharply in 2022 and they continued to rise. 

Most recently, the Federal Reserve has kind of 

reduced the pace of increases. In the most recent 

meeting, there was even a pause. But the general 

idea and expectation is for interest rates to 

continue to increase until next year and 

potentially even maybe start declining towards 

the end. But with recent inflation numbers 

remaining relatively, you know, still higher than 

the Fed’s target, it's hard to know when the Fed

will start to reduce rates. 

So, the short-term interest rates have 

increased dramatically. The longer-term interest 

rates have also increased. So, in the left-hand 

-- or the right-hand side, it shows the yield 

curve that shows interest rates across different 

maturities. You know, both the short and the 

long end have increased, but the short end has 

risen faster. So, the yield curve remains 

inverted. So, this -- you know, this has posed 

challenging conditions not only for the economy 
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as it slowed borrowing and made debt more 

expensive for consumers and businesses. But it's 

also posed various challenges for the banks as 

well. 

So let me pass it over to Ben to speak 

a little bit more about some of those challenges. 

MR. TIKVINA: Sure. Good morning, 

everybody. Thank you, Krishna. So, over the 

next few slides -- we can move onto the next slide 

-- I will talk a little bit on the funding and 

interest rate risks. You'll notice that the 

chart shows net interest margin spanning over the 

past 15 years. The black dotted lines represent 

the industry, followed by the five asset size 

groups that we report in the quarterly banking 

profile.

So, for the second consecutive 

quarter, we had a decline in net interest margin 

for the banking industry, which is a reflection 

of higher funding costs. More particularly, cost 

of borrowings and other non-deposit liabilities 
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as they're rising at a faster rate than the yields 

and earning assets. Looking at the various size 

groups, you'll notice that, that interest margin 

either remained flat or declined from the 

previous quarter for all, except for the 

institutions that are under $100 million.

 Community banks continue to report 

higher net interest margins relative to the 

banking industry. But at the same time, they had 

a lower NIM, or net interest margin, both to the 

prior quarter. And this is mainly due to the 

increase in cost deposits outpacing the increase 

in the yield on loans.

Moving onto the next chart where we 

look at liquid assets and a whole set of funds as 

a percent of total assets. During the pandemic 

as bank deposit and liquid assets swelled, the 

liquid asset ratio rose and the reliance on 

wholesale deposits declined. However, liquid 

assets have been decreasing over the past 

multiple quarters as cash balances, security 
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portfolios have declined to more normalized 

levels. 

Regarding the Q2, we are seeing a 

decline in liquid assets. And it's mostly due to

pledged securities, which was from prudent 

liquidity contingency planning and also declining 

cash and securities. Over the past several 

quarters, we have seen an increase or more of a 

reliance on wholesale funds. And more 

particularly, that has been led by broker 

deposits and FHLB borrowings.

 Moving onto the next slide. So, on 

this slide and on the gold bar, as you'll notice 

that the non-deposit liabilities over the past 

several quarters leading up to the prior quarter 

have been increasing where they have actually 

declined for Q2. And that's mostly been due to 

lower FHLB borrowings. However, for the past 

fifth consecutive quarter, we have seen a decline 

in deposits. The decline in deposits for this 

quarter indicated by the blue line is actually 
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lower than what we had in the prior quarter in 

Q1. So, we are seeing continuation of the 

trend where customers are seeking higher yield -

- higher yield. So, in other words, lower earning 

accounts such as transaction, market deposits, 

owner-saving accounts declined during the quarter 

while time deposits increased. As well, we did 

see a decline in uninsured deposits and an 

increase in insured deposits. 

So that leads me to the next slide. 

This is more of a slide where we kind of tee up 

some of the potential discussions for today or 

for the first part of this presentation. So,

I've brought up a lot of interesting topics that 

touch on the funding and interest rate risk. 

We've devoted plenty of time for the discussion. 

And I would like to hear how your bank is being 

affected by the rising interest rate environment. 

Also, in order to retain deposits and be 

competitive, how fast have you raised your 

deposit rates? As well, I would like to hear 
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have you seen any significant shift in deposit 

flows and what concerns you have about funding 

conditions. 

So that being said, I would like to 

turn -- turn it over to you guys and perhaps maybe 

you can provide some talking points for us. 

MEMBER REIGELSBERGER: I don't mind 

going first. I think what we have seen, think 

about the rising interest rates. We were in a 

very good liquidity position before rates started 

rising to where our loans deposit ratio was 

rather low. Now our goal was to raise -- you 

know, to increase our loan-to-deposit ratio, so 

we did have excess liquidity going into this. 

And I feel like maybe that was a God send after 

all. 

But some of our competition has had to 

raise deposit rates. And guess what that does 

for us who really don't need the deposits. But 

we were really hesitant to try to play that 

competitive rate game, I guess is the best way to 
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put it. So, we thought well, maybe we just need 

to monitor the dollars that moves out. So, I 

call it -- this is my own terms -- excess deposits 

that our customers have. Maybe not their 

operating count or not their personal account, 

but what I want to call excess money. 

How much of that is going out? So, I 

started tracking that, whether it be for a 

$25,000 CD to our competition, maybe some of it 

went out to Edward Jones, to Schwab. And those 

two national firms is where I saw 95 percent of 

the money going. Now I don't think we could have 

competed with their rates anyway. We did have 

some move out to just local banks. But it was 

really a small amount. But those two and then 

buying treasuries. We saw several of our 

customers buying treasuries. 

So that has affected, but we feel like 

we're still in a good position because, you know, 

obviously if it's what I want to call these excess 

funds, if we raised our rates -- We did raise 
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them a little bit, but not much, which on the 

flip side has allowed us to keep our loan rates 

not extremely high. And so, as we talk to our 

customers selling that point of it, even if 

they're the depositor, they seem to understand 

oh, well, that you're not trying to gouge anybody 

by, you know, raising those rates so high on loans 

because you're not paying a whole lot more than 

what we had been previously. 

So that's kind of worked for us. I 

know with COVID, we saw deposits increase 25 

percent. We don't really want to be there with 

that excess liquidity because we want to invest 

it into loans. And then if we need it, you can 

always raise our rates and get some of that money 

back. So, we kind of feel like we're maybe in a 

good spot right now. We're still monitoring any 

monies that have gone out, but that has really 

slowed off. Most of it went out in the first 

quarter, a little bit in the second quarter. And 

so far in the third quarter, it's been almost 
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dropped to nothing.

So, we've only seen our deposit 

accounts slide back about 3 to 4 percent. Nothing 

compared to 20 percent that we got in 2020. But 

we feel like at this point, we're in a pretty 

good position. We do have some of our competitors 

that have basically -- lending is nil. They've 

just stopped it. They're trying to hold the 

deposits they can, but they're loan rates are a 

lot higher than ours now too. So, we're not in 

that position, but we have seen our competition 

do that. And I'm surprised it hadn't brought 

that many more loans our direction, but you know, 

time -- you know, time will tell on that. So 

that's kind of what's going on in Missouri.

MEMBER PILARSKI: I'll just kind of 

piggyback off that. I know you're from Missouri, 

correct, so Shane Pilarksi, I'm from Northwest 

Indiana. And really our scenarios are almost 

identical. Just so for context, I guess, for 

Missouri and Indiana, my comments would -- my 
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comments would really just echo hers. We have 

experienced loan growth though. Our loan-todeposit ratio is at 63 percent right now, so we 

still even have room for more loan growth.

MEMBER HORVAT: I'm Hal Horvat. I'm 

with Centreville Bank in Rhode Island and our 

market is pretty much New England. We have a 

very different story. Our loan-to-deposit ratio 

is about 100 percent right now and it's the first 

time it's been up that high historically. 

We've been in a growth mode, so we had 

to increase deposits. We have done that, but 

we've certainly had to pay for it. And it's the 

inverted yield curve that's really impacted us 

significantly because most of our loans are on a 

five-year basis and our deposits are obviously on 

a short-term basis. And it's really -- it's 

really affected our net interest margin. 

What we're seeing is most banks in New 

England, most of our customers are -- our 

competitors are in the same boat, over 100 
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percent loan-to-deposit. So, the demand is still 

there, particularly for commercial real estate. 

We haven't seen any softening, but a lot of banks 

are out of the market. They're just not lending, 

even though they're not publically saying it, 

it's just the reality is it's not happening. 

We on the other hand were strong 

because we have good liquidity and good capital, 

but we're very selective. If we can't get 

deposits with loans, we're not doing it. If we 

can't get the proper rate, we're not doing it. 

So, it's a very interesting time because we have 

great opportunities to pick up some really good 

customers, but we're passing on a lot as well 

because of the environment. 

MEMBER OSTERBUHR: Good morning. I'm 

Arlen Osterbuhr. I'm with the Midland States 

Bank in Midland, Nebraska. Pretty much the same 

as what the ladies have said here. However, the 

important thing is to maintain our margins 

through the time when we were paying higher 
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interest rates and everyone else was paying a 

little bit less. We were keeping and maintaining 

the good customers in our area -- in our market

area and picking up good customers as well.

Right now, our liquidity and capital 

are very strong. Our loan-to-deposit ratio for 

the first part of the year is about 40 percent. 

It's now up to about 65 to 70. And generally,

through the years, we've maintained around 80 

percent loan deposit ratio -- 80 to 85. And so,

this has been a change for us running a low loanto-deposit ratio. However, having a strong 

capital liquidities position has certainly helped 

us along the way.

Competitive deposits, we have a lot of 

financial institutions in the neighboring 

communities that are within 50 miles from our 

place and we see a lot of competition. In one 

community, there's 35 banks and they are way 

ahead of us in offering deposit rates that are 

special and also their normal rates. And it's 
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all over the board. They're either paying really 

low rates for normal CD, three-month, six--month, 

12-month terms. But we've all jumped into the 

bandwagon with offering specials. And so odd 

number of months, seven months, 11 months, 15 

months, 18 months, and seeing around 5.5 percent 

in those areas, which is a wide span from the 

three-month and six-month.

They've become very competitive. 

However, customers who have been generally very 

loyal have been shopping rates. And as mentioned 

before, Edward Jones and other investment 

companies have been out there and they've taken 

some of the deposits away as well. But in order 

to maintain the margins that we have, I don't --

I don't see a real emergency in losing some of 

those deposits. My concern here is the schools 

that our community banks are involved with all 

the time in helping and providing funding to the 

school to provide quality education to our young 

people in our communities are also the ones out 
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there looking at shopping rates. And for that, 

that's a concern when your local funds are going 

out of town for those reasons.

Hospitals the same way. Although I 

see hospitals and nursing homes struggling with 

the expensive agency staffing and having to 

maintain. A lot of the money in the nursing homes 

and the hospitals right now are from stimulus 

money and/or assistance from the Government, 

which is fine, and I'd like to see them keep their 

doors open. But we've seen a lot of those close 

in Nebraska as well.

So, our competition generally is 

within the banking system and other investors. 

And then the fact that our customers are shopping 

rates and becoming very knowledgeable and 

demanding on what they'd like to see on their 

deposit accounts. So, we treat the public funds 

and the tax money for those taxing entities a 

little differently. We do try and keep those 

funds in our -- in our community because they are 
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tax money.

Current funding conditions, we have 

had a need for borrowing from the Federal Home 

Loan Bank and others through this year; however, 

that's an agricultural situation. It's cyclical 

at this time of year when it's harvest time, we're 

generally at a point where we do borrow money and 

we do have a lot of funds coming into the bank. 

And it's all based on marketing through the 

agricultural sector. And so, we'll see more 

money come in as the end of year and tax season 

approaches. The situation, the business of 

farming and providing sales and revenue comes in 

either at the first of the year or after the first 

of the year. Thank you.

MEMBER HUANG: So, our situation in -

- I'm Warren, Amerasia Bank, is actually very 

similar to Harold and things happening in Rhode 

Island. All the banks in our area, the liquidity 

is strong, but our loan-to-deposit ratios are all 

at 100 percent or even higher. We broke the 100 
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percent mark maybe two months ago. And we've 

been kind of riding that 100 percent right around 

there. 

Most of it -- A lot of it is due to 

we've probably had 12 to 14 percent deposit 

runoff in the last 12 months. A lot of it was we 

didn't want to match our competitors that were 

offering rates and they were climbing really 

fast, really high over the last, I would say 12-

month period. We've increased our CD rates. 

They're in the high 4s at this point, but some 

are offering 5.5. We've even seen 6 for preferred 

customers at other banks. 

And so, it's been a little bit of a 

drag on the loan side. So, we've actually seen 

that -- you know, we've adjusted our loan 

products accordingly where we are doing longer 

fixed terms to ride out the short term and try to 

keep the customer fixed once the rates start 

coming down a little bit. But on the other side, 

we have customers that we did loans with two or 
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three years ago and now they're adjustable rates 

are going up to 9, 10 percent and they're coming 

back for modifications. So, we also have to 

factor that in.

The local deposit rates are actually 

higher now than Federal Home Loan Bank’s five 

year. So, for us, we're trying to play that 

margin game a little bit by taking some of the 

Federal Home Loan Bank’s. So, we would be one of 

those banks with the goal that we've talked 

about. So right now, everybody is just trying to 

see what's the best way to get those -- the 

liabilities -- to try to match the long term and 

short term and the margins right there. 

MEMBER RICHARDS: Good morning. Troy 

Richards, Guarantee Bank in Louisiana. And as 

far as how are we being affected by interest 

rates, you know, there's positives and there's 

negatives when it comes to rising interest rates 

or rate changes in general. The positive aspect 

is that we're very asset sensitive, so of course 
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when rates go up, we make more money, so that's 

always a good thing. But while the re-pricing of 

our loan portfolio would yield higher rates, the 

problem can be seen in a potential inability of 

some of our borrowers to be able to service their 

debt when their loan is due and come up for 

renewal. So that's a concern. 

Thankfully for us, a good percentage 

of our commercial loan activity is in one to four 

family residential category. So much of that 

increased cost that will be borne by the borrower 

is going to be passed onto their rental 

customers. However, there's still a 

lot of uncertainty about the ultimate outcome of 

a repriced loan portfolio. And we haven't seen 

the full effect of that yet. If we knew how high 

rates will get, how long rates will stay there, 

it would be helpful, but we don't know that. 

CHAIRMAN GRUENBERG: I agree with 

that.

MEMBER RICHARDS: It would help us in 
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knowing how to price our assets and our 

liabilities to mitigate interest rate risk. Of 

course, nobody knows for certain. We have raised 

rates, I wouldn't say it's been fast. It's been 

to be able to keep up with competition. We don't 

want to fall behind. We have kept our interest 

rate checking, our money market, and our savings 

rates relatively low as compared with CD rates 

because the CD rates is where all the action is 

right now. 

Have we seen a shift in deposit flows? 

We've got about $320 million in deposits to date. 

We had about $320 million in deposits a year ago. 

What we've seen is a $15 million shift from noninterest bearing into interest bearing. So 

that's where we've seen shift. 

What concerns do we have? There's a 

lot of uncertainty about how much deposit bases 

are going to shrink. Though ours has remained 

stable, between inflation, the Fed shrinking its 

balance sheet, the discontinuing of stimulus 
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payments. We don't know how much shrinkage is 

yet to come. 

Another of our concerns is that -- is 

the regulator expectation regarding all of this 

and our approach to all of this. What is going 

to be the regulatory expectation regarding 

uninsured deposits, contingency funding, core 

versus non-core, which I think needs to be 

redefined. I don't think core versus non-core is 

even meaningful in today's world. The definition 

of that is old. It needs to be updated. It's 

more of uninsured versus insured or stable versus 

nonstable. But there's no reason to suggest that 

a $250 million deposit is any less or more secure 

than any other deposit because of technology and 

what we've seen with SVB and Signature and all 

that.

And so, what's going to be the 

regulatory expectation? It's one thing to know 

what's going on in our shops, in our own 

communities. It's another to try to figure out 
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what you all are going to expect us to be able to 

show or to prove or to measure. And you know, 

one of the concerns that we have is you know, the 

FIL, that I think came out about uninsured 

deposits and how we're supposed to reduce 

uninsured deposits by our public funds. 

Our public fund deposits are insured, 

not by FDIC, but they're collateralized. And so 

why do we need to report those as uninsured? You 

all are going to want us to look at can we cover 

uninsured deposits with cash and our lines? 

Well, if we have to reduce -- we have to add 

public funds to our uninsured number, well on the 

other side, our line at the Federal Home Loan 

Bank is reduced by the amount of the letter of 

credit that we have to cover those uninsured 

deposits. We're getting kind of double whammied 

with that. So that needs to be looked at. 

So those are the concerns that we have 

is what are the expectations? We can manage our 

bank. We can manage what's going on with interest 
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rate risk, but what are the regulatory 

expectations? 

MEMBER HORTON: Thank you. Thanks for 

those comments. I'm Sue Horton out of Spokane, 

Washington, Eastern Washington, I run Wheatland 

Bank. We're about $780 million in total assets. 

And just to give you some perspective on that, we 

were a big PPP lender like I think most of you 

were. So, we went into this environment with 

about a $250 million investment portfolio. It's 

about $230 million now, generating about 1.5 

percent in yield. So, as you can imagine, that 

impacts the margin. 

Fortunately, we have an Ag portfolio 

that's tied to Prime that's yielding about 9.25 

percent and that's about a third. So, we're 

fortunate that we have that. And so actually our 

debt interest margin has expanded, not 

contracted, but just by a slight amount. But we 

have decided rather than worrying so much about 

the loan-to-deposit ratio, with an investment 
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portfolio like that, that you really don't want 

to sell and take the losses, it seems like the 

loan-to-deposit ratio isn't as relative as it 

used to be because we have this huge investment 

portfolio. 

So, we are using the Fed line and the 

FHLB line so that we can continue to lend and not 

have to liquidate investments at material losses. 

Our duration is less than three years on those 

investments. We know exactly where those cash 

flows are coming back. $68 million this year, 

$84 million next year. And we know dollar per 

dollar how those advances will be repaid. 

So as of today, we've borrowed about 

$100 million. Our loan growth is 19 percent year 

over year. Our deposit loss year over year is 

about 7 percent. Part of that though, I would 

say is still related to the Ag portfolio. It 

just depends on when they sell crops, if they're 

doing it in December or they're carrying it over 

to January. So, you can't always go year to year. 
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But we were a little bit slow to start matching 

rates or exception pricing. 

I think like the rest of us, we 

thought hey, why are we competing for a deposit 

all the sudden for rate. And so, we're a little 

delayed on that. And we've used more exception 

pricing. I mean we make sure our rate prices on 

deposits are in the hunt, but we sure can't 

compete with the 5.5 percent CD special, nor do 

we want to. So, we're relying on exception 

pricing. 

We have just moved $100 million of our 

investment portfolio into held to maturity. We 

discussed that with the FDIC to make sure we 

understood the Call Report, the capital 

treatment. And really that was just to 

discontinue so much volatility in our GAAP

capital calculation because we have an unrealized 

AOCI of about $20 million. But again, it's a 

short-term issue. 

So, I would say, you know, interest 
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rates, yeah, they've hurt all of us. I feel we're 

a little bit fortunate having that Ag portfolio, 

but we are getting some pricing competitive 

pressures on that. Other institutions trying to 

put floors in and things like that. So definitely 

saw an increase in cost of funds from 0.03 percent 

to, you know, closer to 1 percent. And then when 

you layer in the borrowing cost, it's more like 

1.35. 

Normally 50 percent of our deposits 

are non-interest bearing. There's still about 45 

or 46 percent non-interest bearing. I don't feel 

we've lost any relationships, but like the other 

comments around the table, we saw it going to 

Edward Jones, you know, U.S. Treasuries, and a 

lot of the brokerage houses in particular. 

We also have a lot of credit unions in 

our environment. And I think credit unions are 

having more of a liquidity issue is what it feels 

like to us. We've heard that, you know, they're 

not even making new loans until certain loans 
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repay. So, we're not seeing quite as much 

competition as we were from credit unions on the 

loan side. We're seeing more of it on the deposit 

side, trying to generate more deposits. So 

anyway, that's what we're seeing in Eastern 

Washington. Thank you. 

MEMBER KITNER: Good morning. I'm 

Cindy Kitner with Jefferson Security Bank. We're 

located in the eastern panhandle of West 

Virginia. As you may recall, we've talked before 

that the bank is 154 years old, certainly in an 

older community, but yet, we're experiencing a 

lot of growth. And that's very common for the 

eastern panhandle.

The panhandle primarily comprises 

three counties. And again, if you're familiar at 

all, there's what looks like a little bit of a 

thumb that sticks out in that area. That gives 

us a close proximity to both the D.C. market and 

also Baltimore. So, we've seen and continue to 

see continued growth.
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For us, we had a lower loan-to-deposit

ratio. I apologize, I'm trying to speak to 

everyone. We did have a lower loan-to-deposit

ratio. And for us, that was in the seventies. 

We did see that come up, but here recently, it 

has come down. And surprisingly what we've seen 

is a recent increase in deposits. So, our 

deposits really stayed stable over the first six 

months of this year. And with some seasonality 

and in particular, with some public deposits and 

other activity, we've seen some recent increases.

In addition to that, with the growth 

in our market, we continue to open up a good 

number of new accounts. But we have seen some 

spending within our current customer base, which 

is reducing those overall balances. So, we've 

only seen a slight shift. We have seen a shift 

from our non-interest deposits to our interest 

bearing. I would agree with a lot of 

the comments from this morning. CDs are 

certainly, you know, the area that everyone has 
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interest in. There's a lot of competition, both 

with our local competitors and then with the 

larger ones as we've discussed. 

A couple of other things that I would 

indicate is we continue to see a lot of growth in 

residential housing. So, I mentioned before that 

we have a lot of manufacturing opportunities in 

our area. And those continue to be enhanced with 

announcements of even more coming. So, with 

that, there seems to continue to be somewhat of 

a housing shortage. We are seeing the larger 

priced houses stay on the market longer, but we 

continue to have really strong rental markets and 

a high demand for those lower cost housing. 

So, with that, similar to some of the 

comments from before with the investment 

portfolio. We did have a larger investment 

portfolio going into this economic cycle. And we 

continue to have concern about the AOCI 

adjustments. We also have a percentage of our 

portfolio that is in HTM, which did help to 
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stabilize. But again, with where we all saw the 

10-year go here recently, we know that those 

impacts are going to continue.

So, what we're trying to really focus 

on is we want to maintain those relationships and 

it is -- with all the competition and with this, 

let's just say interesting economic cycle. We 

have been more intentional with the loans that 

seem to fit into our portfolio. We've had a 

tremendous amount of demand, but we want to be 

selective in making sure that we're serving the 

community adequately. And also making sure that 

the pricing makes sense for us versus what our 

competitors may be doing. Thank you.

MEMBER BATES: I'm Thomas Bates, 

Legends Bank in Clarksville, Tennessee. We're 

just outside of the Nashville area and our market 

has remained surprisingly strong. I've actually 

seen a lot of investment from out of state and 

into the national market right now, which creates 

issues for us. We stayed fairly heavy in funds 
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up until about February of this year. What I 

considered to be a lot of excess-fed funds sold. 

And we were actually moving deposits off the 

bank, using ICS one-way sales here in the first 

quarter. But quickly by the end of the first 

quarter, that changed. So, we're in a more, what 

I would call normal market now as far as keeping, 

you know, a smaller amount of fed funds sold. 

Our loan-to-deposit ratio had dipped 

to about 62 percent during the peak of the deposit 

growth. We've gotten it back to about 75, which 

is, you know, getting close to where we like to 

be in the 80 to 85. We have seen decent loan 

growth this year. We have shrunk deposits. Half 

of the deposits were by design. We basically 

asked them to leave. And you know, we're seeing 

moderate pressure. I mean obviously we're seeing 

pressure on the NIM, but we're not seeing as much 

pressure lately on deposit rates as they were 

earlier. In probably late second quarter, we saw 

a peak in deposit pressure and things seemed to 
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have eased off a little bit. 

We are seeing banks apparently cut 

back because we get looks at deals that we 

wouldn't normally see. Larger deals than we 

would normally want to do. So, we realize that 

the larger banks in the Nashville area have 

started pulling back on real estate deals. So,

you know, that gives us a lot more looks, but not 

much that we would be interested in. I wouldn't 

say we've tightened our lending standards. I 

would just say we don't deviate from them pretty 

much at all anymore. And so that has helped keep 

the loan growth in check.

But overall, I think the economy 

housing is still strong. Larger homes are not 

moving as quick, but small to mid-range homes are 

still moving very quickly in our area even with 

this uptick in mortgage rates. We have seen a 

lot of shakeup in the mortgage market. One of 

our largest banks in our town completely shut 

down their mortgage groups. That was over a 100-
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person layoff. And we've seen a couple of others 

do some shakeups. So that's probably the area 

that I think we're going to see the most 

disruption in our part of the world.

MEMBER BOCK: Mike Bock from Dairy 

State Bank in Rice Lake, Wisconsin. Camille, you 

and I have had some conversations over the years 

surrounding public funds. And Wisconsin might 

have a unique situation, I'm not sure, but the 

State of Wisconsin itself has an originated 

investment fund the municipalities can all use to 

put their short-term dollars into. 

The historic investment philosophy 

has been very, very short. If anybody's been 

watching the short treasury yield curve lately, 

those prices have been escalating very rapidly. 

And municipalities being the good financial 

managers they are, are watching that. And we 

have had a number of our municipal deposit 

dollars transfer out of the bank and head to that 

state fund. We still have more, we collateralize 
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and we try to stay in a reasonable realm pricing 

wise, but if you know what a six-month treasury 

bill is paying today, you can pretty much tell 

what the state pool rate is paying at this point 

in time.

But our history in the smaller 

communities is we've maintained largely the 

townships, the counties, the school districts, 

those types. We've always been very high in 

public deposits in our bank, so this has been a 

big pressure point on our funding costs because, 

you know, we are low loan deposit. We have the 

opportunity to let those run off. But as people 

know, when you're talking about municipal 

deposits, a runoff doesn't mean $200,000, it 

means multiple millions generally when that 

starts going. So, it's not a practice you want 

to get into. I'm just saying well, there's 

another $5 million that's going to go out the 

door and you just kind of, you burn your powder 

pretty fast.
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The other thing that we're noticing, 

while you hear interest rates are going up, real 

estate is being pressured. We are in a part of 

the state that there's a lot of lake properties 

and second homes. And while there's not as much 

residential lending as we saw multiple years ago, 

there is still lake property that's changing 

hands. And with the somewhat recent changes in 

the federal agency's pricing for second home 

mortgages, I don't know if anybody's following 

that, but it's become extremely expensive for a 

borrower to get a second home mortgage. And those 

lake properties qualify for most of those 

programs. They are opting not to go to the 

secondary market, not to go to the agency

programs, but are opting instead to keep their 

loans in house portfolio loans. 

With interest rates up, the fees that 

they have to pay, the costs that they absorb, 

they're just going to say we're going to park it 

in the bank for a while. We're going to let rates 
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come down and we'll refinance at a later date. 

Even with the higher fees with better rates, 

they're willing to do that. 

So, at a time when we would say your 

residential mortgage shouldn't be that active, we 

are having floods of applications, but we have 

enough applications that it's multiple millions 

of dollars of applications we're talking about on 

a weekly basis. And it's because people are 

opting out of the agency programs based on some 

of the changes and the pricing that took place 

largely in the second home mortgage scenario. 

So, interesting caveat there, but it's 

a little bit where we're at and a lot of these 

second homes are not owned by local people. We're 

about 100 miles from the Minneapolis/St. Paul 

market. These are second homes for those people. 

So compared to market pricing in the 

Minneapolis/St. Paul area to where we are, even 

though the locals think our homes have gotten 

somewhat expensive, it's still a pretty good deal 
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to those folks that buy a second home and be just 

a two-hour drive away to a lake property.

So, we're getting kind of mixed 

reviews, you know, not a lot of home activity, 

but it's the second homes. And they're very good 

applications, very good credit situations, so 

we're happy to do those. But we have municipal 

deposits in one hand and trying to balance 

keeping it in. We've got some residential stuff 

on the other hand that we're looking to keep 

funding. 

And amazingly, in spite of the prices, 

the numbers of buys and sells taking place 

between businesses continues to amaze me. I 

would have thought some of these business 

transactions would maybe slowed down with 

interest rates going up, that has not been the 

case. Good business operators that have been in 

the business for long term have been through 7 

and 8 percent interest rates before. They are 

not shocked by 8 percent interest rates. 
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When you talk to somebody that's 30 

years of age or less and you say 8 percent, they 

think you're from another planet. But if 

somebody's been around the block a few times and 

they're 60, 65 years old and they're looking at 

a business transaction and mention 8 percent 

number, they run their numbers at 8 percent. They 

don't panic at that. And if it's still 

economically worthwhile, we've got customers 

making business acquisitions right now, which in 

some respects is surprising because it's still 

happening. Not tons of it, but enough that it's 

meaningful for us as a community bank.

MEMBER MJARTAN: Good morning. So,

I'm Dominik Mjartan. I'm with OPTUS Bank. And 

I was reflecting just listening to the great 

feedback, which I've really appreciated and 

shared most of the experiences with groups in 

this room. And I think two years ago, we probably 

had spent maybe two minutes on liquidity and 

interest rate risk. And now we've been talking
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for a significant amount of time. And also two 

years ago, I couldn't tell you what our total 

deposits were or total assets were, but every 

morning, the first email I pull up is, you know, 

what is our liquidity position? 

And literally our Board and our 

management team monitors our liquidity daily. 

So, I can tell you as of this morning, we're at 

$483,151,402. Right? And we were about $400 

million at the beginning of the year. So, we 

took a little different position as we decided 

that this interest rate environment given the 

mission of the bank, to serve a high potential, 

underestimated communities would be a great 

chance to build new relationships. 

We see customers migrating. Customers 

are aware of the rates and we see them migrating 

and looking for opportunities. And our position 

has been let's build those relationships, even if 

it's a little more expensive for us. And it's 

paid dividends for us nicely.
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Also, our primary focus is on, of 

course, monitoring NIM just like everyone else 

does. But we want to see steady growth and core 

stable, nonvolatile interest income. And so, the 

decision we made is how do we make sure that we're 

generating those relationships? So, if the cost 

of that relationship on the deposit side is 4 

percent, we can then generate a very strong 

quality asset that's yielding 8 percent and we 

decided we're going to lean into that. And it's 

working for us. And really reflecting on the 

risk and the questions there. 

Clearly, it's painful when we've taken 

a longer view. So, we've all been through these 

cycles before. And so, what we're really focused 

on is relationship banking. And that's paid huge 

dividends for us. We negotiated most of the large 

deposits one on one. We have that relationship. 

Since the beginning of the year, like I 

mentioned, we've grown almost $90 million in 

assets on a $400 million base. And most of the 
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relationships we have with us stayed. We lost no 

relationships post SVB. 

We definitely had to pay up. So,

we're starting to see that interest expense 

really balloon up, but we're also starting see 

the yield and earning assets go up almost in sync 

with it. So that's very consistent with everyone 

in the room is discussing one concern we do have. 

And I really appreciate Troy mentioning it, is 

some of the definitions and treatment of 

reciprocal deposits or broker deposits of public 

funds, the core and non-core deposit definitions. 

I do think they're outdated in today's 

environment. 

Those definitions are certainly not 

matching the environment and the behavior of our 

customers that we've seen. And just thinking 

about how many of the SVB deposits would have 

been classified as core. And look what happened. 

Conversely, we have a lot of large depositors 

that have been with us for five years. Through 
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all the interest rate environments, they have not 

migrated out. They definitely ask for a rate 

bump, but before they move the money, they call

us. And I think that's the value of community 

bank relationship banking model.

MEMBER JAMES: I'll lean in. Robert 

James II, Carver State Bank in Savannah. But I 

also --

CHAIRMAN GRUENBERG: Robert, you might 

try to pull the mic a little closer to you. 

MEMBER JAMES: All right. I'll try to 

lean in as well. So, Carver State Bank in 

Savannah, Georgia. But we also are part of a 

multi-bank holding company. So, we're unique. 

We have Carver in Savannah, but we also have 

Alamerica Bank in Birmingham, Alabama. And the 

situations at those institutions are pretty 

different. 

So, at Carver in Savannah, we're 

running a very low loan-to-deposit ratio. We've 

really focused on increasing liquidity over the 
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last, you know, six months. And so, we're at 

about 60 percent loan-to-deposit ratio. Tier one 

capital is at 13 percent tier one capital. And 

we actually just added some capital too. That 

was as of the second quarter. And so now we're 

probably closer to 15 percent tier one. So, we 

were actually quite underleveraged.

At the bank in Alabama, we're at about 

85 percent loan-to-deposit ratio. And we -- I 

really think that Troy's comments about the 

definitions around core and brokered deposits, I 

think are very outdated and need to change. We 

are -- At the bank in Alabama, we're also quite 

underleveraged. We're over 20 percent tier 1 

capital. That's the institution that we just 

acquired. And so, we've recapitalized the bank. 

We really need to add deposits, but 

we're kind of in a -- in a catch 22. The bank 

serve a very low income, I like Dom's term, high 

potential, under-estimated community. I'm going 

to start using that, Dom. But the bottom line is 
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the case is not in that community. And so I'm 

not going to be able to go to the community and 

get the $20 million in deposits that I need in 

order to get that bank back profitable. 

And so, the capital that we've 

injected into the bank, every month, it's being 

eaten away. And frankly, we're going to need 

some help from our partners at FDIC in order to 

be able to go and do the reciprocal kind of 

deposits with the large corporations and larger 

investors who are really interested in our 

mission and interested in helping us to serve 

this, you know, high potential community, but 

feel like they need to have reciprocal deposit 

insurance in order to do that. And I don't 

-- I don't know if there's really another logical 

way for us to go and increase the size of that 

institution so that we can get it back profitable 

and get it back making money. We've changed the 

management team. We've done all the things that 

we've got to do and now we need some assistance. 
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I do think that we are -- we were very 

late to see large depositors asking for 

additional rate increases, but it's finally hit 

us. And so, we're starting to see those larger 

depositors at both institutions asking for rate 

increases, whether they're public institutions, 

so the public funds -- public depositors are 

asking for rate increases, as well as the larger 

corporate entities that are depositors are asking 

for rate increases. 

We're very focused on making sure that 

the ones that we're paying up to, we're really 

focused on making sure that there's a value-add 

relationship. And it's not just a very 

transactional kind of relationship. And so 

again, it's about the stability of that deposit 

and the relationship that we're building. The 

commitment from those depositors to keep that 

money working in these communities. 

And so, we're doing things like 

reporting out on impact, helping them understand 
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what's happening with their money, you know, 

what's the intensity of our lending into the 

communities that they care about. And that is 

helping us to create and build these long-term 

relationships with deposits that otherwise might 

be regulatorily considered to be brokered or in 

other ways hot. 

But if, you know, we could go and put 

ads in the paper in Birmingham and go and buy 

deposits, the proverbial paper. No one reads the 

paper anymore, but you know what I mean. So, we 

could put ads on the internet, and we could offer 

rates and we could get local deposits. But those 

local deposits would be much hotter than a 

corporation that puts in over $250,000 deposit, 

but is committed to the mission of our 

institution. And I think that's the, you know, 

that's one aspect of how I think these 

definitions really need to be looked at because 

the situation and the customer behavior is just 

very, very different. 
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And the reasons that customers want to 

bank with community banks are frankly about the 

relationships that they're building and about the 

impact that they're having in the community. And 

it's not really about, you know, whether they 

happen to live two blocks away from your 

institution. 

MEMBER PERRY: April Perry with 

Kentucky Farmer's Bank in Ashland, Kentucky, 

Northeast Kentucky. And I think the biggest 

shift has been with the consumer. You know, when 

interest rates were low, they were happy to let 

their money just sit in a non-interest bearing 

account. But as interest rates have risen and 

also technology has allowed them to explore other 

avenues for their -- for their cash, the money is 

-- they're looking at all their opportunities. 

You know, how can I earn money on my cash? 

So, looking at the brokerage accounts, 

looking at buying treasuries, and then also the 

credit unions are a huge competition in our area. 
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Credit unions have really expanded their reach. 

They are really acting more like a bank, except 

for the fact that they don't pay taxes, which I 

think really needs to be explored because you 

know, that's a very unfair advantage that they 

have over banks. I think if they're going to act 

like a bank, they should, you know, pay like a 

bank.

So, we have people that, you know, our 

customers that even though we have great 

relationships and we're very much, you know, 

concerned with having a relationship with our 

customers, not being a transactional -- having 

transactional customers having relationships 

with these customers. They are exploring their 

options and they should. 

So, you know, we are paying more for 

our deposits. And of course, that hurts net 

interest margin. But I think it's interesting, 

we went into this rising rate environment 

expecting rates to eventually rise. And so, we 
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were heavy in cash, and we had, you know, 

positioned our balance sheet to be ready for it. 

And that's been a really good thing. 

But now I feel like even though we've 

always managed our balance sheet, I feel like 

we're really managing our balance sheet now. You 

know, we're looking at the numbers on a daily 

basis and looking at our cash position on a daily 

basis. And making, you know, sure that 

everything is how it should be. 

But the biggest change has been with 

the consumer. Looking for a better rate and also 

going longer with their money. Not putting it 

into short-term investments or deposit products, 

but going longer with the CDs.

MS. PEARSON: So, we'll take a 15-

minute break now and we'll return at 10:20. Thank 

you.

CHAIRMAN GRUENBERG: That was a 

terrific discussion by the way. Thank you.

(Whereupon, the above-entitled matter 
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went off the record at 10:04 a.m. and resumed at 

10:21 a.m.) 

MS. PEARSON: Welcome back, everyone. 

We will get back to our credit discussion, so I 

will turn it back over to Camille, Krishna, and 

Benjamin.

MS. SCHMIDT: Thank you, Nikita. I'm 

going to start today's credit risk discussion 

with a look at consumer lending. You can see the 

chart that we posted. Total consumer lending by 

both banks and non-banks has grown consistently 

since second quarter of 2020. Auto loans, credit 

card balances, and other consumer loans have 

grown nearly 17 percent since the pandemic. 

In recent quarters, credit card 

balances and other consumer loans have grown at 

a very fast face. We've seen them rise 16 and 12 

percent in the past year, respectively. So, as 

we head into fall, consumer spending, some even 

labeled -- I've heard it called “revenge 

spending” with the source of economic strength 
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during the summer. We saw Americans splurge on 

international travel. They went to Taylor Swift 

concerts --

MS. PEARSON: And Beyonce. 

MS. SCHMIDT: -- and Beyonce. I 

usually say that too. And other, you know, they 

went to a lot of experiences that they had missed 

during the pandemic. Consumer spending rose 0.8 

percent in July and that was the strongest 

monthly spending gain since January.

However, I'm talking about consumer 

lending today first, because I feel like 

discretionary spending is often the first to be 

cut when budgets come under pressure. Strength 

and leisure spending did level off toward the end 

of August according to the Federal Reserve's 

Beige Book report. And it's really uncertain how 

consumer spending will shape up in the coming 

months. But several economists are expecting it 

to moderate. You even heard Krisha talk about a 

possible recession coming up. 
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So, Americans are facing some 

obstacles. We've got student loan repayment 

starting back up, although you probably noticed 

there was an announcement of a $9 billion 

forgiveness, billion dollar forgiveness program 

yesterday. Growing debt service or the debt-toincome ratios, shrinking savings accounts, and we 

earlier talked about how banks are -- some banks 

may be tightening their credit standards. We'll 

talk more about that. But those are all obstacles 

for the consumer.

So far, the delinquency rates of 

institutions with material exposure to consumer 

loans remains manageable, but we have seen them 

start to tick up. Housing is not included on 

this chart, but I do know some of you specialize 

in residential lending. The residential market 

continues to deal with high interest rates that 

have led to low supply and reduced affordability. 

Nationally home price appreciation has slowed 

this year, but I'm really interested to hear what 
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you're seeing in all of your specific markets.

On the next page, I'm going to shift 

to commercial real estate, which we discussed in 

depth when we all met here in June for the June 

Advisory Committee meeting. But this chart 

considers data based on expiring office leases 

for the next ten years. And it shows that at 

least seven metros in the U.S. have a sizeable 

share of their metros office leases expiring this 

year and next year. The Atlanta market has the 

largest share at over 40 percent. And the Dallas 

market is just behind them with just under 40 

percent. 

I think the big office buildings in 

large U.S. cities are the most at-risk from 

turmoil in the commercial real estate market. 

And this is according to several of the CRE 

research services that we subscribe to. There 

are signs that smaller offices and suburbs, as 

well as newer buildings and central business 

districts could be more insulated from the 
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stress. And this also ties to anecdotal reports 

from examiners and case managers who report more 

often seeing community banks making office loans 

on buildings and suburbs and on buildings like 

that are lower than five stories. Some of you 

are nodding your heads, so you can expand on that 

soon.

Soft data from the field also 

indicates that community banks have more exposure 

to the multi-family and retail sectors than to 

the office sector. At least those that we've 

been surveying. As we've been saying with rising 

interest rates, reduced cash flows, lower 

property values, and tightening credit 

conditions, office loans and really all CRE loans 

coming due in the near term may face some 

struggles with refinancing. 

Then I'll just end on the next slide. 

This is the Fed's Senior Loan Officer survey. 

And it matches data that we've gathered from 

examiners and case managers that confirm that 
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banks are generally tightening their lending 

standards. I would say that the information that 

I've obtained from our field is maybe a little 

less severe than this. They just start saying 

some slight tightening. But they're telling me 

that they report seeing tightening most 

frequently in the form of loan-to-value and debt 

service coverage ratio requirements. 

So that was kind of short and sweet, 

but I'm interested to hear your perspectives 

about loan growth, lending standards at your 

institutions and among the competition, and just 

overall lending concerns that you might have in 

your respective areas.

MEMBER SHOEMAKER: Lillous Ann 

Shoemaker, Magnolia State Bank. We maintain 80 

percent loan-to-deposit ratio and that's kind of 

how we operate anywhere between 80 and 90 

percent. We've definitely seen a slowdown in the 

housing sector market due to the higher mortgage 

rates. Demand for our loans is healthy across 
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all sectors. We've experienced approximately 8 

percent loan growth this year. 

Deposits are strong. Our growth in 

commercial and residential real estate has been 

strong because we had a lot of out of state people 

moving to Mississippi. We've got a popular HGTV 

show that has attributed to that greatly. You 

may have heard of it. Commercial and real estate 

has experienced double digit percentage increase 

in market values because of that. So far, so 

good. We're happy with our deposits. 

We've experienced a lot of the 

competition, but we've been able to maintain 

about a 2 percent deposit growth over the year to 

year. And so, we're concerned about the economy, 

but so far, it's stable in Mississippi.

MEMBER DRENTLAW: Hi. Anita Drentlaw 

from New Market Bank, which is in the south metro, 

the Minneapolis/St. Paul area -- metro area,

Lakeville, Elko New Market and Prior Lake. We've 

actually started to really see a lack of demand 
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for loans. The higher interest rates and higher 

prices for equipment, lake employment, just the 

wage increases that people have had to pay their 

workers, I think has, you know, had an impact on 

their income statement and their ability to feel 

like they want to borrow money at a higher rate. 

I do think that there have been banks in our area 

that have tightened lending standards. We have 

always had fairly tight lending standards. Our 

loan-to-deposit ratio is around 60, 65 percent. 

We've been trying to grow that for several years. 

And I think sometimes maybe we're too 

conservative honestly. We could probably take a 

little more risk. But having lived through the 

Great Recession, I think we're a little gun shy 

honestly. And so, our credit standards have 

always been fairly high. 

I think we tend to focus more on debt 

service coverage, rather than loan-to-value since 

their ability to repay is really better than 

wanting to take back a piece of property. We 
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have a large commercial real estate portfolio, 

but most of ours is really owner occupied or 

maybe, you know, majority owner occupied. They 

might have a portion of their building that they 

rent out. But we tend to lend now to people who 

their businesses is what's repaying that loan. 

So, I noticed Minneapolis was on the 

list of large office spaces being re-priced. And 

I think, you know, that's going to affect 

probably a lot of the larger institutions because 

really our competitors, the community banks that 

are in our area don't have a lot of that retail 

or that office space. I do think it will be an 

issue for our economy though because there's 

safety issues in Minneapolis. And so, I do think 

a lot of businesses have moved out of the downtown 

area towards the suburbs.

Yeah, I don't -- In housing, there is 

a large shortage of affordable housing in our 

area, so that has -- we have a large mortgage 

department and that volume has decreased 
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significantly this year. A lot of it is due to 

higher interest rates, but a lot of it is due to 

a shortage of inventory for one to four family 

homes that are affordable in the area. 

MEMBER PERRY: I'm April Perry with 

Kentucky Farmers Bank. And being from 

Appalachia, I think that we have a lot of people 

that live paycheck to paycheck. And so, they 

don't tend to have a lot of savings. So, you 

know, we've always been a bank that lends to 

people when something happens. You know, their 

washer breaks, they need to borrow money to buy 

a new washing machine. You know, so I guess I'm 

seeing a little bit of a shift. 

You know, our loan demand is still 

really strong, but I'm seeing a little bit of a 

shift in the types of loans we're making. So 

we're making a lot more short-term loans, 

installment loans just to be able to -- for these 

people to be able to live. Making single pay 

loans to get them over a hump that maybe they're 
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going through because of the rising cost.

Also seeing us make more exceptions in 

our auto lending because people are having to pay 

a premium for their automobiles. So, the 

traditional loan value for the automobile that 

they're wanting to buy, it leaves such a gap that 

they can't afford that. So, you know, we're 

making exceptions so that they can actually buy 

their automobiles, so they can keep going to 

work. 

So that's a -- I think that, that's a 

shift in our -- in our lending. In a sense, it's 

good for us because these are higher price loans. 

So that helps with our net interest margin. But 

it concerns me for our consumers because, you 

know, in times like this I feel like the people 

that least can afford it are going to struggle 

that much more. 

One of the areas I guess I'm most 

concerned about -- well, two areas is our 

construction loans. I think I brought this up at 
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the last meeting that, you know, people that 

started building a house thinking that their rate 

was going to go down when they went to permanent 

financing are now finding that wow, my rate is 

going up. And it's not just going up a little 

bit, it's going up a lot. So, this dream home 

I've been building, am I going to be able to 

afford to keep it and be able to afford the 

permanent financing? 

So that's something that we've really 

been looking at. We've been looking at each one 

of our construction loans and running the numbers 

to make sure that our clients are not going to 

find themselves in just a terrible situation when 

their dream home is complete. 

And the same way with our commercial 

loans. So, you know, a lot of those loans, they 

will re-price. And when they re-price, our 

businesses, their interest cost is going up 

tremendously. So, we're really looking at that 

and we're trying to be proactive and reach out to 
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business customers and say, you know, I don't 

know if you realize this or not, but due to your 

loan terms, you know, your interest rate is going 

up to this. And you know, this means you're going 

to be paying this much more in interest cost. 

And even though I know a lot of those 

businesses could probably afford that, these are 

great clients. They're, you know, people we've 

developed relationships with. So, we're trying 

to be proactive in, you know, trying to work out 

a solution that is a win-win for everyone. We 

want to make sure that they don't feel like 

they're being gouged with a rate that -- I mean 

they agreed to it, but they never dreamed that 

the rate that their loan is going to re-price at 

is what they would be paying.

And I'm finding that our commercial, 

you know, our business centers are thrilled when 

we reach out to them and we talk to them about, 

you know, this is what your loan could look like. 

But hey, let's see what we can do to make sure 
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that this is affordable for you, allows you to 

still be successful. But you know, it's a 

competitive rate. So, I'm hoping that by doing 

that, you know, we will cement those 

relationships and we will be able to help these 

people for years to come because that's what we 

want. We want the relationship.

MEMBER REIGELSBERGER: This is Kim and 

I'm from Northern Missouri and we think about our 

credit risk. We've got five locations, one's in 

the metro Kansas City area and four in rural --

when I say rural, the office I work in has less 

than 99 people. We have one that's got 200 people 

and one office -- one office has got 4,500 and 

one's got about 1,200. So, we are rural.

Now speaking about the rural area, 

we're agriculture. Crops is corn and soybeans

and cattle. I actually live on a farm. My 

husband and I farm. We raise cattle. Let me 

tell you, this year it's the drought. This is 

year two for us not getting rain. If we get rain, 
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it's very, very reduced amounts. So, if you're 

thinking about, like we raise cows and we have a 

herd. We raise baby calves. Pond levels are so 

low. Fortunately, right now, we still have 

several ponds on our farm, but what are you going 

to do? You're going to have to sell cattle. 

You're going to have to sell them because you 

don't have the water.

Second, when it's drought, we depend 

on the hay that we put up to feed these cows 

because grain is really too expensive. You come 

and maybe supplement a little bit of grain. I'm 

going to give you an example. One acre of hay 

ground should give you about four -- when I say

big bales, these are the 5-foot tall bales. They 

should give you about four. That's a good year. 

You're doing good. 

This year we were lucky to get one 

bale off of it. You can't feed your herd if your 

crop is, you know, 1/4 of what it should be or I 

guess -- yeah, went down 3/4. So, it's been a 
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big challenge just personally. We've had to sell 

some heads of cattle. So fortunately, the USDA 

released what we call CRP ground, which is 

Conservation Reserve Program ground. This is 

ground that's been set aside for whatever reason, 

highly erodible or something. 

It's not the best hay ground because 

usually you've got some weeds, you've got some 

shrubs, some woody. But when you're desperate, 

you're going to put that up for hay and you're 

going to sell it. Generally, in a good year, 

those bales of hay will bring $30 a bale. The 

CRP hay this year is bringing 75 or so bales, 

which is not -- like I said, not prime. It's not 

the best for your herd. But if you've got good 

hay, you're bringing in $120 a bale, which is 

ouch. That's really significant.

So that's what we're kind of seeing. 

The crops so far, we're just getting into 

harvest. We're about halfway through on corn. 

Because of this drought and not having enough 
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rain, we're seeing yields about 3/4 of what they 

should be. It's not terrible. It's not a 

disaster. It's going to have to be managing their 

operation a little more closely. Of course with 

crop insurance now, that kind of helps that if 

you're a grain operator. But that's kind of what 

we're seeing as far as agriculture. We feel like 

that is something to keep our eyes open for.

As far as housing, usually when 

somebody in the rural builds a home, that's their 

home for life. You don't see a whole lot of 

turnover. But the building of homes has not 

slowed down. The price has gone up and obviously 

interest rates if they're having to borrow. I'm 

shocked that we haven't seen more of a slowdown 

in that. 

One of our local contractors, again 

these are small business owners, he's got ten 

people in line -- now you're probably talking 

three or four years out. Now a lot can happen in 

those three or four years. We have another small 
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contractor -- and these are firms, they probably 

have maybe a five-man crew. They're just small. 

They build nice homes. They are a couple years 

out. 

So, I'm surprised that, that is still 

moving forward because the price of home after 

COVID with the supply chain issues, we haven't 

seen a whole lot of that come back. I mean it's 

still expensive. You know, a 2,020 -- I'll say 

2,200 square foot home, not large, about $325,000 

to $340,000. So that's something to really think 

about if you're going to -- in this environment.

So, we don't really have any CRE 

loans. We have a few small businesses, owneroccupied like you said, but their businesses are 

fine. You know, whether that be, you know, diesel 

mechanic, whether it be anything along those 

lines that has to do with agriculture. We're not 

really seeing a slowdown on those. Those are 

really staying busy. We're not really concerned 

about that piece of it. It's nothing that's being 
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rented out at this time. But that's -- that's 

kind of what we're seeing. 

MEMBER HORVAT: Hal Horvat from 

Centreville in Southern New England. Our market 

is Rhode Island, Connecticut, and Massachusetts. 

We're kind of a broken record when it comes to 

housing. Low inventory, houses sell very quickly 

and the prices keep going up. We expected that 

to level off at some point and it just hasn't 

happened. It continues to increase. Real 

problem with affordable housing, it's going to be 

a problem if we do head into a recession. Vacancy 

rates on apartments are almost nonexistent and 

those rates continue to go up.

On the commercial side, the only thing 

we're seeing soften is the downtown office 

market. We're not seeing it on suburban as you 

mentioned. We do have a number of suburban 

projects and there's a little bit of a flight out 

to the suburbs and particularly in the Boston 

area. But the office markets are definitely 
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seeing some softening as rents come up or as 

leases come up.

Lending standings haven't really 

changed. I mean we've continued on the credit 

side. The credit has been -- we haven't seen 

that from our competitors either. The only thing 

that has changed is pricing. We have to get 

additional pricing and we have to get deposits. 

But by and large, credit has been really strong. 

MEMBER RICHARDS: Troy Richards, 

Guarantee Bank in Louisiana. For us, consumer 

borrowing for real estate has slowed down 

dramatically. Refinances have all but gone away. 

I think we've probably all seen that. I know my 

mortgage is at 2.2 percent. I told my wife don't 

get any ideas about moving. It's not going to 

happen. 

Commercial borrowing for us has 

remained relatively strong. Our loan portfolio 

has actually grown some over the past 12 months, 

even with some tightening of underwriting. It's 
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probably attributable to the degree on the fact 

that inflation and interest rates are up, more 

people are renting, rather than buying. And much 

of our commercial loan activity is in the one to 

four family residential property business.

We've seen an increase in past dues, 

which I know a director once that said if your 

past dues are more than 2 percent, boy, you're 

turning down too many loans. And so, he would be 

happy right now. We've seen an increase in 

personal bankruptcies. I've been in my 38th year 

now at the bank. And we've never had as many 

suits filed as we do right now. Which you know, 

we're a secured lender, so we're going to get 

back the properties, but we all know what happens 

when they're bank-owned properties, pennies on 

the dollar. You know, so we're trying to manage 

that risk. 

We've also seen an increase in 

overdrafts. Chris is not here this morning, so 

I'm not going to bring up my comments about 
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overdrafts. You all know how I feel about NSF 

and overdraft fees. It's costing us about $2,400 

a month right now, not charging on 

representments. So that's an employee basically. 

But anyway, I'll leave that alone. 

We have tightened up our lending 

standards somewhat. Tightening up of our debt 

service coverage ratio is something that we've 

really tried to focus on factoring in potential 

large increases in hazard insurance and flood 

insurance. I think I commented last time, in our 

part of the world, if we have one named storm 

this year, it could be disastrous for Louisiana, 

for Mississippi, and some of the coastal states. 

Hazard insurance premiums have skyrocketed.

Deductibles are through the roof. Pardon 

the pun. Because I know for my church, our 

deductible went from $2,500 to $25,000. And 

we've seen some of our commercial customers who 

have expressed interest in self-insuring. And 

so, you know, how does that factor into your 
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underwriting if they're going to do that? So,

there's a lot of uncertainty right now in the 

insurance markets, both hazard and flood. But we 

have tightened up our credit standards from that 

standpoint. 

You know, we were in Washington last 

year and heard FEMA very proudly say that, well, 

it's only going to be a potential 18 percent 

increase in flood insurance premiums over the 

next five years. Country boy math said that's 

almost 100 percent in five years. And so, if 

you're doing a loan and you're pricing it for 

five years, are they going to be able to afford 

the flood insurance premiums if that's the case 

three years down the line? Big unknowns right 

now is what's going to happen in the insurance 

market. So, that's what's happening with us. 

MEMBER BOCK: One of the portfolios 

that I have, maybe not so much concern right now, 

but I do have a concern three to five years from 

now, is the senior housing and assisted living. 
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We are in largely an older population market, a 

lot of retired folks. Those are the demand. 

There's going to be a demand. Developers see 

that demand, so they are starting to build 

projects. There's already been projects built. 

They're already facing the first 

challenge is the staffing. They can't staff the 

current housing projects to the level that they 

need to, to take them up to 100 percent occupancy. 

So, there's already a challenge starting to pop 

up on them, but there's still others being 

developed. So, if more units come on board, if 

the current ones can't get the staffing they 

need, the new ones can't get opened. And those 

are the higher cost -- there's going to be higher 

room rates. They're going to be the last ones to 

be occupied.

In the general demographics of this 

country are we are not getting younger. There is 

currently a group of folks that have hit the 

retirement world and starting to fill those units 
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that I don't know what five to ten years might 

look like when that demographic starts passing 

away and we have all these units built up. Again, 

it's maybe not a concern today, but maybe a canary 

in a coal mine situation that let's watch out for 

the delinquent demographics that are going to 

challenge this whole segment of our financing 

world. 

And just the ability to attract people 

to staff those facilities. It's a hard job and 

they are not well paid in most cases. I know the 

State of Wisconsin is right now making some 

serious effort to try to get some assistance for 

those types of facilities so that they can pay 

their staff better. But the general economics 

are already being challenged and some of these 

other things that are going to come down the road 

with more new units opening. There's going to be 

more demand for the staff. There's going to be 

more overhead. 

And demographics are we are going to 
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all pass away. And in our area of the world, 

that's going to be five to ten years from now. I 

think there's going to be a lot of empty units 

that are not going to be that far into the 

project, that they're going to have a lot of big 

equity that they can fall back on. I hope it 

never happens, but it's one of those areas that 

I see some concerns in our area.

MS. SCHMIDT: We've seen that -- We've 

seen examiners comment on that, sorry, in several 

exams or surveys or things that we do to collect 

data. There's real concerns. And I thought it 

was maybe just an anomaly in our set, but since 

you've said that, I just wanted to say we are 

seeing that a lot too. And I've also seen 

comments about bankers proactively talking to 

borrowers before they have to refinance. So,

when you mentioned that, that is also something 

that I'm hearing.

MEMBER HORTON: I'll lean in as you 

say. Again, Spokane, Washington, Eastern 
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Washington environment. We're primarily a 

commercial and ag bank, as well as residential 

lending. But we sell most of those mortgages on 

the secondary market. 

Just getting a report from my chief 

credit officer before coming here, you know, 

first of all back up our asset quality. Like all 

of yours, I'm sure has been excellent. We have 

zero nonaccruals. You know, we have zero net 

loan losses over the past decade. So, we're a 

pretty conservative bank. We have tightened our 

credit policies just a little bit in some of the, 

you know, non-owner occupied CRE space with a 

higher debt service coverage ratio with a lower 

loan to value, et cetera.

But what we're seeing is that our Ag

producers are experiencing reduction in profits. 

In 2023, we're just seeing the beginning of that. 

And you know, the livestock I think is one 

exception in our area, but primarily in the wheat 

crops and the hay crops. And we're seeing if 
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they held on to their crop from the prior year. 

They have a higher level of inventory and now a 

lot lower prices. So that's impacting their 

profitability here in 2023.

Of course, they rely a little bit on 

crop insurance, but the crop insurance is also 

down over prior years. And you know, the crop 

insurance helps, but what they really need is a 

crop, not the crop insurance. Of course, higher 

fuel prices are impacting this. You know, 

everything from, I mean all of the input costs. 

Like you mentioned, equipment costs, fuel, 

insurance, and of course interest expense. So 

that's kind of what we're seeing on the ag side. 

Most of our ag producers have good strong 

secondary sources of real estate that's 

unencumbered that we can kind of take to shore 

them up for a year or two. And we tend to do 

that. We work with our customers throughout the 

process. 

On the commercial side, we're really 
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not seeing any softening or problems there. Of 

course, we don't lend into the office market. 

What we're seeing was a little different than 

what I heard from some of you. Just recently we 

are seeing a softening in some of the home values, 

as well as the rental market in terms of prices 

coming down on apartments, duplexes, multifamily. And then values of the homes coming down 

as well. So that's what we're seeing out in our 

area. And like I mentioned, we're seeing a lot 

of competition still on loans, but not as much 

from the credit unions. So just a few comments. 

Thank you. 

MEMBER SHOEMAKER: We're adhering to 

our loan policy. However, like liquidity that 

we're managing daily, we're monitoring our 

concentration levels of commercial and 

residential real estate and stressing them 

regularly. We're also stressing income-producing 

properties and ability to repay, not only for our 

customer portfolio, but for our entire customer 
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base, which has been very helpful. So those are 

two things that we're being very active. And 

also, as April mentioned, reaching out to our 

commercial customers and making them aware of 

upcoming maturities. 

MEMBER DRENTLAW: I'll add to that. 

We for several years have done a lot of like 

stress testing on our HELOC portfolio. And I do 

think as interest rates, if they stay high or 

continue to go higher, that could be a portfolio 

across our area or maybe across the United States 

that could start to have problems once -- usually 

it's the auto loans or credit cards first. But 

depending on how long this lasts, I could see 

where HELOCs -- because they have jumped up. 

Usually, they're tied to prime. So, people are 

paying a lot more now than they were seven or 

eight months ago. So, I think doing that stress 

test of that portfolio, making sure that our 

borrowers are able to sustain that debt is going 

to be important.
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MEMBER PILARSKI: Shane Pilarski, 

Northwest Indiana, Alliance Bank. As far as 

tightening lending standards like many in the 

room have said, we just never really loosened 

them and we've remained very conservative there. 

As far as what portfolios most concern me, I would 

have said a couple of years ago, we were primarily 

an ag lender. That has shifted. Whereas ag was 

our largest portfolio, it is no longer. As rates 

have risen, we used to be able to retain or 

attract ag clients because of our great client 

service. Well, with the rising rates, that kind 

of lessens in importance. And so, we're losing 

a lot of our strong borrowers to Farm Credit. 

You know, Farm Credit is no longer 

that lender of last resort. They're seeking out 

the best ag farmers and business. And so that 

has really hurt and so we've had to transition as 

a bank. And now really CRE is our largest 

portfolio, which is a switch for us. We've had 

to make sure that we put in -- we stress test 
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things differently now. And so that's been a 

change. We are adapting to it. But it's not 

necessarily where we saw things moving. 

MEMBER BATES: Once again, Thomas 

Bates. We're in the Clarksville/Nashville

market. We have about 75 percent of our assets 

in the Clarksville/Montgomery County area and 

about 25 percent in the Davidson/Williamson 

County. Our market, we've always been a CRE bank. 

I think we had to start doing the quarterly 

profiles in about 2009 and have gotten pretty 

good at it over the years. We've added a lot of 

different metrics. We're tracking a lot of 

different metrics, but we do a fair amount of 

single family residential. We'll keep 125 to 135 

construction loans going with a good majority

being speculative. That's part of the nature of 

being in a military town. We also do a lot of 

multifamily, mostly smaller and we do have a 

fairly good size hospitality portfolio, but we 

stay away from conventions and things. We focus 
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on mid-tier flags. 

We have not really seen any 

significant stress in that portfolio so far. We 

do have a different market in Nashville. You see 

a lot more institutional investors, basically 

people with other people's money. And we've 

tried to stay away from those. And really, we 

haven't had any problems in our HELOCs. We are 

starting to track the usage on a monthly basis. 

And that usage is still pretty well below 50 

percent, so we're pretty happy with that. 

So, most of our -- we have tightened 

that portfolio a little bit. We've tightened our 

metrics just a little bit on that just to be 

proactive. But we've tried not to tighten the 

standards as much as focus on pricing and 

relationships. So, if you're a good deposit 

customer, you'll get a better rate. If you're 

not a good deposit customer, you'll get a rate 

you probably don't like. And that's sort of how 

we've controlled it so far. But overall, we've 
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been surprised by how well things have held up in 

our market. 

MEMBER OSTERBUHR: Arlen Osterbuhr, 

Midland Exchange Bank in Midland, Nebraska. 

Having been a banker in the 1980s, there's a lot 

of factors that are comparable today that there 

was in the 80s. I was a banker in the early 80s 

when I was a loan officer and also the manager of 

a Collection Department. And it was a very 

interesting time. And we were passionate about 

what we did and very concerned about our 

customers.

If the 80s taught us anything, we were 

cash flow lenders. We needed to become cash flow 

lenders. At the time we were collateral based 

lenders and that had to change and it has changed 

over the years. And I think more and more, we're 

using cash flows to tell us whether that loan is 

going to cash flow and make its payments on its 

own. In the 80s, we also looked at workforce. 

And it was hard to find a job if you were in the 
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workforce getting out of college as I was in the 

early 80s. And today, it's hard to find a 

workforce. Everybody's looking for somebody to 

come to work for them. It seems like all the 

banks around my area especially are looking for 

help, including us. 

Residential lending in Midland, 

Nebraska today, we have three housing 

developments going on. And they're all three 

thriving and aggressive. And we've been very 

successful. We just completed a 54-housing 

development. And the three that are going on 

right now seem to be doing okay, even though we 

have higher interest rates. Although, as I look 

at the development and I think of our local 

lenders in my community of 3,200 people, having 

larger communities all around us, most all of us 

are using the secondary market. And not 

necessarily holding those loans in our own banks, 

which is unfortunate. 

Auto loans, if you're making new car 
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loans, you are offering a rate that's really low. 

It's hard for us to make a new car loan in our 

area. Manufacturers have that market and seem to 

be offering prices that are much lower than prime 

rate. 

Used loans -- used car loans, we try 

to be ten years old or less and our rates are 

higher. However, most of our local market is 

staying with commercial banks and making auto 

loans with us. And I would say there's probably 

not a lot of growth, but it's moderate if any at 

all.

Commercial loans, again we pride 

ourselves in being an agricultural bank. 

However, we've also diversified into the 

commercial area. And what we're finding is now 

that COVID is somewhat passed, people are 

traveling more. So, we're seeing more hotels pop 

up, more campgrounds being developed. Most 

people bought campers wanting to travel. 

Athletic venues, we're seeing a lot more club 
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sports and young people traveling for that 

reason. And so, we've seen a number of athletic 

venues being built. And pretty soon right next

door is a new hotel, which has been good. 

Small businesses and manufacturing 

has been very good. It's had growth, although 

moderate. Small business real estate buildings 

continues to be a very big part of our business 

in our area. And that business continues to be 

strong, although we look at many of those 

businesses as being family-owned businesses and

then they're just expanding. Manufacturing has 

been good and we're fortunate for that reason 

too. Keeping people employed. Although we're 

all looking for help, it's keeping people who 

want jobs employed.

In the agricultural sector, our land 

values have gone up considerably the last few 

years. And again, cash flow lending is very 

important in the ag sector. And so, the input 

costs have been high, land prices have been high. 
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There's been a lot of stimulus money come in to 

that in the sector, along with government program 

payments. And a lot of that money in the last 

few years has been spent. And that's where the 

amount of deposits that we've had has gone down. 

It's been money that's been reinvested into their 

own business. 

And right now, we're looking at 

commodity prices going down. And the commodity 

prices need to stay fairly high in order to cover 

those input costs that are out there; feed costs 

as you mentioned, cattle prices have all gone up. 

Commodity prices have to be there as well. And 

then I turn around and look at the consumer market 

and they've got to pay for that in the food 

counter. And that's where my concern is as well. 

So, my concerns are high cost of rents, no matter 

if it's residential property or commercial 

property, the high cost of vehicles. You can't 

find a lot of new cars on the lot. And if you 

are, you're paying for a higher price for them
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and you're being probably financed through the 

manufacturer. Used cars are high, food costs are 

high, medical assistance and medical costs are 

high. So, the consumer is losing on most all 

these battles. And as Mike mentioned, nursing 

homes, hospitals, they need the help as well. 

I've got an $8 million loan for our 

local nursing home. We have 60 beds in the 

nursing unit, 16 beds in the memory care unit, 

and 35 beds in the assisted living area. $8 

million was the cost of rebuilding -- tearing 

down and rebuilding a brand new nursing facility. 

And that was in 2017. And I'm very thankful I've 

got a 90 percent USDA guarantee on that loan 

because they at times are struggling. Even with 

the people who pay their own way, because those 

are the ones that are paying the difference from 

the ones who can't. So, thank you.

MEMBER KITNER: Hi. Cindy Kitner, 

Jefferson Security Bank in Shepherdstown, West 

Virginia. I know I touched on the housing market 
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earlier, but just a couple other comments that I 

would add. We had the benefit earlier this year 

of adding an experienced chief credit officer and 

that's allowed us to focus on a lot of the 

concerns. You know, I would share in some of the 

staffing concerns, as well as the cost and the 

cost to all of our borrowers. 

But more specifically within the 

portfolio, we are keeping a close eye on the 

construction market throughout the pandemic with 

the supply issues and others. We've seen a longer 

period with some of those construction loans than 

what we'd like to see. And now what we're seeing 

with the increased growth and the growth has 

continued is that we do have some of the builders 

that are into multiple projects at a time. And 

they're just not getting those completed in the 

time period that the homeowners would wish. So,

we're keeping a close eye on that.

We are a high residential lender, so 

luckily, we don't have a lot of commercial 
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lending. But we are also keeping a close eye on 

all the commercial lendings and the projects that 

we have going on. The comments that were made 

earlier in regards to the deposits and making 

sure that we have that deposit relationship with 

the loan relationship is very important to us as 

well. 

And lastly, as far as tightening 

lending standards, I would agree. I don't know 

that we ever loosened our standards. We've 

always had pretty tight standards and we want to 

continue to maintain those. We have seen some 

tightening standards with our competition, 

particularly with larger commercial construction 

projects that may or may not be of interest to us 

anyway. But we've seen just some recent 

discussions among the local bankers about some 

larger projects that you can tell that their 

interest in those is definitely less than it was 

before. Thank you.

MS. SCHMIDT: All right. We are 
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getting -- Would you like to -- Please. I think 

we have time for one more.

MEMBER CAMPBELL: Yeah. Troy Campbell 

from Altoona First Savings Bank in Altoona, 

Pennsylvania. As far as tightening standards, we 

haven't really tightened standards, but we have 

looked much more closely at projections. We do 

a lot with small businesses and projections. 

Interest rates are going up. Developers know 

that. So, we're watching like cap rates that 

they're using. 

We're seeing they're starting to 

increase cap rates. And one of the things in our 

community that's happened is it's been a 

beautiful thing to see a lot of, you know, young 

people have left our community, but they're 

returning back home. And you know, in our 

community, it's kind of crazy, but our kids come 

back and they don't want a house. They want to 

have, you know, a unit to live in. And we don't 

really have that in our market. 
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So, it's been something that 

developers have been really aggressive on. But 

we're also seeing, you know, market rate. That 

wasn't even a thing in our community and now it's 

a huge thing. But the developers, I think, are 

getting a little excited about that and starting 

to project higher cap rates than we believe are 

reasonable and that are sustainable. So that's 

been a big thing for us is watching the 

assumptions that are going into projections.

MS. SCHMIDT: All right. Well, in the 

interest of time, I know we can talk about credit 

risk for hours. But thank you all. You know, 

you did a great job. You covered residential, 

CRE, consumer, ag. I think we've got it -- got 

it nailed down. So again, thank you. And I'll 

let Nikita move to the next subject. 

MS. PEARSON: Thank you very much, 

team. And thank you all for sharing your 

perspectives. That was a very engaging 

discussion. So, after talking about a very 
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important topic about credit risks, it's also 

important for us to move to another very 

important topic. And we're going to start this 

conversation off a little bit differently because 

I'm leading the discussion and I like to start 

things off differently. 

So, I would like to ask you to take 

probably like a quick minute and close your eyes 

for a second. And as you close your eyes, I will 

ask you to visualize a meeting at your 

institution that you were in and an important 

decision was being made. And visualize who was 

in the room. 

Now I ask that you visualize the 

individuals who were impacted by the decision 

that was being made in that room. Now I ask you 

to think about a time an important decision was 

made that impacted your life and you did not have 

an opportunity to influence that decision. And 

think about how you felt. 

Now I ask you to open your eyes 
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please. I have two rhetorical questions for you. 

How do you make the invisible visible? And how 

do you create opportunities for everyone? My job 

today is to help convince you that one way we can 

help you is for you to complete -- take advantage 

of the opportunity, complete the diversity selfassessment. 

Now if I can't convince you with the 

facts I'm getting ready to lay out, I hope that 

you're moved by the feeling that you have while 

your eyes were closed. So, let's get to the 

facts. There was a study done by the Federal 

Reserve in 2019. That study said that revenue 

ratios increase once the share of women on the 

Board increased to just 17 percent -- just 17 

percent, the revenues increased. 

A 2015 study by McKenzie said that the 

top quartile for racial companies with racial and 

equity diversity -- I'm sorry -- ethnic 

diversity. They're 35 percent more likely to 

have financial returns above the national average 
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for their industry. And you notice the timeframe 

for these studies are a little bit older. This 

isn't new information. 

If you haven't heard about the Office 

of the FDIC, named the Office of Minority and 

Women Inclusion is also not a new office. And 

it's also an office at other federal banking 

agencies. It was created in 2010 based on Section 

342 of the Dodd Frank Act. Within that Act, the 

federal agencies came together and created the 

joint standards that were established and issued 

out in 2015. These were joint standards related 

to diversity. And we put out these joint 

standards and we came up with the selfassessment. And it is simply that, the selfassessment. And we ask that you voluntarily 

complete it. 

The FDIC has over 3,000 banks that we

are the primary federal regulator for. Less than 

200 complete the self-assessment and submit it to 

us. We are aware that there are some who complete 
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it and don't send it to us. And I heard 

anecdotally why that is. And I'm here to convince 

you that not only would we like for you to 

complete it, we would like for you to submit it 

to us and we think it will benefit you because 

Troy, one day, I'm going to get you to say I am 

from the Federal Government and I am here to help. 

Those are the words I want you to say out of your 

mouth one day. All right? It's a deal. That's 

the deal we're going to work on.

So here are some common, what I call 

some myths that I would like to address that I 

think will help you make that decision. We 

actually extended the open period for the 

diversity self-assessment. It was originally 

scheduled to close on September 30th. Because of 

this meeting, we extended it to October 20th 

because if you have not completed it, I'm asking 

you if you will consider to complete it by October 

20th. And if you will call three of your peers 

at other institutions and ask them to consider to 
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complete it. And that's also for the individuals 

who are watching on a livestream.

The first thing I would like for you 

to consider that if you complete the diversity 

self-assessment, it is not a part of your safety 

and soundness or consumer protection examination 

ratings. It is not considered as a part of your 

Community Reinvestment Act performance 

evaluation. When you complete the selfassessment and submit it to our office, it stays 

with our office. It is not a part of your exam 

findings.

The other piece of information is once

you submit it, it does not go into a government 

black hole. We actually do review your 

information. And we review it with the purpose 

of identifying some promising practices that we 

hope to share with you. The reason that's helpful 

-- potentially helpful for a community bank, 

because a lot of community banks don't 

necessarily have the opportunity to have 
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dedicated staff to focus on diversity efforts. 

So, if we can get information from a 

number of banks and identify those promising 

practices, we can share that information with you 

if you don't have the staff. And we can put it 

in a report. If you went out to the FDIC’s 

website and go to our financial institution 

diversity web page, you will see where we've 

identified promising practices that you can take 

advantage of and see for free. That's the 

advantage that you get when you share that 

information with us.

You should know that we do not share 

your individual bank data that you send to us. 

We do share the information in aggregate, but not 

individual bank data. You should know if you 

have any questions, you don't have to do this 

alone. We have individuals who will answer any 

questions that you have. There's an email 

address called bankdiversity@fdic.gov --

bankdiversity@fdic.gov. If you email us and you 
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want to have your answer -- question answered by 

email, we'll do that. If you email us and you 

want a person to call you back, we will do that 

as well. You don't have to do this alone.

If you're worried about the amount of 

time that it takes, when this was just the paper 

form, we estimated it was eight hours to complete 

the form. Since that time, we've automated the 

form and we've added what we call -- I used to 

call it the copy and paste feature, but the IT 

people wanted me to call it the cloning feature, 

which is apparently the appropriate term for 

this. And so, it's more efficient and effective. 

That means that once your team inputs the data, 

if that information remains, it automatically 

inputs it for the next year and you just have to 

update the things that changed. And so, it 

becomes more efficient and effective year after 

year.

If your bank is the size of 100 or 

more and you submit a report, your EEO1 to the 
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EEOC already, you don't have to worry about it. 

The information you report to them is the same 

information that you will report to us as far as 

it relates to workforce data. So, it's not new 

information that you have to create.

If you are an institution and you have 

a bank holding company and you by some chance 

submit your information to the Fed by mistake, 

don't worry. We talk to our friends at other 

regulators. So, we talk to each other, so if you 

send it to one, we talk to each other. We can 

exchange it and get it from the other. 

If you by some way decide that you 

only want to complete the workforce data and you 

don't want to complete the supply diversity data, 

you don't have to complete every box. We would 

love for you to complete every box, but you don't 

have to complete every single box. You actually 

don't have to submit the information to us. We 

just ask that you complete it at the minimum, but 

you don't have to. It will help you more if you 
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submit it to us because we can get you more 

information. But at least complete the selfassessment. 

You don't even have to complete the 

form in a format that we provided to you. If 

your financial institution has a different way 

that you complete or assess yourself in the space 

of diversity, equity, inclusion, and 

accessibility, you can submit that information to 

us in the form that you use it and you can just 

email it to us that way. We try to make this as 

simple and as easy as we can. And we will take 

it from there. If you think that you are 

the only ones who have to do this, don't worry. 

In the part of the country that I'm from -- I'm 

from Georgia. If you've noticed, I'm not from 

D.C. -- we have this saying called sweep around 

your own front door. Federal agencies are the 

same way. We have to report our efforts to 

improve diversity, equity, inclusion, and 

accessibility. In fact, our data is publically 
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available just like every other federal agency. 

And we are also working in this space. So, it is 

not something that we're asking you to do, that 

we're not working on ourselves. 

So, with that being said, those are 

some of the reasons that I've heard people say 

that they have not -- bankers say that they have 

not completed diversity self-assessment. But I 

wanted to clear those things up and open up the 

floor to any questions that you may have. I'm 

happy to answer them. This is way too easy.

MEMBER JAMES: I've got a basic 

question, Nikita. Thank you very much for the 

information. How do we find the survey? And 

who's the right person inside the institution 

typically to complete it? Is it more of an HRrelated survey or is it something that at the Csuite level, we would need to review? 

MS. PEARSON: So, the first question 

is, so we issued out a financial institution 

letter with the diversity self-assessment. And 
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then I believe we placed a copy of it in your 

materials. In addition to that, we can make sure 

that we send it out to all of you again. We'll 

make sure we do that. Generally, the workforce 

person, your HR person will have the work force 

data. If you have someone that's a supplier 

diversity -- has supplier diversity 

responsibilities, they could complete it. But it 

generally depends on how you divvy out your 

responsibilities. But I would start generally 

with your HR staff or if you have a chief 

diversity officer designated. 

MEMBER CAMPBELL: Is it available on 

the portal as well?

MS. PEARSON: It is available on your 

portal, yes. Thank you for that, Troy.

MEMBER MJARTAN: I wanted to ask a 

couple questions. First of all, I want to thank 

you and the Chairman for creating space for this 

at this meeting. I think it's really important 

to do this, not just because I believe it's the 
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right thing to do, but it's also very productive 

as you pointed out. 

We just completed company-wide 

training and we had 98 percent of the employees 

participate in it. It was a very big success in 

my opinion. But the trainer that we hired pointed 

out a lot of the same statistics that you shared, 

but went much deeper. And I know you were trying 

to be brief. I will say my reaction was I was 

stunned to see that particularly for the banks 

where they actually correlated some ROA results 

with diverse board and executive management. 

They were able to find significant correlation 

over a long period of time. 

So, my question to you would be do you 

have on those 200 banks, is there anything you 

could share in aggregate to see how them just 

simply completing the survey correlates with 

their performance. And how does their 

performance stack compared to the other, you 

know, 3,000 or 2,800 banks that didn't complete 
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it? 

MS. PEARSON: That's a great question. 

I don't have that information available with me, 

but that's something I can look into.

MEMBER MAUST: Just a real quick 

question. The estimated time of eight hours 

might seem a bit daunting for 3,000 banks. 

They're looking at it. Is there an option to 

fill out portions that maybe, you know, ease a

bank into it and then obviously on follow on 

basis, they'd probably, you know, continue to 

fill out more and more, and eventually, you know, 

the entire survey? 

MS. PEARSON: Yes. A lot of banks if 

they just want to get started on it, they first 

start with the workforce data and just start 

there and maybe leave the supplier diversity 

portion alone and just look at what does my 

workforce look like? What does my Board look 

like? What does my management team look like? 

And when I say look like, meaning provided 
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demographic data.

MEMBER MAUST: And that's helpful for 

the FDIC? Okay.

MS. PEARSON: It is very helpful. 

MEMBER MAUST: Great, thanks. 

MS. PEARSON: Thank you.

MEMBER REIGELSBERGER: So, the 

question --

MEMBER RICHARDS: Oh, I'm sorry. Go 

ahead. 

MEMBER REIGELSBERGER: I was just 

going to ask real quick, is this -- when we submit 

this, is that tied back to our bank? Is it 

anonymous or just figuring out how that worked? 

MS. PEARSON: Oh, yes. Absolutely. 

So, when you submit it to us -- When I say us, 

meaning it comes to the FDIC, but it comes 

specifically to the Office of Minority and Women 

Inclusion, where I work. It does not go anywhere 

else outside of my office with your bank's name 

on it. We share it in aggregate, meaning we just 
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take the data and add it all up together and 

that's where we publish it. But no one else 

outside the individuals in my office will see 

your individual bank data. And then, within the 

financial institution letter, there's a statement 

that we have and there's some legal language 

there related to the FOIA. But other than that, 

we don't share your information.

MEMBER REIGELSBERGER: Okay. Thank 

you very much. 

MEMBER RICHARDS: Just a follow-up on 

Trey’s question. It sounds like there's 

different sections like supplier and different 

sections. But within a particular section, if 

you don't answer all of the questions, will you 

get some sort of evil warning message at the end, 

you did not complete every question within this 

section or can we pick and choose, you know, some 

questions might not be readily available what the 

answers are. Some are going to be easier than 

others. So, within each -- within each section, 
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can we leave questions blank?

MS. PEARSON: Remember Troy, we're 

from the government, we’re here to help. There 

is no such thing as evil. 

(Simultaneous speaking.)

MS. PEARSON: Trust me. So, you only 

have to complete the ones that you want to 

complete. 

MEMBER RICHARDS: Okay. 

MS. PEARSON: You will not get a --

it's not a case where you have to complete a 

section. If you only wanted to open the selfassessment and literally only answer one question 

--

MEMBER RICHARDS: Okay. 

MS. PEARSON: -- you can do that. 

MEMBER RICHARDS: So, you're not like 

the Federal Reserve and their systems. 

MS. PEARSON: I'm not going to take 

that bait. Other questions, concerns? 

MEMBER REIGELSBERGER: Just this is a 
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quick review in my mind. I've been in senior 

management for 30 years. It's nice to see if 

nothing else in this Board here, even though it's 

primarily male and female and some minority, as 

my years in banking, it's always been a maledominated field. Any time I've ever attended 

anything, I was the minority. And it is nice to 

see that a little better represented here. So,

thank you.

MS. PEARSON: Thank you. And I think 

the Chairman has certainly made a concerted 

effort to ensure that we brand under his 

leadership to make sure that we have a commitment 

to diversity, equity, and inclusion here.

MEMBER MAUST: There's a word you've 

been using that I find interesting. About two 

minutes ago you said accessibility. Could you 

talk just briefly about that? And then I was 

curious, is there may be a carrot, such as would 

it be like a positive point on your management 

rating? The accessibility is what I'm really 
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interested in just given the state's special 

needs and I don't know what it entails.

MS. PEARSON: So, remember, it's not 

connected to your examination rating. So,

there's no carrot there. Accessibility really 

relates to how do we ensure that people have the 

ability to access the different things? And I'll 

give you an example of something that happened 

within my work unit. The FDIC, there are federal 

goals as it relates to hiring individuals with 

disabilities. And that's appropriate for us to 

talk about because it's actually National 

Disability Employment Awareness month. And the 

FDIC has consistently exceeded those goals. And 

we have a very strong record with that. 

During the pandemic, we were mandatory 

telework and we held all of our meetings 

virtually. I have a wonderful colleague on my 

team who's deaf. And we were working on the 

virtual meeting and this individual did not have 

a sign language interpreter for the meeting we 
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were having. And I asked how can he participate 

in the meeting? And the response I received was 

well, he can turn on the Teams captioning --

closed captioning. 

So, I turned on the closed captioning 

to join the meeting the same way he would join 

the meeting. When I turned on the closed 

captioning, all I saw was a bunch of words. 

Living that same experience with him, what I 

realized was, that was what he saw. So, he was 

trying to look at the people on the screen and 

read the words. And I said well, why can't --

why can't there be names with each individual as 

they're speaking so he can determine who's doing 

the talking. 

And so, I called the chief information 

officer here at the Agency, Sylvia. And she said, 

oh, all we have to do is just turn on the switch,

and she did. Accessibility isn't just the 

representation of individuals that have a 

disability. But how can we make sure that they
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can have the same experience with the same 

access? And that's what I mean by accessibility. 

And sometimes that means doing life together 

because if you had asked us, we would have said 

we have a great record because we have great 

representation. And for the most part, everyone 

has a great experience. But until we did life 

together, that's when we recognized we had an 

opportunity to have more accessibility. Did I 

answer your question, Trey? 

MEMBER MAUST: You did, thank you. We 

have autism directly in our family, so I fully 

appreciate that. That's why I asked the 

question. So, it's expanded into that as well. 

Okay, thank you.

MS. PEARSON: Thank you. Other 

questions? All right. So, we will keep moving 

into the next part of our agenda. I would love 

to invite my colleague, Betty, up to the table 

for us to have an update on our Minority 

Depository Institutions Subcommittee meeting. 
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Betty is the Director of the Office of Minority 

and Community Development Banking. And then 

Warren who is already at the table with us, Warren 

Huang, serves on both this Committee and the MDI 

Subcommittee. And they will provide us an update 

from yesterday's meeting. 

MS. RUDOLPH: Thanks, Nikita. Just a 

brief reminder, the MDI Subcommittee was 

established under the authority of the Advisory 

Committee on Community Banking. That's all of 

you. And the Federal Advisory Committee Act 

requires that any subcommittees provide advice or 

recommendations to the FDIC through this 

committee. So that's why we're appearing before 

you today. 

So, the MDI Subcommittee reports 

directly to all of you, not to the FDIC. And we 

have three goals for the MDI Subcommittee. The 

first is to serve as a source of feedback for the 

FDIC and our strategies to fulfil the goals that 

-- the statutory goals that we have to preserve 
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and promote minority depository institutions. 

Secondly, to provide a platform to promote 

collaboration, partnerships, and best practices. 

And third, to identify ways that we can highlight 

the work of MDIs in their communities. 

So the Subcommittee is composed of 

nine executives -- MDI executives representing a 

diversity of types of MDIs. So African-American, 

Hispanic, Asian, and Native American. And we 

have a range of business models, size, and 

geographic mix. So, the nine members of our MDI 

Subcommittee represent about 10 percent of the 98 

MDIs that we supervise. And in addition to the 

MDI Subcommittee, we have four MDIs represented 

on this committee: Robert James, Dominik Mjartan, 

Andrew West with Eagle Bank, and Warren Huang.

So, we met yesterday afternoon, and 

I'm going to turn it over to Warren to provide an 

update from the meeting. 

MEMBER HUANG: Thank you, Betty. At 

this time, the MDI Subcommittee does not have any 
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recommendations for the FDIC. But the 

subcommittee does want to share a brief recap of

yesterday's meeting. So, at yesterday's meeting, 

we received a presentation on current economic 

and banking conditions and selected MDI financial 

performance indicators. So similar to our 

discussion here today at CBAC, we responded to 

the same questions about funding, interest rate 

risk, and credit risk. We had the same 

discussions -- similar discussions. 

During the MDI's spotlight, we heard 

about a unique collaboration between 16 MDIs and 

CDFIs that came together to do a $78 million 

syndication loan to the National Football League. 

The discussion included perspectives from some of 

the institutions that supported the 

collaboration, including the National Black Bank 

Foundation, Bank of America, as well as two MDIs; 

First Independence Bank in Detroit and Industrial 

Bank here in Washington, D.C. They shared their 

thoughts on what worked well, lessons they 
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learned, recommendations for future 

collaborations, and for companies that might 

consider working with community banks, MDIs, and 

CDFIs borrowing needs. 

So, the subcommittee found the 

presentations useful. I believe that FDIC will 

place the video on its website so MDIs, CDFIs, 

community banks, and corporations can all learn 

about the collaboration. And we also had a 

briefing from FDIC on the June 2023 update on 

third-party guidance, as well as cybersecurity 

updates and information about the upcoming 

Interagency MDI/CDFI Bank Conference that will be 

held in Dallas at the Federal Reserve on November 

15 and 16. And that concludes the report from 

the subcommittee. So, any questions, Betty and 

I would welcome them. 

MS. PEARSON: Well, it is lunchtime. 

Thank you both, Betty and Warren, for that 

update. We will break for lunch and we will --

oh, we'll take a -- we are doing -- we're not 
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doing the photos. Right? No, okay. Awesome. 

We will have lunch upstairs and we will return 

here at 1:00 p.m. Thank you.

(Whereupon, the above-entitled matter 

went off the record at 11:33 a.m. and resumed at 

1:07 p.m.)

MS. PEARSON: Welcome back from lunch. 

And I've heard a few people comment, you are 

correct, we turned the temperature down. So,

there will be no sleeping after carrot cake. It 

will stay nice and cool in here.

So, you may have noticed we have a few 

new colleagues here at the table with me. We 

will have now our supervision and policy updates. 

At the table you will see my colleague Mark 

Pearce, who is the Director of the Division of

Depositor and Consumer Protection. Mark will be 

hanging out the entire panel.

And first up we have Lisa Arquette, 

who's a Deputy Director in the Division of Risk 

Management Supervision. Lisa will chat about 
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banking cannabis-related businesses.

And we also have Suzanne Clair, who's 

an Associate Director in the Division of Risk 

Management Supervision. And Suzanne will speak 

about funding and liquidity risk management. And 

we'll keep going into different panels.

But I'll turn it over first to 

Suzanne, correct?

MS. CLAIR: Good afternoon, everybody.

MS. PEARSON: Good afternoon.

MS. CLAIR: Hi. Yes, so I think, yeah, 

this is the first chart. 

So, we've headlined this Asset 

Liability Management. We wanted to talk about 

interest rate risk management and liquidity risk 

management under that umbrella of asset liability 

risk management.

So, we wanted to share a few slides 

with you on some charts that show trends in 

liquidity and interest rate risk at community 

banks. This data is from call reports for 
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community institutions.

So, this first chart shows the 

weighted average yield on earning assets, net 

interest margin, and cost of funds for community 

banks. And as you all are aware, the pace of the 

current rising rate cycle is nearly twice as fast 

as previous rate cycles, rate hiking cycles.

Since March of 2022, the Federal Open 

Market Committee, or FOMC, has responded to the 

high inflationary environment by increasing the 

Fed Funds target range by over 500 basis points. 

These charts reflect June 30 numbers and data, 

but we saw as recently at 9/30 that the ten-year 

treasury closed at 4.579, and at 6/30 it was 

3.819.

So, looking at the chart, the Fed 

Funds rate is indicated by the dashed green line. 

This chart's showing that recent quarters 

indicate that NIMs are compressing, shown in 

yellow, as the increases in weighted average cost 

of funds, which is shown in the red line, outpaced 
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increases in earning asset yield, which is shown 

in the dark blue line.

So, over the past six months, weighted 

average cost of funds has almost doubled, 

increasing 77 basis points. And the weighted 

average yield on earning assets increased 45 

basis points during that time.

So, moving to the next slide, this 

slide highlights some balance sheet liquidity 

trends over the past several years for community 

banks. On deposit growth and loan demand, during 

the pandemic resulted in significant growth in 

securities portfolios.

Some banks made investment decisions 

underestimating a potential rate hiking pace, and 

the increases in the Fed Funds target range led 

to corresponding increases across the U.S. 

treasury yield curve's term structure, as we 

discussed. As market interest rates increase, as 

you know, longer duration assets, including debt 

security's decrease in value. 
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So, over the past year, you can see in 

the chart some of the deposit growth that we saw 

during the pandemic has run off and been replaced 

with wholesale funding. So, this chart shows 

deposits as a percentage of total assets in the 

orange line, and wholesale funding in the dashed 

black line.

Additionally, the trend of a build-up 

in the securities portfolio, shown by the blue 

line, is beginning to reverse as loan demand, 

which is shown in the dotted purple line, picks 

up.

So, moving to the next slide, this 

slide illustrates deposit composition and asset 

growth, with weighted average cost of funds 

overlaid as the red dotted line. So, as you can 

see, deposits grew significantly during the 

pandemic, but over the past two quarters, 

community banks saw a shift from MMDA and other 

savings accounts into time deposits.

The shift in deposit type, coupled 
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with increasing market rates, contribute to the 

significant increase in weighted average cost of 

funds.

So, moving to the next chart, as we 

mentioned in a prior slide, over the past year 

there's been significant increase in wholesale 

funding, which is primarily centered in increases 

in borrowing, brokered, and reciprocal deposits. 

And as of the second quarter of 2023, 

of June, the volume of broker deposits at 

community banks, which on this chart's shown in 

the blue line, in the light blue -- I'm sorry, in 

light blue, are at the highest level since 2018 

at least. They increased from 86.2 billion at 

year-end to 112.3 billion.

So reciprocal deposits, shown in 

yellow, are at a new peak, increasing from nearly 

70 billion at year-end 2022 to slightly over 100 

billion as of the second quarter. 

And lastly, borrowings, including 

Federal Home Loan Bank advances, are shown in 
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green, and other borrowings shown in purple. 

These increased from 108 billion at year-end to 

143 billion in the second quarter.

So, our last chart, which is the next 

slide. This chart shows the impact of higher 

rates on investment portfolios, again, through 

the second quarter. The chart on this slide 

illustrates again the rapid increase in 

unrealized holding losses on investment 

securities. And this includes not only the 

available for sale, but the held-to-maturity 

security portfolios.

Again, this chart shows the rapid 

increase in these unrealized holding losses, 

consistent with the jump in the ten-year constant 

maturity treasury rate, as shown here in the 

dashed blue line.

Again, from a capital perspective, 

both AFS and held-to-maturity net unrealized 

holding losses net of tax are not factored into 

regulatory capital for most community banks. And 
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this is because most institutions have opted out 

of AOCI, or accumulated other comprehensive 

income, which are net gains or loss to treatment 

for AFS securities and it's in accordance with 

the generally applicable capital rules.

And additionally, held-to-maturity 

securities are not measured at fair value for 

financial reporting purposes. However, equity 

capital that's defined by GAAP reflects AFS net 

unrealized holding losses. So therefore there 

are some institutions that now have significantly 

lower gap equity compared to regulatory capital.

And given the increases in long-term 

rates, especially as I mentioned these recent 

increases in September that we see, it's 

anticipated that there will be even more 

institutions that will have low or negative gap 

equity capital.

So, it's important to point out that 

most bonds that experience these market value 

declines will likely make timely interest and 
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principal payments but -- up to maturity, but 

while there may not be credit risk, the interest 

rate and market risk presented by these bonds 

with these significant unrealized holding losses 

has various implications for liquidity and 

capital.

So, moving on to slide 7, where we 

completed our charts, we wanted -- I wanted to 

just update everybody on, I think at the last 

Community Bank Advisory Committee meeting, that 

my supervisor, Ryan Billingsley, discussed a lot 

about liquidity, liquidity funds management, 

contingency funding planning. 

And since then, the agencies issued an 

addendum to our 2010 Interagency Policy Statement 

on Funding and Liquidity Risk Management. And 

that addendum focuses on the importance of 

contingency funding plans.

So again, that was something that was 

issued by the FDIC, OCC, and the Federal Reserve 

in late July. Again, this update serves as a 
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reminder that banks should maintain actionable 

contingency funding plans that take into account 

a range of possible stress scenarios.

There's more detail in the full 

statement, but at high level, depository 

institutions should do the following: maintain 

actionable and operationally ready contingency 

funding plans that are updated to and address 

evolving liquidity risks and take into a range of 

appropriate -- a range of appropriate stress 

scenarios. 

And also assess the stability of their 

funding and maintain a broad range of funding 

sources. And then strongly consider 

incorporating the discount window as part of 

contingency funding arrangements.

Institutions should also be aware of 

the operational requirements to obtain funding 

from contingent sources and also the importance 

of testing contingent funding sources on a 

regular basis is emphasized.
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And then again, the statement also 

emphasizes importance of understanding and having 

collateral available for contingency funding 

needs and understanding the potential operational 

challenges, as well as reviewing and revising 

your contingency funding plans. 

And that pretty much is most of my 

remarks. Does anybody have any comments or 

questions?

I'm just kind of curious too to ask if 

any of the charts resonate with the committee. 

Have you seen shifts in your time deposits or 

funding profiles? I know, it's very challenging, 

right. So. Sure.

MEMBER RICHARDS: You talk about the 

discount window. We've never applied for that or 

used that in the past. We've been an FHLB advance 

borrower. But we've been hearing that we will be 

criticized if we don't have a discount window 

application in process or you know, in place 

rather.
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So, we're going through that process. 

We're still with the Fed, it's challenging, but 

we're getting there. But the Bank Term Funding 

Program specifically. You know, we're not going 

to worry about that because it's coming to an end 

first part of next year anyway. I've heard it 

might be extended.

But if we were to have an exam, would 

there be any -- I understand there might be some 

criticism if we've not signed up for the discount 

window. Would there be any criticism if we didn't 

sign up for the Bank Term Funding Program?

MS. CLAIR: No, I would say no. The 

Bank Term Funding Program would be if your 

institution had a large amount of unrealized 

losses and was trying to manage through that. 

That's really what that program was intended. 

Because then you could borrow against those at 

par.

But as far as we know it is going to 

end late March, I think 24th was the date.
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MEMBER RICHARDS: Right.

MS. CLAIR: But yes. And we -- the 

statement encourages and the FDIC is one of the 

agencies encouraging institutions to sign up for 

the discount window. I think it's important --

MEMBER RICHARDS: And we only have 

four securities in our securities portfolio. So 

even if we want to borrow from the discount 

window, I think we'll have to put loans up. And 

it's maybe loans that FHLB does not count. So,

we haven't gone through that process yet, so 

we're going to go through that.

CHAIRMAN GRUENBERG: All right, if I 

could just ask, I think one of the lessons learned 

from the failures earlier this year was the need 

for institutions to be prepared if necessary to 

access discount window borrowing, particularly in 

the event of stress.

And I think part of the objective 

here, if I can say, is to -- there still seems to 

be concerns about a potential stigma in utilizing 
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the discount window. Which frankly we want to 

try to push against by making it a, in effect a, 

as it were, normal source of liquidity that an 

institution can draw upon with reliability if it 

has the necessary collateral.

So, I would be interested in hearing 

from you all your thoughts on this stigma issue 

and how big an issue is it for you, and any 

thoughts you have in regard to it.

MEMBER DRENTLAW: Well, as a fourthgeneration banker, I think there's a bigger 

stigma with my father than there is with me. Me, 

I'm kind of trusting I guess that if we need those 

funds, that we would be able to draw on it and 

not have the stigma with it.

We would still use our FHLB line. 

Quite frankly, it's way easier to draw on. We 

did the Bank Term Funding Program, and it was 

painful. It's a painful process to get the money, 

to pledge things. So, there's part of me that 

hasn't done the discount window because of just 
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the logistics of it.

But that being said, if it was needed 

because of liquidity, I won't hesitate to draw on 

it.

MEMBER HORTON: I'll just add that we 

love using it. And we were able to lock in, you 

know, a lower rate. There's no prepayment 

penalty. If rates were to go down, I mean, you 

get better value for your collateral.

We signed up very early, and I think 

we have, you know, almost probably about 80 

million on it. And we're not worried about a 

stigma. I mean, I remember hearing those things 

about PPP borrowers were going to have a stigma 

associated with them. 

I just think that it was a very 

appropriate and wise tool that you put in place 

for us, and we really appreciate having it. Thank 

you.

CHAIRMAN GRUENBERG: That's very 

helpful, thank you.
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MEMBER RICHARDS: You know, when we 

were here last, we were talking about this FDIC 

insurance report that you all came out with that, 

you know, we were going to look at changing things 

up. Well, that's kind of died down. And I think 

the smart thing to do on that is nothing.

And that kind of correlates to this 

stigma idea. I think when everything was hot and 

heavy with SVB and Signature, there would have 

been a stigma of being on a list. But I think 

kind of like with FDIC insurance, nobody really 

cares now, so if you borrowed from it.

I would be more worried if the 

regulators would frown on us for using it more so 

than the public stigma. And I would hope that 

there would not be any regulatory stigma attached 

to that.

CHAIRMAN GRUENBERG: That's why I'm 

asking the question in part, because.

MEMBER MAUST: And I didn't see it on 

our agenda today, but I did see, Mr. Chairman, 
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your remarks yesterday at the Research and Policy 

Conference regarding the insurance, attempts 

toward insurance reform.

And I know the desire publically for 

that has kind of waned, but your comment about 

being prepared, I think that's another example of 

we may not need it today or the public doesn't 

see the need for it today, but I think that's 

something that we -- do one or both, we can keep 

pushing it about dialog.

And back to the question regarding the 

TFP. We'd accessed TFP too. It was a interesting 

process to go through to get it set up. But we 

now have access to the discount window and TFP.

I think the concern we initially had 

was we remembered what TARP was like. And it 

wasn't so much that people were interested in 

identifying who it is that accessed TARP, it was 

the media. And I think that's something that 

agencies can get ahead of and just remind 

everybody that this was put together in a prudent 
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manner for a particular reason. 

So, I appreciate asking the question. 

MEMBER SHOEMAKER: And we had access 

to the discount window for many years, a long 

time. And it was seamless signing up for the 

Bank Term Funding Program. We didn't have any 

difficulties. But we have also not accessed it.

MEMBER JAMES: Yeah, similarly we had 

discount window access. And so bank term funding 

was simple. We have not used it, we tested it, 

but we have not needed it. Because we're quite 

liquid, so.

CHAIRMAN GRUENBERG: Thank you.

MEMBER MAUST: Can I ask a question 

regarding reciprocal? And that came up earlier 

today. 

We did see -- we had used it as a tool 

for larger borrowers that wanted to stay with a 

local institution or where there's a strong 

relationship. A lot of it was perception-related 

in terms of, you know, a small institution versus 
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a money center or a G-SIB.

But it did level the playing field 

somewhat when there were no eligible depositors 

who also had corporate governance that understood 

that this covered it in the same fashion that in 

their minds a large institution's strength would.

I'm curious if reciprocal deposits are 

looked at differently, other than having a good 

understanding of why the relationship is there. 

I see it listed as sort of in the same buckets as 

volatile funding sources. 

And so, I wanted -- and I recognize 

that could certainly be the case if the terms are 

disparate between maybe alternate sources. But 

I'm curious if it's considered in the same bucket 

as, say, like FHLB advances or brokered CDs 

things like that.

MS. CLAIR: I would say it's probably 

the size of the, you know, the deposits that's 

creating the look at it, the view of it as 

wholesale, and that those investors are likely 
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more sophisticated and you know, financial --

like and institutional investors or ratedependent investors, so depositors. 

So, it still falls in the bucket. We 

view it as wholesale, but you know, it has 

different characteristics. So, it's hard to give 

fast and steady, you know, definitions of how 

they'd be viewed compared to other funding 

sources.

MS. PEARSON: We're ready to move on, 

Suzanne.

MS. CLAIR: Sure, thank you, thank 

you.

MS. PEARSON: Lisa.

MS. ARQUETTE: Thank you, Nikita.

Hello, my name is Lisa Arquette. I 

serve as the Deputy Director for Operational Risk 

in the Division of Risk Management Supervision. 

This afternoon I'll be discussing or highlighting 

some cannabis-related business matters and other 

information for you. I understand that's a key 
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concern for many state bankers. Slide 2, please. 

As you know, nothing has changed in 

terms of marijuana being considered a controlled 

substance, Schedule I controlled substance. What 

that means is that it has a high potential for 

abuse with no acceptable medical use. Under 

federal law, the cultivation, distribution, and 

possession of marijuana is prohibited.

Notwithstanding the federal ban, the 

majority of states and the District of Columbia 

have legalized some form of marijuana use. I may 

refer to it as cannabis, which is the plant from 

which it's derived.

The National Conference of State 

Legislators tracks the number of states, 

territories, and the District of Columbia that 

have legalized the use of cannabis for medical 

and other purposes. As of the second quarter of 

this year, 38 states, three territories, and the 

District of Columbia allow medical use of 

cannabis.
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Twenty-three states, two territories, 

and the District of Columbia have enacted 

measures to regulate cannabis for adult nonmedical use. I believe that's referred to as 

recreational use. Next slide, please.

Before I get to any additional 

comments about regulatory requirements for 

marijuana-related businesses, I think it's 

important to clarify our position regarding any 

customer account. The FDIC recognizes the 

importance of ensuring public access to financial 

services for consumers and businesses. 

The decision to open, close, and 

decline particular account relationships is made 

by the institution and should be based on 

business objectives of the bank, the evaluation 

of associated risks posed by individual customers 

on a case-by-case basis, and implementation of 

controls to manage the relationship commensurate 

with the risks.

As a general matter, the FDIC does not 
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direct banks to open, close, or maintain 

individual accounts or encourage banks to 

maintain -- or encourage banks to terminate 

entire categories of customer accounts without 

regard to the risks presented by an individual 

customer or the bank's ability to manage those 

risks.

I would refer you to financial 

institution letter 05 issued in 2015. It's 

titled The Statement on Providing Banking 

Services just to reiterate our position.

And with that said, I'll move into the 

regulatory requirements associated with having 

marijuana-related businesses. What I highlighted 

on the first slide, and I am on slide 4 now, what 

I highlighted on the first slide was the 

difference between federal and state laws.

The Financial Crimes Enforcement 

Network, which is a bureau within Treasury, they 

serve as the administrator of the Bank Secrecy 

Act. So, the Financial Crimes Enforcement 
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Network is the administrator of the BSA.

On February 14 of 2014, FinCEN issued 

Bank Secrecy Act Expectations Regarding 

Marijuana-Related Businesses. The guidance was 

issued to financial institutions to clarify Bank 

Secrecy Act expectations for banks seeking to 

provide services to marijuana-related businesses 

because, again, it's a controlled substance.

At the same time on the same day, the 

Deputy Attorney General James Cole issued 

guidance to U.S. Attorneys specific to marijuana 

enforcement. It's referred to as the Cole memo.

One of the key objectives of that memo 

was to highlight and focus limited investigative 

and prosecutorial resources to address the most 

significant marijuana-related cases in an 

effective and consistent way. So, these two 

pieces of guidance came out on the same day.

The Cole memo has since been 

rescinded, but the FinCEN guidance remains in 

effect. And the FinCEN guidance refers to the 
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priorities that were identified by law 

enforcement. I'll give you two. These are very 

intuitive for everybody in the room, I'm sure.

But it would be preventing the 

distribution of marijuana to minors, preventing 

revenue from the sale of marijuana to go to 

criminal enterprises, gangs, and cartels, and 

then there are six others. But these are key 

priorities that were established by DOJ a number 

of years ago and that have been reiterated in 

FinCEN's guidance.

Separately from those priorities, 

FinCEN has identified red flags that could help 

any financial institution identify some unusual 

activity related to this type of relationship, 

this cash-intensive business relationship. 

They also identify due diligence 

procedures that financial institutions could 

follow when evaluating the customer relationship 

and conducting ongoing monitoring of that 

customer. That's something that you do for all 
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customer types. 

That would be no different, right -- 

you establish a customer risk profile for money 

laundering, terrorist financing, and other 

illicit financial activity risk, and you monitor 

that account regularly, or your staff does. And 

if there's something unusual, you would file a 

SAR.

But in this instance, because it's a 

controlled substance, FinCEN issued guidance 

about filing suspicious activity reports, as well 

as the currency transaction reports.

They had three categories identified. 

One was a priority SAR, and that would be filed, 

designated and filed when the institution, the 

financial institution, thought that it triggered 

one of those priorities. 

So, if they had reason to believe that 

the proceeds were being used to fund gangs or 

cartel members or that these proceeds were used 

or derived from selling to minors, an institution 
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would place that on the SAR. 

If it was just a normal customer 

business except for the product that we're 

talking about, the bank would designate 

suspicious activity report as being limited, a 

SAR-limited.

And in instances where the bank chose 

to terminate the relationship, they would also 

make a designation. The reason for this it to 

help not only law enforcement keep track of the 

types of suspicious activity that's being 

reported by financial institutions, but also for 

analytical purposes. 

What does this mean, how many banks, 

credit unions, securities brokers and dealers, 

money service businesses might be engaged with 

marijuana-related businesses that are a priority 

for law enforcement? Ultimately that's what the 

purpose of the SARs is.

So that remains outstanding. Now, the 

examination experience may be, you know, a 
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question for you, but our examiners evaluate 

these accounts like they evaluate all accounts.

Banks will establish a risk 

assessment, a baseline risk assessment for all of 

your products, services, products and geographies 

in which you operate. That would be called a 

risk assessment for money laundering, terrorist 

financing, and other illicit financial activity.

What feeds into that are customer risk 

profiles. Banks will develop high-risk lists so 

that they can monitor those accounts differently, 

spend a little more time, collect a little more 

information, and determine what steps they need 

to take. 

Sometimes it might be filing a 

Suspicious Activity Report, sometimes it's asking 

the question of the customer and getting the 

answer and understanding why cash flows change. 

But that's your customer risk profile, and that's 

the monitoring for suspicious activity. The same 

expectation for these types of accounts.
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So, an examiner, if you've identified 

marijuana-related businesses as high-risk 

businesses, they may sample those accounts when 

they go in just to evaluate what you do. If 

you've opened a new account, they may look at 

your new account opening procedures. 

But generally they're going to treat 

them no different than other accounts, except 

that they're going to check that you're following 

the FinCEN guidance as far as filing Suspicious 

Activity Reports and filing large Currency 

Transaction Reports if you get a high volume of 

cash, more than $10,000 on any given day, 

deposited or withdrawn.

So that's the guidance. Nothing's 

changed since 2014. This has been a controlled 

substance for a long time. But I did hear that 

in August of this year there is a proposal to 

move marijuana from a Schedule I controlled 

substance to a Schedule III controlled substance. 

Is it still a controlled substance? 
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Yes. But is it migrating a little bit? Possibly. 

We'll have to wait and watch. We don't know, 

we're not in control of that at all.

I would ask to move to the next slide 

and highlight something else that's very, very 

related. So, marijuana and hemp come from the 

cannabis plant, same plant. The difference being 

that hemp has no more than 0.3 percent of 

tetrahydrocannabinol. I'll refer to that as THC 

going forward.

THC is commonly associated with the 

altered state of mind. So, it's really specific 

in the growth of the cannabis plant. That is no 

longer hemp, less than 0.3 percent THC, that is 

not a controlled substance. It's just like any 

other crop, but I understand that it's highly 

regulated by most states. 

That is not a controlled substance. 

It comes from the same plant, but you do have to 

know how much THC is in the hemp to make sure 

that you're complying with the FinCEN guidance.
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So, I would ask that you move along to 

the next slide. Thank you, Lisa.

The FDIC along with the other banking 

agencies issued some clarifying -- issued a 

clarifying statement regarding hemp that aligned

with the Farm Bill of 2018, where hemp was removed 

as a controlled substance pursuant to the 

Controlled Substance Act. So that financial 

institutions were aware that we would no longer

for Suspicious Activity Reports unless of course 

a customer engaged in the business of producing 

or distribution or selling hemp met some other 

criteria for unusual activity. That's up to the 

institution to identify that. 

So, they would be treated as all 

customers, and if there was indication of some 

type of unusual or criminal activity, then you 

would file a Suspicious Activity Report.

FinCEN, again, the administrator of 

the Bank Secrecy Act, issued additional guidance 

to highlight customer due diligence requirements 
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that might be pertinent to this type of activity. 

Again, this is clarification for financial 

institutions. They cover not only banks, credit 

unions, but securities brokers and dealers, money 

transmitter, etc., just 14 different types of 

financial institutions.

So, the bottom line is for purposes of 

marijuana, still a controlled substance. Banks 

are required to file Suspicious Activity Reports 

and Currency Transaction Reports. States, most 

states, have taken steps to legalize it or 

decriminalize it. 

There's a difference between federal 

and state law. What we do is check for compliance 

with Bank Secrecy Act requirements, and risk 

management, as with all customer accounts.

So, I'd be happy to take any questions 

if you have any.

MEMBER DRENTLAW: I do. Minnesota is 

a newly recreational-approved state. One thing 

that we're struggling with a bit now is the delta 
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variants that are derived from hemp. Because 

they're derived from hemp, some say that they are 

still under that 0.3 percent THC. However, they 

have hallucinogenic effects and stuff.

And so, we're struggling with how, 

just because we have customers who are selling 

that. You can actually go into any liquor store 

and they have THC-derived delta variant drinks 

now. And it's becoming extremely difficult, to 

be honest, to monitor all these different 

businesses. Because every grocery store can have 

them.

So, there's questions in our board's 

mind how much -- how far do we have to go? Like 

how -- are they considered hemp, are they 

considered marijuana? And there's just very 

little guidance because everything is pretty old 

that we're trying to use.

MS. ARQUETTE: Not exactly an area 

where we specialize in making that determination. 

But as with any kind of customer who's making a 
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representation, it's not uncommon for a bank to 

double-check. So, if you've entered into a 

commercial relationship with a customer who is 

selling hemp products, we've seen banks request, 

you know, the documentation.

I understand that many, if not most,

states have tightly controlled requirements 

related to hemp production. Things can change 

from one growing season to the next.

MEMBER DRENTLAW: I think it is 

dependent on the state. Minnesota is not. Okay, 

unfortunately, so.

MS. ARQUETTE: And if the state didn't 

have tightly controlled requirements and testing 

requirements, it would be up to each bank to, at 

account opening or depending on the risk profile 

that you've developed related to the customer, 

ask for documentation about crops. 

But that would be a decision that a 

bank would make and that's what we've seen in the 

past. Because it can become difficult. It's the 
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same plant.

MEMBER RICHARDS: You make a statement 

FDIC encourages institutions to take a risk-based 

approach and not just decline to provide banking 

services to a category. But if a bank has in its 

policy that we will not knowingly bank cannabisrelated or marijuana-related businesses, are you 

going to frown on us for that?

MS. ARQUETTE: A bank establishes 

their own risk tolerance. Often, it's based on, 

you know, the expertise of staff, what they can 

manage, how well they manage it. If a bank makes 

a choice -- in the AML space, anti-moneylaundering examination space, no frowning.

MEMBER RICHARDS: Okay.

MS. ARQUETTE: No frowning. We just 

--

MEMBER RICHARDS: Because you hit the 

nail on the head --

MS. ARQUETTE: We just check for 

compliance.
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MEMBER RICHARDS: We don't have the 

expertise. And with all the safe store 

businesses that we bank, we don't know that they 

might not be selling something related to that. 

But there's no way that we would know to monitor 

for that or if we knew they were doing it, what 

the rules are to.

So, we've made the decision in our 

policy to not knowingly bank any marijuanarelated business. So that would be fine then.

MEMBER SHOEMAKER: And our concern is 

more if the examiners, you know, how hard are 

they going to come down on us. We have a very 

similar policy, but some of the examiners have

come in with a hammer and said well, you know, 

you've always banked a commercial real estate 

developer. Did you know that that developer is 

leasing to a marijuana-related business? 

And we just keep getting the 

investigation. It goes deeper and deeper. And 

the time and resources of our BSA department and 
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quite frankly my time, it's costly. 

And so, I read this guidance and it 

makes sense to me. But we've risk-rated these 

customers. And our commercial real estate 

developer, he's doing what he's done for 20 

years. 

But we don't want to get in trouble or 

get our hand slapped when our developer is, 

actually his loan payments would be direct 

debited from his account. We don't get into his 

records, you know, and they're probably paying a

check. Because it's legal in Mississippi to a 

certain extent.

MS. ARQUETTE: So again, we leave the 

risk tolerance up to each institution. As an 

example, not every bank will provide services to 

foreign financial institutions. 

One, they don't have the bandwidth or 

they're unfamiliar with other jurisdictions, and 

so they simply are not going to provide 

correspondent banking services to a foreign 
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financial institution. That makes sense, right. 

Similarly, if you don't have the 

bandwidth or simply it's not within the risk 

appetite of the bank's board to manage these 

types of relationships, that's simply a decision 

that the bank makes. And we'll check for 

compliance if you have marijuana-related business 

relationships, just with the Bank Secrecy Act 

requirements.

MEMBER REIGELSBERGER: As far as hemp 

is concerned, we don't currently have any farmers 

growing hemp. We did have one several years ago. 

The first year they said between the deer eating 

the hemp and then not having a source to sell it 

to, they said we're done, we're out. They're not 

going to do it anymore.

But I'm not saying -- looking through 

our state, we have a, the State of Missouri has 

got a website, I can go look and see. Now, 

everybody on that list is an LLC. I don't know 

who owns that LLC to say if they're my customers. 
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I think I would know because we're a small bank.

But if they're growing hemp, and it is 

very regulated on the state level, so if by some 

chance they mess up and it's got high THC, there's 

a cure for that. That cure is they destroy it. 

I don't know if thinking about a risk assessment 

as a bank, a whole, I mean, we've had very 

interesting conversations with between the 

auditors and the regulators about hemp.

I feel like it's a legal crop, and as 

long as they're following the rules and it's --

they're not being penalized or if there's not a 

problem with it, just like you would any other 

business, to make sure they're not having 

suspicious activity, then we're good to go.

But to have a special hemp section in 

our BSA risk assessment, I feel like that's maybe 

not where we needed to go. Because it's legal 

and there's a cure. Now, granted, if there's the 

cure and they don't do it, that's a whole 

different ball of wax that we've got to address 
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and file a SAR. I get all that.

I didn't know if there's any thoughts 

that you might have to share with us about hemp 

and like just the overall BSA risk assessment 

that we have.

MS. ARQUETTE: So currently a risk 

assessment isn't a requirement. It is a common 

practice that bankers use in all areas. We don't 

specify what you need to have in there. It's 

really driven by the customers, the product 

services, geographies in which you operate. 

Maybe even methods of payment, whether you use 

online banking, etc. 

Just all of the characteristics, all 

of the attributes that kind of feed into what 

adds risk for illicit -- illicit financial 

activity. Hemp is not a controlled substance any 

longer. Not required in a risk assessment. Risk 

assessments aren't required. 

So, it's really up to the institution 

to figure out its own profile of what it can 
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tolerate, how it can then use an internal control 

framework to manage the risk that you've 

identified in your -- that the process that you 

use.

MEMBER REIGELSBERGER: Okay, that's 

helpful, thank you.

MEMBER DRENTLAW: Sorry, I'd like 

another clarification just to Lily's point of 

having somebody who is renting a space. Or as 

this gets going, somebody who works for a 

cannabis shop that we didn't realize they did but 

had had an account for ten years, and all of a 

sudden we find out that they're working from --

we're struggling with how far does this go.

Like, how far do we have to start to 

or keep reporting on these businesses as it 

becomes completely legal in our state? Because 

I understand the Tier I, Tier II, Tier III. I 

mean, I think we'll end up being a Tier III by 

just definition because it'll be impossible to 

not ever have any money flow through the bank 
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that isn't somewhat related.

It's, where it's becoming difficult as 

we have for instance a farm, I called it a nursery 

some -- in a different meaning and somebody 

thought I meant a daycare. I don't mean a 

daycare. 

But like a farm nursery, they have, 

you know, one side of their business is plants, 

shrubs, trees, that kind of stuff. They have a 

whole other separate business that does have --

then they intend to get into the marijuana-based. 

Yes, they keep it separate, but how, 

you know, they're still going to have owners that 

have, even if we say we're not going to bank your 

marijuana-related business, that that owner has 

some commingling of funds at some point. And I'm 

not sure where it's -- where it stops. 

So, what if our, one of our employees 

has a spouse that works. Do we have to report 

SARs on them because we know that their spouse is 

getting their income from an illegally --
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federally illegal derived business? 

And so, if there's any clarification, 

whether it's now, or that the FDIC or FinCEN or 

the FFIEC could give to states. I know I've 

talked to several bankers that they would really 

appreciate looking past just the guidance that is 

out there now, because it doesn't address all of 

those things.

MS. ARQUETTE: Thank you for your 

question. I would say that FinCEN's guidance 

was, I thought it was fairly clear in 2014. They 

did not address indirect relationships but rather 

the bank and the customer relationship. 

You know, if however, you've got a 

customer relationship and it's a commercial real 

estate and the vast majority of its customers 

have businesses where they sell hemp, or maybe, 

you know, it's a business that involves funding, 

agriculture funding, production, selling, 

whatever it happens to be. 

You know, I think many banks will look 
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at the proportion of the proceeds that come just 

from the business model itself, that FinCEN 

didn't go into detail or tiers in fact. They 

just indicated the direct relationship between 

the bank and the customer.

And when you develop for customer due 

diligence purposes the risk profile of the 

customer for other illicit financial activity, I 

mean, that would be an opportunity for you to 

kind of parse out what exactly the business 

relationship means to the bank so that you can 

monitor it and make sure that it is in fact what 

it was intended to be. Just like every other 

relationship. 

Is it easy? Clearly it is not easy 

and it's getting more difficult. But FinCEN's 

guidance was very clear, it would be the bank's 

direct relationship with a customer that was 

engaged in a marijuana-related activity. I know 

that sounds like a non-answer, but that's as 

clear as they've been.
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The FFIEC wouldn't separately 

interpret Bank Secrecy Act requirements on behalf 

of FinCEN, but I'm certainly happy to tee this up 

again for them, saying that there's difficulty in 

parsing out how far down the relationship, if 

there's a multi-tier relationship, a bank should 

go in evaluating whether or not some of the 

proceeds are derived from the sale of marijuana.

MEMBER DRENTLAW: That would be great. 

I think a lot of --

MS. ARQUETTE: At this point it's 

direct, but I'm hearing you.

MEMBER DRENTLAW: Yeah. And I think 

because so many states now have legalized it in 

some form or fashion, there's a lot more 

questions than there seems to be answers, 

especially as there are new states coming in and 

stuff. So yeah, any pull you have with FinCEN to 

give more guidance, that would be great.

MS. ARQUETTE: It's not uncommon for 

banks to file Suspicious Activity Reports on 
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indirect relationships depending on how they view 

the risk of that relationship.

MS. PEARSON: All right, are we good? 

Thank you very much, Suzanne and Lisa. Thank you 

all for an engaging discussion.

I believe next up we have Tom Lyons, 

Associate Director for the Division of Risk 

Management Supervision, and Luke Brown, Associate 

Director in the Division of Depositor and 

Consumer Protection. Tom will touch on 

commercial real estate loan accommodations and 

workouts. 

He'll be followed by Luke, who will 

discuss guidance on third-party risk management 

guidance.

I will now turn it over to you, Tom.

MR. LYONS: Thanks, Nikita.

So welcome. Thank you for having me 

here to talk about the CRE workout guidance, 

appreciate that.

So, on June 29 of 2023, the banking 
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agencies and the NCUA issued a, the Interagency 

Policy Statement on Prudent Commercial Real 

Estate Loan Accommodations and Workouts. The 

statement was published in the Federal Register 

on July 6, and this is a principles-based 

resource for financial institutions to consider 

when engaging with borrowers experiencing 

financial difficulties.

So, this updates and replaces the 

interagency policy statement that we had issued 

in 2009 on the same subject. And given the myriad 

of challenges and risks facing the CRE lending, 

the agencies, in consultation with the state 

regulators, decided to update and expand upon the 

2009 statement.

So currently more than 98 percent of 

the banks engage in CRE lending and CRE loans are 

the largest loan portfolio type for nearly half 

of all banks. Further, the dollar volume of CRE 

loans is at an historic high and it recently 

peaked at more than three trillion, $3 trillion. 
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Nearly 30 percent of banks have a 

concentration of CRE loans exceeding 300 percent 

of capital. That's Tier I capital plus the 

reserves. Or acquisition, development,

construction loans exceeding 100 percent of 

capital and reserves.

So, in 2020, the COVID pandemic led to 

stress across several CRE property types, 

including hospitality, office, retail, the 

entertainment sectors. The office sector remains 

particularly vulnerable. Some borrowers, you 

know, may have difficulty refinancing, given the 

structural decline in the office demand that 

we've seen over the past couple years.

So regardless of the CRE sector, CRE 

borrowers' abilities to manage through a period 

of softer economic conditions, including supply 

chain imbalances, labor challenges, and 

geopolitical tension, inflation, rising interest 

rates, will impact the direction and magnitude of 

the risks in 2023 and beyond.
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Lisa, can we move to the next slide?

So the new statement discusses the 

importance of working constructively with CRE 

borrowers who are experiencing financial 

difficulties and would be appropriate for all 

supervised financial institutions engaged in CRE 

lending.

The agencies recognize that prudent 

CRE loan accommodations and workouts are often in 

the best interest of both the financial 

institution and the borrower. 

Accordingly, the statement reaffirms 

the key principles from the 2009 statement that 

financial institutions that implement prudent CRE 

loan workout arrangements after performing a 

comprehensive review of a borrower's financial 

condition will not be subject to criticism for 

engaging in these efforts, even if these 

arrangements result in modified loans that have 

weaknesses that result in adverse credit 

classification.
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And that modified loans to borrowers 

who have the ability to repay their debts 

according to reasonably established terms will 

not be subject to adverse classification solely 

because the value of the underlying collateral 

has declined to an amount that is less than the 

loan balance.

So, the statement adds a new section 

on short-term accommodations. Short-term and 

less-complex CRE loan accommodations are a tool 

that can be used before a loan requires a longer 

term or a more complex workout scenario. The 

statement reflects changes in GAAP since 2009, 

including those in relation to the current 

expected credit loss methodology, or CECL.

The statement also updates the 

original examples that were included and adds 

three new examples for multifamily, ADC for 

residential construction, and income-producing -

- income-producing example for hotels.

The statement was issued for industry 
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comment in the fall of last year. We received 22 

unique comments. And the statement was revised, 

you know, based on the industry feedback. Next 

slide, please.

So, you know, just as, you know, we 

held an -- on September 14, 2023, the Federal 

Reserve hosted an Ask-the-Regulator session on 

prudent CRE statement. And so, the speakers from 

there, all the agencies that were involved, FDIC, 

OCC, NCUA, we walked through the guidance, which 

included a deep dive into one of the examples to 

kind of walk through the thinking there.

The presentation had about 3400 

participants. And we received a number of 

questions on that. But most of them were really 

case-specific, very specific scenarios about how 

the guidance would be viewed in that particular 

scenario.

So, the most common questions came up 

around, you know, accruals and non-accruals and 

when those need to be applied and reported. 
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Whether a particular workout scenario would be 

pass or adversely classified. 

And also questions about an A/B note 

structure, which would be splitting the loan into 

two notes, you know, with one note representing 

the charge-off amount and the other representing 

the balance that was on prudent repayment terms.

So those -- that's a quick and dirty 

highlight of the CRE work out guidance. And happy 

to take any questions or comments that you have 

on that.

MEMBER SHOEMAKER: Do I understand it 

correctly that in some of these changes, that 

TDRs, for example, if you do an accommodation for 

a customer due to loan competition, a rate, that 

that is now classified as an adverse, a loan 

accommodation instead of really a competition 

issue?

MR. LYONS: Okay, so as this relates 

to a TDR?

MEMBER SHOEMAKER: Yes.
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MR. LYONS: Right, so TDRs with CECL, 

you know, are no longer an item there. So, we 

removed that from the guidance as a 

consideration. But we're still looking at -- the 

guidance really focuses in on what -- how the 

examiners will be taking a look at -- and that's 

really how the, you know, all those examples are 

in a lot of the guidance, you know. 

So, they'll be looking at the specific 

situation and how that, you know, applies to 

whether there's going to be an adverse 

classification or whether that would be passed. 

And you'd be looking at the same 

things even before we get there, you know, so 

that you're recognizing the risk and rating that 

accordingly. And we'd be, you know, verifying 

that.

MEMBER SHOEMAKER: Thank you.

MR. LYONS: You're welcome.

MEMBER RICHARDS: You know, y'all came 

out with some guidance the other day asking I 
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think for comment on how you all were going to, 

I think change the Call Report. 

You'd take the TDR language out of the 

Call Report, and you're going to replace it with 

modifications for borrowers experiencing 

financial difficulty. And so, there's a lot of 

questions about what that's going to look like. 

But one thing I will say, I think you 

all learned, and I appreciate it, during the 

pandemic, it's almost as if you all took the 

opinion of you all know your borrowers and were 

able to work with your borrowers. You know them 

and you know the problems that they're having. 

And you're exactly right. And I think 

it turned out to be very positive. I wish that 

same mentality would apply to other regulatory 

rounds as well. 

But you know, my question and my hope, 

my advice would be is you all think of how you're 

going to define a modification for borrowers 

experiencing financial difficulty. That you keep 
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it simple.

I read in there that, you know, what 

about the duration. Well, it's going to be a 

minimum of 12 months potentially. And then 

there's going to have to be some sort of very 

detailed credit analysis of the borrower to 

determine if they're still in that financial 

difficulty, whatever that is, situation.

But this could be a monster of a 

thing, like CECL, which is totally unnecessary. 

Or it could be simple. And let's keep it simple, 

at least for community banks. We don't need 

another monster accounting thing to deal with.

MR. LYONS: I appreciate the comments. 

I'll pass those along to our folks in the -- that 

work on the Call Report in the accounting group. 

Because a lot of those things, you know, there's 

a lot of the accounting issues which also come 

into play, which can be complicated. 

But I thoroughly hear you. Wherever 

we can be -- simplify things and make things 
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straightforward, that's always the best approach 

whenever we can.

MEMBER REIGELSBERGER: I think another 

addition to both comments might be as we do a lot 

of two- and three-year balloons for rates, you 

think about where we were at three years ago 

today, and now they're getting a rate increase of 

one over prime. And you're going from 4-ish to 

9-1/2. 

Sometimes in what we've kind of 

stumbled upon is it's not so much -- it's rate 

shock to them. It's not so much they can't afford 

it because they can. In their minds, that visual 

look of going up to say 9-1/2 percent is like 

they come in, oh my God, I don't believe this. I

know rates have gone up.

So, in order to help calm them down so 

they don't go looking, which I don't know where 

they're going to find a better rate. Maybe, 

maybe, I don't. Probably Farm Credit services, 

they take a lot of that. They take a lot of our 
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farm loans away from us.

But in a situation like that, rather 

than see the loan walk, we're probably going to 

tweak their rate a little bit. And you know, 

just the rate shock in their eyes when they see 

that. 

So that's kind of going back to your 

comments. I would not consider that a borrower 

experiencing financial difficulty. It's more of 

they can afford it, they don't want to pay it. 

But we kind of soften the blow for them a little 

bit.

If deposit rates can afford us a 

little bit of play there if we can take advantage 

of that too. So that's kind of adding to kind of 

what their thoughts are as we think about the 

definition that we're working on here.

MR. LYONS: Appreciate that.

MR. BROWN: Good afternoon, everybody. 

Thank you for having us join the CBAC meeting. 

As Nikita mentioned earlier, Tom Lyons and I plan 
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to walk you through the interagency third-party 

risk guidance that was issued last June. Slide 

two? Oh, we are on slide two.

Prior to the agencies issuing this 

interagency guidance, each of the federal banking 

agencies had issued their own separate guidance 

for managing third-party risks. The agencies 

generally had included the same principles in 

their guidances, but there were differences in 

scope and the number of examples.

However, with separate issuances of 

guidance on the same topic, some entities were 

unsure as to whether the guidances conveyed 

consistent messages related to third-party risk 

management. Slide three, please?

In developing the interagency 

guidance, the agencies sought to work together to 

make their guidances consistent, to articulate 

clear risk-based principles for third-party risk 

management, and considering feedback received, 

the agencies understood that because of the 
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increase in the number and types of third-party 

relationships, banks, especially community 

banks, might find examples of considerations 

useful in identifying and managing risks 

associated with a wide range of third-party 

relationships, and also for all stages of the 

lifecycle of third-party relationships.

So, in June 2021, the agencies issued 

proposed interagency guidance on third-party risk 

management in the Federal Register seeking public 

comment. Slide four, please?

In the aggregate, the agencies 

received over 80 comments for consideration in 

developing the final guidance. The FDIC, OCC, 

and the Federal Reserve Board reviewed and 

carefully considered public comments received, 

and issued final guidance in June of 2023.

Upon issuing the final guidance in 

June, each of the agencies also rescinded their 

previously issued third-party guidances. The 

final guidance provides a general framework and 
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a resource to assist institutions in implementing 

effective third-party risk management processes.

Banks use many types of third parties 

for numerous functions. All activities present 

some level of risk, so effective risk management 

is always important, particularly when a third 

party's engaged and provides services and 

conducts activities for banks.

The interagency guidance reminds 

institutions of this key principle. Whether 

activities are performed internally or via third 

party, financial institutions are required to 

operate in a safe and sound manner and in 

compliance with applicable laws and regulations, 

including those designed to protect consumers. 

Also, a bank's use of third parties does not 

diminish its responsibility to meet these 

requirements to the same extent as if the 

activities were actually performed in-house.

 Recognizing that there is a wide 

variety of third-party relationships for varying 
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purposes, the guidance promotes tailoring of risk 

management practices commensurate with the risk 

profile, appetite level, as well as the 

complexity of the bank's third-party 

relationships. 

And you might have -- so there are 

some similarities here obviously with the 

conversation with Lisa. I will now pass the baton 

off to my colleague, Tom Lyons.

MR. LYONS: Thanks, Luke. So, you 

know, the guidance is a principles-based resource 

and it's not mandatory. It's not a rule. The 

guidance is not intended as a checklist or as a 

safe harbor, so we do have those kind of questions 

that have come up in the past.

The guidance serves as a resource to 

assist institutions in implementing third-party 

risk management practices by providing examples 

of considerations in each stage of the lifecycle, 

the risk management lifecycle. So, those are 

planning, due diligence, contract negotiations, 
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ongoing monitoring, and termination.

So, the principles and examples of 

considerations addressed in the guidance are 

meant to be applied in a risk-focused manner, to 

take into account the level of risk, complexity, 

and size of the institution, as well as the nature 

of the specific, you know, third-party 

relationship, which kind of brings us to the next 

slide, Lisa, please.

So, tailoring, this is a key message 

throughout the guidance. If you've read it, you 

know, we mention it in several places. The 

institution can consider, you know, which 

activities discussed in the guidance within each 

stage might be appropriate for that institution 

depending on the situation, and can tailor its 

third-party risk management program to its 

specific relationships and risks and its 

activities.

An institution may need to 

incorporate, you know, different considerations 
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and factors such as those that may be found in 

more specialized, you know, topic-specific 

guidance to appropriately manage the risks from 

some types of third-party relationships.

So, you know, on governance, this 

section discusses the roles and responsibilities 

of board and management, the role of independent 

reviews, you know, to assess related controls and 

documentation, and reporting considerations, and 

to provide the necessary information for 

assessing the effectiveness of third-party risk 

management processes.

It highlights that the institution's 

board of directors has ultimate responsibility 

for providing oversight for third-party risk 

management and holding management accountable. 

Institutions are free to structure their thirdparty risk management processes in a variety of 

ways, as long as those processes provide 

effective risk management with accountability 

throughout the third-party risk management
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lifecycle.

So, under the supervisory review 

section, this discusses how examiners will assess 

a bank's third-party risk management practices, 

but a key message here is that examiners will not 

examine to the guidance, but will evaluate the

risks in the third-party relationships, the 

effectiveness of risk management processes, and 

whether activities are conducted in a safe and 

sound manner in compliance with all applicable 

laws and regulations, including those for 

consumer protection. So, next slide, please, 

Lisa?

So, here we have a number of resources 

that we believe are important and generally 

applicable to almost any situation when it comes 

to third parties, but, you know, we'll get into 

all of these, but they are on our website and 

here they are here. But a last point I do need 

to make is that business relationships with third 

parties engaged in lending, payment, or deposit 
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activities for the benefit of the bank or through 

the bank should be evaluated using, you know, 

both third-party risk management guidance, you 

know, a lot of good things in there to consider, 

as well as the various risk management processes 

and rules and regulations that apply to 

traditional lending and deposit relationships.

Now, relationships that are only 

between banks and their direct customers of 

traditional bank products and services such as a 

depositor, or retailer, or commercial loan 

customer, would not be addressed in a third-party 

risk management framework. 

Those are covered by various risk 

management processes and rules that apply to 

traditional lending and deposit relationships. 

You know, you all have, you know, your 

traditional underwriting standards that you'd 

like at. And with that, you know, we're happy to 

take any questions or comments that you have on 

third-party guidance.
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MEMBER MAUST: Thank you for covering 

that. I appreciate the agencies in a joint basis 

issuing guidance to the industry. It's been a 

topic of growing concern, I think, from 

institutions that are engaging in relationships 

that are outside of legacy service providers, and 

I think we're going to see more and more of that 

in a variety of different forms, not just in, you 

know, one way, but those that are more 

innovative, either direct to market, so market 

facing, or behind the scenes assisting banks in 

novel ways that aren't provided by definitely the 

legacy providers. So, this is very helpful.

I think the one comment you made or 

characterization you made was spot on, and I 

think it's written here somewhere, but treating 

it as if we're conducting the activities 

ourselves, is there a way to then ensure that if 

somebody's doing it in an outsourced form, that 

we can make sure that those activities are being 

conducted as if we were controlling all the way 
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through?

One of the challenges I've seen in 

banking, the so-called banking to service, which 

I'm not a real fan of that nomenclature, and I 

think that type of business model of handing off 

is probably not healthy for the industry, but 

working in a joint way in an embedded banking 

fashion probably is when we're talking about real 

economy participants.

One of the real challenges that I've 

seen in that space has been the handoff of 

responsibilities to a third party. So, in 

having, you know, kind of going through this, I 

noticed it pulls it back in and really looks at 

it, and says okay, if we're going in a joint basis 

to market or we're strategically aligning with 

somebody, that the bank needs to control, almost 

in a supervisory fashion, the process all the way 

to the end customer as if it's your own end 

customer, and I suspect that's -- is that a 

position held by the FDIC as well when we think 
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about field examiners on site?

MR. LYONS: So, you know, the bank 

really does need to understand, you know, all of 

the ramifications of the contracts that it enters 

into and the relationships that it's in, because 

ultimately, it's going to come back to and 

reflect on the institution, right? So, you know, 

one of the things we tried to walk through in the 

guidance, I think -- you know, I've been living 

this for too long. 

You know, to me, it's almost kind of 

intuitive for business folks, you know, plan out 

what you're going to do, understand why you're 

going to do it, you know, do your due diligence 

on your partner, and in the activity itself, what 

does that mean for the institution and what are 

the goals that are going to meet the goals of the 

institution?

And then, you know, as you're putting 

this through, and I know I'm kind of walking 

through these things, but I think they're really 
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important, you know, to think about it before you 

get involved in the relationship, how that all 

comes back and how is the institution going to 

oversee that? Do you have the expertise? Do you 

understand who your partner is and, you know, 

have the ability to get the information that you 

need, you know, to understand how they're doing 

that?

I know that we've had instances where 

third parties have kind of gone off track and the 

bank hasn't necessarily picked up on that, and 

yet it reflects back on the institution. So, 

it's very important to know those things.

Can you know everything that's going 

on if they're not going to tell you those things? 

I think that's a challenge, right, but there are 

ways that you can kind of put things in place and 

make those expectations, you know, known right up 

front.

What the examiners are going to be 

looking for is how does the approach that 
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relationship? Have you done your due diligence? 

Have you, you know, documented what you needed to 

do? Have you done what you could as far as from 

a contracting standpoint, a monitoring aspect, 

and reporting that up, you know, to your board 

and to senior management, and when things need to 

be elevated, you know, bringing those, you know, 

forward. You know, it's those kind of things 

that I think are really important.

Another thing that we highlight in 

here, which I think is also important but doesn't 

get as much attention as it maybe needs, is when 

you need to end that relationship, what happens 

then? Who owns the data? How do you, you know, 

back out of that and go forward? 

But it's also important from a 

contingency, you know, aspect. And Suzie was 

talking a lot about the contingency and I know 

you brought up the reciprocal side, understanding 

how things impact the institution when things 

need to change. So, I don't know, Luke, if you 
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want to add?

MR. BROWN: Yeah, there's not much I 

can add to that. I'll just say, so I think the 

guidance provides a really helpful framework that 

applies across a huge range of types of 

relationships, and I think it starts with the way 

you asked your question. 

You know, if the bank understands at 

the end of the day, despite being in a 

relationship, they're required to be consistent 

with safety and soundness, and laws and 

regulations, including consumer protection laws 

and regulations, then the bank steps back and 

says well, that's my level of obligation and I 

should be focused on these issues.

And I would also suggest that I think 

that sometimes in terms of getting involved in 

third-party relationships, institutions are more 

focused on their front end of the process as 

you're bringing in and you're vetting the third 

party, but that's got to be a lifecycle approach 
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throughout the relationship. There could be 

different changes and you want to understand 

what's going on under the hood essentially, so 

that's what I would add to the discussion. Thank 

you for the question.

MEMBER RICHARDS: Thank you. I had a 

question. I understand this guidance has to do 

with our responsibility for third-party 

management. I have a question. Mainly, I guess 

you could say it's what FDIC's responsibility is 

for third-party risk management.

We report to FDIC our people that we 

have relationships with, our vendors, and I know 

we get reports when you all examine the Jack 

Henry's and the Fiservs and the Finastras, the 

biggies, but how far down the food chain does 

that go for all of the Fintechs that are out 

there?

And what I'm getting at is if there's 

a situation that a bank has with a particular 

third party, it may be a Fintech, and it's a bad 
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outcome, a bad situation, is there a way that we 

would get notified about that, if they're in the 

financial services ring, that we'll know not to 

go there or is there privacy concerns that, you 

know, that won't let you do that? How far does 

you all's responsibility go to keep us safe when 

there's bad actors out there that are having 

these relationships with banks? Does that make 

sense?

MR. LYONS: I think so. I'm not an 

expert in the Bank Service Company Act, so I might 

need to, you know, reach out to a friend, but --

(Laughter.)

MR. LYONS: -- some of what you're 

asking for relates to, you know, our authorities 

under the Bank Service Company Act.

MS. ARQUETTE: Thanks, friend. So, in 

terms of significant service providers like the 

one that you mentioned, we work with the other 

federal banking agencies and we jointly examine 

the service provider. We evaluate the service 
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that's provided to institutions. 

To the extent that maybe we believe 

the findings need to be shared with client 

institutions, we will push out or offer the 

Report of Examination to client institutions, and 

that would mean if there's something that we 

think you need to know. So, it may not be highly 

rated, but there could be problems that relate to 

possibly the ability of the service provider to 

provide services at some point. That helps you 

to assess --

MEMBER RICHARDS: Sure, sure.

MS. ARQUETTE: -- your contingency 

plans, but in terms of other types of service 

providers, we evaluate regional service 

providers, those that provide services and are

significant to institutions that we supervise in 

geographic areas, and we do only go so far, you 

know, just in terms of resources.

MEMBER RICHARDS: I just kind of 

wonder what that --
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MS. ARQUETTE: What the threshold is?

MEMBER RICHARDS: -- cutoff level, 

that threshold, size-wise or --

MS. ARQUETTE: Importantly, we're 

focused on the ability of an institution to 

continue operating. So, for instance, if you 

have your core services provided by a service 

provider, if you will, and something that is 

affecting that core service provider could cause 

you to no longer be operational, whether it is 

malicious, an outside event that's malicious, or 

an event, a weather event, or some other type of 

just issue that happens with that service 

provider, if it's within our portfolio, we would 

certainly notify client institutions, so the 

banks that get their services from that core 

service provider.

We are exploring additional ways with 

our counterparts from other agencies to do this 

a little bit differently because we recognize 

that a lot of complexities have entered into the
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financial system, who you're working with and 

what becomes critical to an institution, and 

there has been a lot of, you know, vendor 

relationships, outsourcing, et cetera, so we're 

working with our partners to see how much we can 

do. 

Could I add one more comment? In 

terms of the issue that you brought up and the 

term that you don't like to use, which lots of 

people don't like to use, but entering into a 

third-party relationship when that third party 

facilitates relationships on behalf of the bank, 

whether on the deposit side or the lending side, 

we've seen that that can go poorly on the Bank 

Secrecy Act / Anti-Money Laundering side in that 

the third party might generate a lot of account 

relationships. 

There may be a master agreement in 

place where the bank relies on that third party 

to collect information at account opening. It's 

always worth double checking and making sure that 
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it's happening. 

The regulatory requirement is the 

bank's regulatory requirement if the third party 

is not collecting it. Sometimes there are 

streamline processes that are not consistent with 

the customer identification program 

requirements.

 The bank should, you know, just double 

check periodically, due diligence on your thirdparty relationships. So, that's where we've seen 

some interesting streamlining by third parties, 

not by banks intentionally, but by third parties, 

so always important to double check.

MEMBER JAMES: Very quickly, I think 

this is very interesting. I wanted to push a 

little bit on Troy's comment, and the Chairman 

may recall this. A few years ago, we had some 

discussion with FDIC around whether it would be 

appropriate for the FDIC or the other regulators 

to sort of create a green list of Fintech

companies that would be okay for us to use. 
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You know, we may not have, you know, 

extensive staff that can evaluate, you know, 

these technology companies and dig into their 

algorithms. They may not allow you to actually 

see the algorithm to show you how they're 

selecting customers, for example.

I don't want to get to the point where 

we're not taking responsibility for the 

relationship. So, to the point that you're 

making, I mean, we still are ultimately 

responsible for these relationships, whether it's 

a lending or depository relationship, but I do 

wonder, however, if it is, if maybe the FDIC can't 

create sort of a list of players that have passed, 

you know, whatever the criteria are.

 Perhaps there's a way for you to tell 

us which ones are creating problems so that we 

know to steer clear, you know, and make sure that 

we're not running into BSA/AML compliance issues 

when those issues have been caused ultimately by 

a contractual -- you know, you enter into a 
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contract with the Fintech. 

The Fintech is supposed to apply the 

regulation according to the standard by contract, 

but however, we're still -- we're regulatory 

obligated, so our obligation is a higher-level 

obligation, but if there's a problem, we may or 

may not know about it, and I think that's where, 

you know, I'd be interested to know if there's a 

way for us to create -- you know, keep us 

informed, keep us aware.

MEMBER RICHARDS: That's what I meant 

to ask.

MEMBER JAMES: Yeah, yeah.

(Laughter.)

MEMBER SHOEMAKER: And essentially 

you're asking for a TSA PreCheck.

MEMBER JAMES: Yeah.

MEMBER SHOEMAKER: You still have to 

go through security.

MEMBER JAMES: That's right. That's 

right.
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MEMBER CAMPBELL: Yeah, I --

MEMBER JAMES: I love that.

MEMBER CAMPBELL: I like the idea of 

the red list. I don't like the idea of a green 

list, you know, but I think, you know, a lot of 

times too like with the banking associations that 

we're part of, they do a lot of this type of work 

as well working with Fintech and vetting some of 

those things. So, I think that's a great resource 

for us, but I definitely wouldn't want FDIC 

picking the green list, picking the winners.

MEMBER JAMES: Right.

MEMBER CAMPBELL: But it would be nice 

if we were aware of the losers and didn't even go 

down that path.

MEMBER MAUST: We talked about a 

shared assessment model. I think that was a 

couple of years ago. Yeah, the industry would 

have a joint cooperation with the public sector 

as well.

I did want -- and the bank secrecy, or 
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the Bank Service Company Act is pretty limited in 

scope. I think at one time, it was a very wide 

scope in relation to what banks consumed as far 

as data processing and other third-party service 

provider relationships, but it's become a pretty 

small, narrow scope relative to all of the other 

services that are provided to banks.

So, it's unfortunate that they don't 

fall under the umbrella for supervision by 

federal function regulators or agencies. That 

sure would be nice for us. So, it might be 

incumbent upon us to take that on.

I did -- I thank you for bringing that 

up regarding BSA. And I don't mean to just pick 

on BSA, but having been through -- and it took us 

two years of just corporate governance, risk 

management, planning, build-out, and hiring 

before we even opened our very first account with 

a small program just to see how it would go.

We audited 100 percent, and did for 

quite some time, of every single opening as if it 
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were happening at the branch. And I think what 

we have to remember is any novel provider to the 

banking industry -- legacy providers, it's 

totally different, but novel providers are like 

hiring a brand-new employee out of college. 

They don't know what they don't know 

and they don't understand banking, certainly not 

to the extent we do, and they don't have an 

appreciation for why things are the way they are, 

and so it's incumbent upon us to make sure that 

every single one of those activities is compliant 

and under control. So, thanks for bringing that 

up because I didn't want to discount that.

MR. PEARCE: Yeah, I've been sitting 

here for like an hour, so I felt like I had to 

start talking at some point.

(Laughter.)

MR. PEARCE: So, you know, I think on 

green lists and red lists, I wouldn't expect us 

to do that anytime in the near future. I 

understand the rationale for wanting to have one, 
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but when we look at our authorities, right, so we 

have the authorities to supervise state nonmember banks and do that supervision, and the 

third-party risk management guidelines that Tom 

and Luke talked about, provide some resources for 

you to help manage those third-party 

relationships, but we really rely first and 

foremost on the bank to do it, right?

The Bank Service Company Act, as Lisa 

talked about, you know, we do have some 

authorities there and we have a program related 

to that, and that is certainly an area where we're 

probably increasing our intention. So, on the 

consumer protection side in particular, some of 

the issues that we have seen that have caused 

consumer harm have been related to some 

deficiencies with a third party, and so this is 

certainly an area that we're paying attention to 

and expanding our work, but we don't have the 

resources, or capability, or the regulatory 

authorities over some of the Fintechs and the 
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non-banks directly, so I don't think that's 

really going to be in the scope for us certainly 

in the near term.

MEMBER RICHARDS: Well, let me push 

back just a second on that. And I understand 

where you're coming from, but if there's a bank 

that had a relationship with a Fintech and there 

was some incident, a bad incident that took 

place, that bank is probably going to report it 

to FDIC in some form or fashion, whether it's 

through a SAR or just picking up the phone and 

calling FDIC and saying hey, we had this bad thing 

happen, and you knew that there were any number 

of other banks that were also customers of that 

Fintech, would you all not think it incumbent 

upon yourself to make some sort of notification 

to the other banks or not? I mean, I'm just 

asking.

MR. PEARCE: So, speaking on that --

MEMBER RICHARDS: I would like to know 

that.
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MR. PEARCE: Certainly, on the 

consumer side, when we have identified situations 

where there may be a third party involved, one of 

the things we do look to see is do we know if 

that third party is working with other FDIC 

supervised institutions --

MEMBER RICHARDS: Okay.

MR. PEARCE: -- so that we can do the 

appropriate follow-up work. Each of these 

scenarios are going to be a little bit different, 

but we do try to connect the dots, at least as 

related to our supervision program, but there are 

lots of issues around notifications of banks 

regarding what we found in other supervised 

institutions, especially if our authorities are 

not clearly related to the third party. 

So, it's a pretty complicated area, 

but certainly understand that we are living in a 

world where there's a lot more partnerships or 

arrangements between third parties, non-bank 

third parties and banks, and so it's an area that, 
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you know, we're continuing to look at our 

authorities in this space, and from an 

operational perspective, how can we get better at 

seeing those intersections as third parties are 

working with multiple supervised institutions? 

So, I definitely am sympathetic to the point and 

it's an area that we continue to look at.

MEMBER RICHARDS: I take what I get.

(Laughter.)

MEMBER PERRY: I can see where it 

would be hard for the FDIC to be, you know, 

policing all of the third parties, but we might 

also look to our state banking organizations to 

do that for us. So, I feel very blessed to be in 

Kentucky where we have a very strong state 

banking organization, the Kentucky Bankers 

Association, and, you know, they endorse vendors.

 So, you have to go through a process 

of being approved to be an endorsed vendor, and 

it's not just vendors within Kentucky. It's 

vendors across the nation. So, you know, that 
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might be a good place for us to look. 

That doesn't relieve us of our 

responsibility to do our due diligence on these 

third-party vendors, but at least they've gone 

through an initial check through our state 

banking organizations. So, that, I think that 

gives me a little peace of mind before I start 

doing my due diligence, so.

MR. BROWN: And I'll just add a couple 

of thoughts. You know, one thing that we haven't 

quite touched upon is that the agency does a lot 

of work in terms of understanding the companies 

that are out there, and their tendencies, and 

their relationships, both on the policy side and 

examination side, because we want to make sure 

that we're educating ourselves. 

And again, our focus is derived 

through our authorities through banks, so that's 

-- much of what you see here is from our 

understanding what's going on out there and then 

sort of processing the information, sort of what 
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are the risks and what can we communicate? 

And also, you know, we have a lot of 

relationships with other regulators with 

different authorities. So, if we find an issue, 

whether it's a violation of law or some sort of 

concern, we certainly would refer that item to 

another regulator that would have the authority

to address that issue.

MS. ARQUETTE: So, if I might, Nikita, 

I would add in the Bank Secrecy Act / Anti-Money 

Laundering space, when we're aware of a 

relationship where a third party has streamlined 

their process, thereby causing the bank not to be 

in compliance with regulatory requirements, 

including suspicious activity monitoring, or 

customer due diligence, or collecting information 

at the beginning of the relationship, the 

customer identification program, we'll notify the 

institution, you know, and we have seen these 

third parties go to other financial institutions. 

We will work with our staff in other regions to 
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focus and ask the same questions, thereby working 

with the institution to make sure that they are, 

in fact, meeting their obligations. 

So, as Luke said, we do that 

internally as an agency with other agencies, and 

as appropriate, refer matters to the Financial 

Crimes Enforcement Network so they can focus. 

They have much wider authority in the Bank 

Secrecy Act space and can work with other federal 

functional regulators.

MS. PEARSON: All right, thank you 

very much to the panelists, and thank you all for 

the engaging conversation. We'll move now to 

Lance Jameson, who is product owner for FOCUS, 

which is one of our systems of record. 

Lance works in the Division of Deposit 

and Consumer Protection. Lance will provide us 

an update on the banker engagement site. After 

Lance's brief update, we'll move to Mark Pearce.

MR. JAMESON: Thank you, Nikita. As 

a product owner for our system of record, I just 
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basically represent the business side and the 

modernization effort for our system of record, 

providing business requirements to our vendor and 

our IT specialists as we go through our 

modernization effort.

Today, I'd like to share with you a 

product that we just deployed in September known 

as our Banker Engagement Site. As we were 

developing our new module for our pre-exam 

planning module, we identified an opportunity to 

create a new banker portal that would facilitate 

the compliance and CRA examination activities. 

So, today I'd like to share some of that 

information.

We launched the Banker Engagement Site 

on September 7. We do think there's going to be 

great efficiencies in the exchange of documents, 

information, and communication, both benefitting 

the examiners and the institutions.

The pre-exam planning process 

generally starts 90 to 120 days before the 
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examination process. There's several components. 

There's an information package, a pre-examination 

questionnaire, a compliance information and 

document request, and a transactional testing 

request. All of that information that's 

exchanged between the institution and our 

examiners helps us set up the scope of the 

examination, so it's critical to our planning 

process.

We also, within this Banker Engagement 

Site, have an ad-hoc capability. So, outside of 

the pre-exam planning process, we can share 

documents and information between the bank and 

the institution. 

So, examples of ad-hoc would be maybe 

during the, later in the examination cycle, maybe 

there's some additional documents that we want to 

securely share, so those could be processed 

through the Banker Engagement Site.

Outside of the examination cycle, 

there are times when banks reach out to our 
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examination teams to talk about third-party 

relationships or new disclosures, so those types 

of communication could also be facilitated 

through the Banker Engagement Site.

So, earlier this year, we engaged with 

a vendor to conduct banker usability testing for 

the Banker Engagement Site. We had nine 

institutions from across the country, ranging 

from $180 million to almost $15 billion. 

And the vendor led them through a 

series of exercises and communication, bringing 

them into the application and asking them to 

complete tasks. They intuitively were able to 

complete the task based on the design, the userfriendly design of the application.

They appreciated the transparency in 

identifying where they were in the process of 

completing the component or completing the 

overall pre-exam planning process, and the 

ability to upload documents and associate them 

with specific request items was helpful, one or 
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more request items. It took some of the pain 

points from the existing process away from the 

sharing of those documents.

The bankers also shared a number of 

ideas with us for enhancements. We were able to 

address those during our development and finish 

a couple of others over the recent weeks. Some 

of those included placements of some of the 

features, others label changes for clarity, but 

I think we will continue to seek feedback from 

the bankers as we roll this out and make changes 

through our agile development process.

The banks will also have the ability 

to opt out, so choose not to use the Banker 

Engagement Site. In those instances, we will, 

the exam teams will talk to the bank and address 

that through another sharing process, for 

instance, the Enterprise File Exchange, EFX, 

that's currently used.

We may still use EFX for some other 

examinations that have an extreme high volume of 
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sharing or sharing with state examiners or RMS 

for some of the joint activities. Let's see, can 

we move to slide two? Thank you.

As far as communication, an FIL was 

issued in early September, FIL-49-2023, and that 

provided the awareness that the Banker Engagement 

Site was, the impending release of the site. 

We've had -- this is a week or so old, but, you 

know, we probably have well over 100 bankers that 

are enrolled in the Banker Engagement Site at 

this point. Something like 30 or 40 institutions 

have a full team in the Banker Engagement Site.

We've initiated 25 pre-exam planning 

activities with bankers, and at least two as of 

yesterday have completed the pre-exam 

questionnaire in the Banker Engagement Site. 

Next week, we'll reach out to our examiners that 

have been working with the bankers to see if there 

is some early feedback from that process.

We do have user guides and job aids 

that are available in the Banker Engagement Site. 
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We'll continue to maintain those training 

resources current as enhancements or changes are 

made or if training needs are identified by 

bankers. There's also help desk numbers that are 

available for banks to call for assistance.

We have briefed and demoed the Banker 

Engagement Site with the staff, some staff from 

the ABA and ICBA. They've shared some 

information, I think, with the state associations 

after those briefings, and if there's additional 

information that they need for state 

associations, they'll be reaching out to us and 

we'll be providing additional information as 

needed.

Earlier this week, we recorded a short 

video, I think it's eight or ten minutes long, 

that gives an overview of the Banker Engagement 

Site. That will be available on the FDIC site 

under the Banker Resource Center, and we'll be 

sharing that with our regional field management 

so they can do outreach, and as they reach the 
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institutions to start the exam process, share 

some resources so they have an understanding of 

the Banker Engagement Site the first time around.

So, the Banker Engagement Site, again, 

is compliance and CRA activity for pre-planning. 

RMS will still use EFX for their document sharing 

process.

And so, it's a brief update, but we 

really just wanted to give you an awareness of 

some of the terminology that's going to be coming 

out. We're looking for feedback and ideas, and 

hopefully it's a great experience for the bankers 

that use this new tool. 

MEMBER SHOEMAKER: In regard to the 

ad-hoc communications, will this become a part of 

our permanent record or will it purge after so 

many days or months?

MR. JAMESON: Yeah, the ad-hoc record 

will, if it's related to an examination, it would 

fall likely into the workpapers and part of that 

retention process. If it's a communication, it 
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would fall under our communication rules and be 

retained under our communication retention plan.

MR. PEARCE: One of the things, just 

to jump in, here is this, is something that we're 

hoping will really be a win-win, both for our 

examination teams and for the bankers. 

On the consumer compliance approach, 

our exam approach, we've shifted over the last 

decade to doing much more work in the pre-exam 

planning part where we do risk scoping to really 

focus on the areas where we think there would be 

a risk of consumer harm, and so a lot of our 

examinations are now occurring off-site, you 

know, and then we have an on-site portion once we 

scope the exam. 

And every quarter, I get a report from 

our ombudsman that does the post-exam survey and 

gives us feedback that bankers have provided over 

the course of, you know, at the end of the 

examination, which is completely anonymous, by 

the way, and I don't know who does it, but it 
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gets compiled and I get statistics and 

information through it.

But one of the things that's really 

been a pain point for bankers on the consumer 

compliance side has been there are a lot of 

questions in the pre-exam process on the consumer 

side, and there may be a lot of documents that 

get requested in advance, and so that's kind of 

been a pain point. 

And I think the Banker Engagement 

Site, I think the long-term vision for this site 

is it will enable an easier flow of information 

and ability to, you know, down the road, be able 

to have more information that's kind of prepopulated that might not change from exam to 

exam, and hopefully will make that pre-exam 

planning process more efficient and remain as 

effective as we need it to be. So, that's a goal. 

So, we're still working toward that, but this is 

step one.

MEMBER DRENTLAW: Is there any thought 
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to extending that to the safety and soundness 

side? Because, don't get me wrong, the 

compliance exam, it is extremely thorough, but 

even on the safety and soundness side, there's a 

lot of repeat questions in the officer 

questionnaire. 

It would be nice to be able to link 

documents with specific questions because they 

get lost sometimes, so we have to re-upload 

stuff. It sounds like a great site that could be 

really utilized well on the risk management 

piece.

MR. PEARCE: We're first out of the 

gate on this. We've been undergoing a 

modernization of our internal systems for the 

consumer compliance process for our examiners, 

and my colleagues on the safety and soundness 

side are embarking on a similar process, but at 

a later phase. And so, hopefully some of the 

lessons learned from our development work will be 

useful in their development work, so that's 
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probably down the road a bit, but certainly on 

the agenda.

MR. JAMESON: And we are actively 

talking with that team about some of the common 

capabilities in the portal and the questionnaire 

to facilitate that exchange of information, and 

have that transparent and available, not only 

prior to the exam, but, you know, for the next 

cycle of exams are all things that they are very 

interested in and seek common value.

MR. PEARCE: All right, Nikita is 

giving me a look, so I guess I've got to check my 

watch. So, the last thing we wanted to talk about 

is our return to banks process. 

About a year ago, we shifted from the 

pandemic footing to beginning to come back onsite 

at institutions. And maybe as a backdrop to that, 

on the consumer protection side, I just sort of 

talked about how we have moved over time to having 

more off-site work in the pre-exam planning 

process. 
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And so, pre-pandemic, we were about 

two-thirds off-site and one-third on-site, and 

obviously during the pandemic, we were 100 

percent off-site, and as we over the last year 

have been kind of coming back into banks, we're 

somewhere in between, so we're 20 or 30, you know, 

20, 25 percent on-site. 

And so, we're really trying to work 

through the process to make sure that we're 

finding sort of the sweet spot of, you know, 

making sure that we have on-site presence and 

still utilize off-site capabilities to make the 

exam process efficient and effective.

On the RMS side, the safety and 

soundness side, sort of pre-pandemic, it was 

about 40 percent that was off-site and, you know, 

more of that on-site activity. And, you know, so 

we have been coming back into the banks and we 

wanted to at least take the opportunity at the 

end of this meeting to see if you had any feedback 

regarding that transition to having examiners 
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back on-site at the bank, or if there have been 

any new challenges or things that we need to take 

a look at now that it's been about a year.

MEMBER RICHARDS: When I saw this 

title, I got excited. I thought this was going 

to be a return of insurance premiums back to --

(Laughter.)

MEMBER RICHARDS: I think for us, I'm 

always a face-to-face person, but, you know, 

truthfully, I think a hybrid approach works 

really well for us. A lot of the stuff, we can 

send and it's self-explanatory, but a lot of it 

is not and you need that eyeball to eyeball 

sitting across the desk from somebody part of it 

and -- because, you know, banking is not just 

data. 

It's relationships, and sometimes we 

need to explain those relationships, and so I 

think face-to-face, I don't want to give that up, 

but, you know, I don't mind sending in a lot of 

the data either.
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MEMBER HORVAT: I would agree with 

Troy's comments. I think pre-pandemic, it could 

be extensive. I mean, there were points where we 

thought we had some additional employees, but 

they were FDIC examiners, and I think we actually 

had a pretty good balance the last exam we had 

with on-site and with off-site. I think it can 

work both ways.

MR. PEARCE: Great, thanks.

MEMBER DRENTLAW: I think we -- oh.

MEMBER PILARSKI: Go ahead.

MEMBER DRENTLAW: We had an exam last 

October, so it was one of the first on-site exams 

I think the examiners had been on for a while, 

and I concur. It was nice to not have our entire 

parking lot full of additional cars.

So, the hybrid was great, but the 

relationship that you can build with the examiner 

face-to-face, I think, is extremely important, 

because there were times that, in the off-site 

exams only, that assumptions would be made and it 
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would not be brought up until the end of the exam 

rather than just having that conversation, and 

even just talking about families and stuff, it 

makes everything a little bit more relatable, so 

I think having people back in is a good thing.

MEMBER PILARSKI: I would agree with 

all of those comments. The one pain point on the 

safety and soundness is sharing imaged loan 

files. We see a lot of value to them getting 

those off-site, but we don't have -- somebody 

help me out, is it FIVE? And we've talked to our 

core and it would be very expensive for us to get 

that, so if there's some sort of alternative 

there, that would be very helpful.

MR. PEARCE: Yeah, I can tell you 

we're continuing to look into that area because 

we know a significant percentage of banks don't 

image loan files and getting those files to us is 

challenging, and, you know, looking at 

technologies and strategies to do that is still 

something that we're working on, and we've got 
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some technology people that have a lot of great 

ideas, and so we're trying to figure out if we 

can make those into reality.

MEMBER CAMPBELL: What I found most 

beneficial through the virtual exam was time 

management, and so your staff seemed to do a 

really good job of learning to manage their time 

in bringing a pre-list of questions and then 

scheduling time for that as opposed to, you know, 

when they're in the office, it's just quick 

access, and so it could be all day --

MR. PEARCE: Back and forth.

MEMBER CAMPBELL: -- you know, and so 

I think if they can, you know, take what they've 

learned through the virtual with, you know, 

scheduling time, that was very beneficial.

MR. PEARCE: Great, thanks for that.

MEMBER HUANG: I piggyback pretty much 

what everybody else has said. The pre-exam stuff 

has really helped a lot, I think the fact that we 

can, if the FDIC is able to give it to us 90 days 
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out, we're able to give it to you early. 

Your examiners have time to digest 

everything, and from day one, they can come in 

just with substantive questions. Then we're able 

to clear up any kind of misunderstandings so that 

we're not at the end of the examination having an 

exit meeting and we're still trying to explain, 

you know, certain things that we probably could 

have cleared up if we were face-to-face.

The hybrid has really worked well for 

us. We don't have that many C-level executives, 

and if, you know, there are 15 people from the 

FDIC, it almost feels like a three-on-one five 

days a week, and that wasn't a lot of fun to be 

honest, but the fact that we can kind of hybrid 

it then, you know, plus for our office space 

management, it works out well too, so. 

MEMBER MJARTAN: If I could add, I 

agree with most of the comments, but one thing I 

would point out is we recently had a visit from 

the regional office in Atlanta, and we're in 
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between exams, and it was really nice to have 

them on-site, especially now that we're in a 

little bit of an uncertain environment, having 

those conversations in person and for them to 

make the trip, make the effort, and then spend a 

couple of hours on-site was extremely valuable, 

and I encourage them to do that.

We try to do that quarterly anyway 

with both the case manager and also the regional 

director or the assistant regional director. In 

terms of the exam, you know, we're a small bank 

as well, but I would advocate, like I think I did 

last time, just for as much on-site time as is 

manageable for both. It was a much more 

productive exam for us to have that relationship.

MEMBER HORTON: I would just like to 

add that our experience with the FDIC examiners 

has been so appreciated that there's a lot of, 

you know, continuity, experience, retention of 

examiners more so than at the state level has 

been our experience. 
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And I think, you know, the 

communication has been great whether it's been 

hybrid, in person, or remotely, and I think it's 

that experience of the examiner. So, whatever 

you're doing to retain good people, keep it up, 

because we notice the difference, and we would 

love to --

(Laughter.)

MEMBER HORTON: -- have that 

experience with examiners any day than 

inexperience. So, they really understand risk 

management and how to put things in perspective, 

so thank you for that. 

MEMBER DRENTLAW: Just to follow-up on 

Troy's comment, for the exam that we had when 

they were back on-site, I noticed exactly what 

you were talking about, where they were really 

good at, again, saving up a list, asking for time 

to sit down ahead of time instead of just driving 

by and stopping in. So, it seemed at least the 

team that we had on-site had taken that 
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experience that they had had during the pandemic 

and brought it forward.

MEMBER JAMES: We have an exam that 

just kicked off, so I'll let you know.

(Laughter.)

MEMBER JAMES: I do know that we were 

forewarned that we were getting a lot of 

trainees, which makes us nervous, quite frankly, 

to have extra people because we're so small that, 

you know, when we have a lot of extra people and 

they have to sit there for a couple of weeks, 

well, there's a lot more time, you know, for them 

to go and nitpick, frankly, you know, and so that 

has been a big concern of ours. 

So, we'll let you know, you know, how 

it goes when they come on-site. I think they 

start on-site next week if I'm not mistaken, so 

we'll see, but we've been -- the pre-work has 

been pretty extensive this time, so, you know, 

hopefully it will be a very substantive and 

constructive visit.
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MR. PEARCE: Thanks. You know, all of 

the experienced, talented examiners we have, 

which is, I think, a terrific resource for the 

FDIC and something we're proud of, you know, we 

have to start somewhere, right, in training, and 

a lot of folks during the pandemic, they came on 

board and we had training, and they haven't had 

the opportunity to go on-site.

And so, some of that, kind of getting 

back on-site and having those positive 

experiences and conversations with bankers is 

really an important part of our training program 

and development. So, understand that there may 

be some challenges that come from that, but it's 

something that is pretty important for us to be 

able to develop our team and then be able to 

provide that kind of comprehensive and capable 

examination that I think we care so much about.

And I guess I should have probably 

mentioned it at the first part, and I really 

appreciate all of the feedback from you on this 
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because it really reinforces and validates a core 

for us, which is the importance of the on-site 

portion of the examination, that we're very 

committed to that. 

We think it adds a lot of value for 

the examination to be a constructive process, and 

I think what we hear from bankers is they get a 

lot of value from that too. And so, we know you 

don't want a whole parking lot of people for 

extended periods of time, and so we're really 

trying to refine that and calibrate it to make 

the hybrid approach effective and efficient, so 

thank you. I'll turn it back over.

MS. PEARSON: So, we are wrapping up 

the meeting. There's a couple of points I would 

like to make briefly. First, thank you all very 

much for your time and engagement today. I wish 

you safe travels. 

I would like to thank Lisa Roy for all 

of the work that she did today. Thank you to the 

IT team in the back. And I know there's a lot of 
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team members who are outside, Shannon, Roz, and 

a lot of other team members. I really appreciate 

their help. 

I want to thank Cassia Rodrigues, who 

is a Master's in Applied Economics student at 

University of Maryland, for joining us today. 

She has an interest in networking and increasing 

her knowledge, so if you have an opportunity, 

please make sure that you say hi to her before 

you leave.

And before I turn it over to the 

Chairman, Vice Chairman Hill, are there any 

closing remarks that you would like to make? All 

right, Chairman Gruenberg? 

CHAIRMAN GRUENBERG: Thank you, 

Nikita. We're right on time, so I'm going to try 

to stick to that. Let me just say a brief word 

of thanks to all of you for your thoughtful and 

candid comments really throughout the day today. 

We're very appreciative. This committee really 

brings a lot of value to the FDIC, so we really 
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thank you for your time and commitment.

I'd like to say a final word of thanks 

to the five members of the committee who will be 

leaving us and this is their last meeting, Mike 

Bock, Chief Executive Officer of Dairy State Bank 

in Rice Lake, Wisconsin; Hal Horvat, President, 

CEO, and Chairman of the Board of Centreville 

Bank in West Warwick, Rhode Island; Cindy Kitner, 

President and CEO of Jefferson Security Bank in 

Shepherdstown, West Virginia; Arlen Osterbuhr, 

Chief Executive Officer and Chairman of the Board 

of Minden Exchange Bank and Trust Company in 

Minden, Nebraska; Shane Pilarski, President and 

CEO of Alliance Bank in Francesville, Indiana. 

I should mention also Andrew West, who 

couldn't be here today. He came down ill. He's 

the President and CEO of Eagle Bank of Polson, 

Montana, who will also be leaving us. Thank you 

all. It's really been a pleasure. My thanks to 

everybody. We'll see you next time. Take care. 

(Whereupon, the above-entitled matter went off 
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the record at 3:00 p.m.)