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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,

JUNE 1, 2023

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The Advisory Committee convened at 9:00

a.m. EDT in the Federal Deposit Insurance

Corporation Board Room at 550 17th Street NW,

Washington, DC, with 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

MICHAEL CULHANE, President and CEO, North 

 Cambridge Co-operative Bank, Cambridge, 

 Massachusetts

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 -

Director of Strategic Initiatives, Carver 

State Bank, Savannah, Georgia 

CINDY KITNER, President and CEO, Jefferson 

Security Bank, Shepherdstown, West Virginia 

TREY MAUST, Executive Chairman, Lewis and 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 Famers Bank Corporation,

Catlettsburg, 

 Kentucky

SHANE PILARSKI, President and CEO, Alliance Bank, 

 Francesville, Indiana

KIM REIGELSBERGER, President, Preferred Bank, 

 Rothville, Missouri

TROY RICHARDS, President, Guaranty Bank and Trust 

 Company, Delhi, Louisiana

LILLOUS ANN SHOEMAKER, President, Magnolia State 

 Bank, Bay Springs, Mississippi

ANDREW WEST, President and CEO, Eagle Bank, 

 Polson, Montana
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3 

ALSO PRESENT:

MARTIN J. GRUENBERG, Director, Federal Deposit 

 Insurance Corporation, Chairman

TRAVIS HILL, Director, Federal Deposit Insurance 

 Corporation, Vice Chairman

MICHAEL J. HSU, Acting Comptroller of the 

 Currency

JONATHAN McKERNAN, Director, Federal Deposit 

 Insurance Corporation

ROHIT CHOPRA, Director, Consumer Financial 

 Protection Bureau

JOHN ANDERLIK, Assistant Director, Division of 

 Insurance and Research

ROSALIND BENNETT, Center for Financial Research, 

 CFR Executive Program Director

RYAN BILLINGSLEY, Deputy Director, Division of 

 Risk Management Supervision 

ROBERT DiCHIARA, Regional Manager, Division of 

 Insurance and Research

DOREEN EBERLEY, Director, Division of Risk 

 Management Supervision

G. CHRIS FINNEGAN, Senior Deputy Director,

Division of Depositor and Consumer Protection

MARTIN HENNING, Deputy Director, Division of Risk 

 Management Supervision

THOMAS LYONS, Associate Director, Division of 

 Risk Management Supervision

PATRICK MITCHELL, Director, Division of Insurance 

 and Research

RAE-ANN MILLER, Senior Deputy Director, Division 

 of Risk Management Supervision 

JON POGACH, Senior Economic Researcher, Division 

 of Insurance and Research

BETTY RUDOLPH, National Director, Minority and 

 Community Development Banking

CAMILLE SCHMIDT, Section Chief, Division of Risk 

 Management Supervision

KAYLA SHOEMAKER, Acting Section Chief, Division 

 of Insurance and Research

MICHAEL SPENCER, Associate Director, Division of 

 Insurance and Research
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C-O-N-T-E-N-T-S

Introductory Remarks.......................... 5 

Discussion of Banking Conditions .............10

Update from the Minority Depository

Institutions Subcommittee .............. 80

Deposit Insurance Fund Update ................ 89

Options for Deposit Insurance Reform ........ 117

Supervision and Policy Updates .............. 154

Closing Remarks............................. 251
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P-R-O-C-E-E-D-I-N-G-S

9:02 a.m.

CHAIRMAN GRUENBERG: Good morning, 

everybody. We’ve got a full house this morning. 

Thank you all for being here. And, I’d like to 

call this meeting of the FDIC’s Advisory 

Committee on Community Banking to order. We’ve 

got a full agenda today. I think we’ve got a few 

things to talk about and very much look forward 

to your participation and feedback.

Let me start by welcoming a number of 

new members who are just joining the committee. 

Let me read off their names if I might: Thomas 

Bates, the President and CEO of Legends Bank in 

Clarksville, Tennessee; Michael Culhane, the 

President and CEO of North Cambridge Co-operative 

Bank in Cambridge, Massachusetts; Anita Drentlaw, 

President and CEO of New Market Bank in New 

Market, Minnesota; Sue Horton, President, CEO, 

and Board Chair of Wheatland Bank in Spokane, 

Washington; Warren Huang, General Counsel of 
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Amerasia Bank in Flushing, New York; April Perry, 

CEO and Chairman of the Board of Kentucky Farmers 

Bank Corporation in Ashland, Kentucky; Troy 

Richards, President of Guaranty Bank & Trust 

Company in Delhi, Louisiana; Lillous Ann 

Shoemaker, President of Magnolia State Bank in 

Bay Springs, Mississippi. We welcome you all. 

Really delighted to have you on the committee. 

And, I think you’ll find it interesting.

We’re joined by three of our Board 

members this morning. And, I’ll give them an 

opportunity in just a moment if they’d like to 

make a comment. Let me just provide a quick 

overview of the agenda for today.

We’re going to start our program with 

a discussion of current banking conditions. I

think that our staff will pose some questions on 

pressing issues. And, we’ll really try to elicit 

your feedback and thoughts.

We’ll then follow that panel with an 

update on our Minority Deposit Insurance 
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Subcommittee, which held a meeting yesterday. 

That’ll be followed by an update on the Deposit 

Insurance Fund, as well as a panel that follows 

that on options for deposit insurance reform 

which seems to be a topic of interest. And, 

finally for the final panel of the day, we’ll 

have a series of presentations on updates on 

supervisory and policy issues.

So, I think we’ll have a full day. 

We’ll very much welcome your engagement and look 

forward to the discussion. And, maybe I can call 

on Vice Chairman Travis Hill if he wants to say 

a word.

VICE CHAIRMAN HILL: Well, I just want 

to welcome everyone today. Thank you all for 

your time and input and participation today. 

This has been a very valuable committee in the 

past and now seems like an especially useful time 

to hear from all of you. So, look forward to 

hearing from everyone, and thanks again.

CHAIRMAN GRUENBERG: And, Director 
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McKernan?

DIRECTOR McKERNAN: Nothing for me.

CHAIRMAN GRUENBERG: And, Controller 

Hsu? 

CONTROLLER HSU: We’re good.

CHAIRMAN GRUENBERG: Well, let’s get 

started. And, if I may, I’ll turn the program 

over to Doreen Eberley. I found her. She’s, as 

you all probably know, is the Director of our 

Division of Risk Management Supervision. And, 

she’ll serve as the moderator for today’s 

meeting. Doreen?

MS. EBERLEY: Thanks, Chairman 

Gruenberg. So, since we do have several members 

of our Board of Directors with us today, I have 

some brief housekeeping remarks. The government 

in the Sunshine Act imposes notice and access 

requirements whenever a quorum of the FDIC’s 

Board of Directors meets to conduct or determine 

agency business.

This meeting is not held for such 
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purposes and does not constitute a meeting under 

the Act. The Board members present will only 

engage in general or preliminary discussions that 

do not relate to specific proposals for action 

pending before the FDIC. Any specific issues for 

official Board resolution will remain open for 

full consideration by the Board following 

conclusion of the meeting.

If anybody has any questions, I’ll be 

happy to answer them or not me, but I have others 

in the room that can answer them. Any questions? 

Okay, great. We can go ahead and get started. 

We’re going to begin this morning by turning to 

John Anderlik who is Assistant Director of 

National and Regional Risk Analysis in our 

Division of Insurance and Research; Robert 

DiChiara, Regional Manager in the same division; 

and Camille Schmidt, Chief of the Risk Insights

and Analytics Section in our Division of Risk 

Management Supervision. 

John, Robert, and Camille will provide 
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an economic overview and touch on industry risks. 

And, throughout their presentation, we want to 

hear from committee members regarding your 

thoughts on these risks as well as any others 

that are on your mind. We look forward to hearing 

from you about what you’re seeing in your 

communities. John?

MR. ANDERLIK: All right. Thanks, 

Doreen. So, the way this is going to work, we 

have split this session into two sections. I’m 

first going to talk about a couple of economic 

issues and then touch on net interest margins 

from the newly released quarterly banking profile 

from yesterday.

I’ll talk for just three to five 

minutes, then turn it over to you to hear from 

you about some of those issues. And, then the 

second part, Camille and Bob are going to talk 

through just a few slides on credit risk and then 

also open up to you. So, most of this session

will be you talking to us. I think that’s what 
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we want to hear.

So, let’s turn to the next slide. I 

have four slides to go through quickly, two 

economic slides. So, the first slide is one of 

the major considerations we see in the economy. 

That’s tight labor market conditions.

And, I always like to start meetings 

with the bankers’ group with a map that we can 

all find yourself on the map and see where you 

are. The first thing to notice, well, first off, 

this map has four different colors. If you’re 

one of the brown colors, you’re doing well. Your 

state is doing well.

The darker brown color are the best 

five unemployment rates in the country. And, if 

you’re blue, you’re doing slightly worse than 

average. The best state in the country is South 

Dakota with an unemployment rate of 1.9 percent, 

which is unfathomably low.

And, the highest rate is Nevada at 5.5 

percent. And, by the way, these are March 
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numbers. We wanted to get the April numbers in 

here. We just didn’t meet the press deadline. 

But, things didn’t change much in April.

So, we see some disparity across the 

country. But, by and large, these are extremely 

low unemployment rates. And, that’s what we keep 

hearing from economists is this is just the most 

resilient labor market despite the fact the Fed 

is raising rates to try to slow things down, to 

try to tame inflation.

When I looked at Oregon and Illinois 

in the bottom five at 4.4 percent, that just means 

we’re just in shockingly low times. So, the main 

takeaway here is labor markets remain very strong 

despite the Fed’s aggressive moves to try to slow 

things down. Flip slides. And, this slide shows 

inflation.

We have two different inflation lines. 

The brown line is the headline CPI. The dark 

blue line is the core CPI which is CPI less food 

and energy. And, then the blue line is the Fed 
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funds rate.

And, you see that after the pandemic, 

we had a big spike in inflation. The CPI peaked 

at 9.1 percent in June of ‘22. The core CPI 

peaked at 6.6 shortly thereafter.

Then the Fed started raising interest 

rates. We’ve seen ten straight meetings where 

they’ve raised rates to take the Fed funds target 

rate from 0.13 percent to 5.13 percent since last 

March. Those movements have helped CPI moderate 

to some degree.

The headline CPI is down to 4.9 

percent as of April. The core CPI is a little 

stickier at 5.5 percent. The Fed funds rate, we 

focus on that. It went up 400 basis points just 

in the last three quarters of last year and that’s 

going to be important when we get to the next 

slide. We had two more rate increase in the first 

quarter of this year, but that was only 50 basis 

points. It was a moderation in the rate hikes.

And, what we’ll see on the next slide 
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is the rapid rise in the Fed funds rate; had 

enormous impact on bank financial performance, 

especially community banks. This slide shows --

and like I said, freshly minted. This is as of 

yesterday, first quarter.

This slide shows community bank and 

industry net interest margins going back for 15 

years. The big story for community banks and the 

industry in the first quarter was the turn 

downward in the net interest margins. You can 

see that on these lines.

We had quite a bit of compression 

during the pandemic. NIMs bottomed in the first 

quarter of 2022 at 3.11 percent for community 

banks and 2.54 percent for the industry. And, 

then as the Fed raised rates last year in the 

last three quarters, like I said, 400 basis 

points, we saw some pretty large increases in 

NIMs.

Community banks added 60 basis points 

to their NIMs in the last three quarters of last 
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year. And, the industry added 83 basis points. 

But, then, like I said, in the first quarter, we 

had a moderation in the Fed’s actions, only went 

up 50 basis points.

And, we see a downturn in NIMs for the 

first quarter. The industry had a narrowing of 

7 basis points, and community banks were about 

three times higher than that at 22 basis points. 

And, my last slide to tee things up is this is 

really the reason that we saw a NIM compression 

in community banks in the first quarter is 

because the increase in deposit costs exceeded 

the increase in loan yields.

You see during the second quarter of 

2022 and the third quarter of 2022, community 

bank loan yields were expanding faster than what 

they’re paying on deposits. That was a big boost 

to NIMs. In the fourth quarter, they actually 

pretty much caught each other.

We had just a slight gain for deposit 

costs over yields. But, in the first quarter, 
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deposits, the funding deposit costs cost 39 basis 

points more. And, loan yields only went up by 16 

basis point. And that 23 basis point gap really 

fed into the 22 basis point decline we saw in 

NIMs.

So, with that, I teed a lot of things 

up for discussion. And we have 20 or 25 minutes 

to talk about it. But, basically, what I like to 

hear is for your bank or your market areas, if 

you want to talk about your labor markets.

I love to hear if your customers are 

facing tight labor markets. Are you having 

trouble hiring? How have inflation or interest 

rates affected your bank? 

And, really if we want to talk about 

net interest margins and deposit flows, I know 

we’re really having to price up deposits. And, 

if you want to talk about that, I’d love to hear 

that too. So, with that, I can turn it over to 

you all.

MEMBER SHOEMAKER: Lillous Shoemaker 
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from Magnolia State Bank. In regard to the 

unemployment rate, Mississippi for the last 

quarter was 3.5 percent. But, it’s interesting, 

we definitely have seen tightening in the labor 

market.

But, our seasoned employees are 

seeking employment elsewhere. We can’t seem to 

get new employees to hire on at respective wages. 

And, there’s a lot of job openings, but it’s not 

reflective of the unemployment rate.

MR. ANDERLIK: Yeah, we see that the 

JOLTS report came out yesterday. That’s the job 

openings report, and it was unexpectedly strong, 

again, to show how many job openings there are in 

relation to how many jobs are needed. How many 

jobs employees want to fill is still shockingly 

high.

MEMBER BOCK: Am I on now?

MR. ANDERLIK: Yeah, there we go.

MEMBER BOCK: With proper staffing, 

it’d probably increase sales by a million to two 
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million dollars pretty simply. But, I think the 

other thing that we’re starting to kind of see, 

we’re an area that’s starting to have an elderly 

population, a lot of assisted living, nursing 

homes, things of that nature. They cannot get 

the staff they need to take care of the people 

that are in those facilities.

And, there’s been some new facilities 

been built, financed, et cetera, that are just 

trying to get off the floor. And, they got wings 

that closed down because they can’t find the 

staffing to go in there. And, it’s going to put 

us in a new mindset on some of those properties.

You see appraisals where appraisers 

talk about stabilization rates. We’re looking at 

those industries, especially with newer 

facilities, of what could be coming down the road 

for them. They know they need to be occupied at 

a certain level.

They need a certain room rate. But if 

they can’t put the staff in there the way the 
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state requires people to be serviced, they are 

not going to be able to meet those potentials. 

So, I think that’s one of the things we’re seeing 

an area and we’re right at the edge of the 

vacation front.

We have a lot of Ag to the south of 

us. But our northern rim, there’s a lot of 

vacation. And buyers of restaurants, resorts are 

having a terrible time getting the staff they 

need to get the facilities up and running this 

summer.

So, I think the labor shortage is 

almost a universal situation around at least the 

upper Midwest at this point in time. And, it’s 

across all industries. It’s not one particular 

sector.

MEMBER HUANG: I think the short 

answer for all three of your discussion questions 

is yes.

(Laughter.)

MEMBER HUANG: Warren Huang, Amerasia 
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Bank in New York. I echo the tight labor market 

that was just presented. So, maybe I’ll tackle 

the second one or the third.

We’ve been having a pretty difficult 

time with net interest margin compression. 

Deposit rates in our neck of the woods has been 

quite strong and rising rapidly. Our customers 

are coming in with internet printouts of online 

banks and saying this Fintech or this non-FDIC 

bank are coming in with this interest rate. Can 

you match it?

And, a lot of times, we cannot. So, 

we’re also having a race to the bottom in terms 

of CRE loans where when it was at 7-8 percent, a 

lot of our customers are balking at those costs. 

And, for us, we understand. Their debt service 

can’t handle it.

So, we’ve been working with our 

customers to try to get a reasonable 

accommodation. But, that’s definitely been a 

pressure for us. But, we’re trying to do what we 
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can for our customers, both on the deposit and on 

the loan side.

MEMBER MJARTAN: Good morning. This 

is Dominik Mjartan. I’m with OPTUS Bank. We’re 

maybe a little bit unique, but I see two trends 

that I wanted to highlight for the team.

From our perspective, I think the, 

first and foremost I think we’re in a little bit 

of a perfect storm in terms of the interest costs. 

The 500 basis point increase, those of us that 

have very sticky mission driven relationships 

certainly not being affected in terms of outflow 

of deposits. But in terms of cost of funds, I 

think we’re feeling the pressure.

We do have a concentration of large 

depositors that want to bank with us because of 

the relationship banking services and the mission 

that we offer to them -- the mission premium that 

we offer to them as a small minority-owned 

community development bank. So, we’ve not lost 

any deposits. We felt no pressure at all.
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Where we’re feeling significant 

pressure is in our cost. And, further increasing 

that pressure is what I call the panic buying 

deposits and panic pricing of deposits. There is 

a panic premium that we’re starting to pay as a 

small bank partially because of the migration to 

the larger institutions.

I can share a couple examples without 

naming any names where we had customers that 

committed to move their significant relationships 

to us - business accounts. And, then following 

the SVB, they all backed off and actually moved 

their relationships to the large Wall Street 

banks at a substantially lower rate that we were 

offering them. And, so that’s one trend.

And, then the other trend too further 

making that worse, I think, there is a permanent 

migration, at least we’re seeing some our 

communities, of those deposits. And, so, on top 

of just liquidity flowing out of the banking 

system, a little bit into other places, the panic 
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buying of deposits, the premium that we’re having 

to pay. And, I see that migration to these large, 

too big to fail institutions.

I do have grave concerns, not actually

about our liquidity position or our ability to 

meet the needs of communities, but long-term 

growth and then the net interest margin 

compression. One point I would very much echo 

what Warren shared, the NIM compression is real 

because there’s only so much that a customer can 

handle in terms of debt service. So, going from 

4 percent to 6 percent was doable. Going from 6 

percent to 8 percent, that cash flow doesn’t 

necessarily work out.

While we are having to pay up to 

upwards 4 and in some cases even 5 percent on 

deposits as an industry, definitely the ability 

to pass on some of that increase nominally to our 

customers doesn’t seem to be there. 

Simultaneously, the loan demand is very strong. 

We’re continuing to see strong demand.
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Maybe it’s because of our mission, 

because how we’re known in those communities. 

But, we’re getting flooded with requests, with 

referrals from other banks. They want us to help. 

They want us to serve.

As they’re pulling back, they see that

our loan deposit ratio is still below 100. So, 

they want to reach out to us. And, say I guess 

you have some room on your balance sheet, so can 

you help us out? And, we have to say, look, 

unless there’s liquidity attached to it, unless 

there’s a primary banking relationship or the 

loans are pledgeable, we’re also taking a pause 

which is really detrimental to the most 

vulnerable, what I call underestimated 

communities in America. They’re going to feel 

this pain first.

And, so, if I had to say one grave 

concern, I think the immediate pain is going to 

be felt in communities like Mississippi and 

communities in South Carolina or Georgia that our
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or Robert’s bank serves. The impact is probably 

going to hit there first. Because of that, the 

more underestimated, underserved communities, 

regardless of their high potential, are going to 

probably feel that pinch of credit access first.

MEMBER HORTON: I would echo all the 

comments. I’m Susan Horton, by the way, with 

Wheatland Bank. We’re headquartered in Spokane, 

Washington, Eastern Washington.

In addressing the NIM, I would just 

add to that going into this environment before 

rates were risen so quickly, we actually had the 

99th percentile of the lowest cost of funds in 

our UBPR group. So, we enjoyed a 0.03 cost of 

funds. Fifty-one percent of our deposits were 

non-interest bearing.

What we’re struggling with, the one 

thing we haven’t touched on yet here in this 

meeting is these large investment portfolios on 

all of our books. A third of our balance sheet 

because of all the growth from the PPP that we 
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participated in. We grew from about 480 million 

to 650 million almost overnight.

All of those funds went into safe, 

short-term investments, yielding about 1.5 

percent. Our duration is 3.4 years, but we’re 

living with that. And, we’re not selling them 

and recognizing the losses.

But, we are recognizing those losses 

in a reduced yield on assets every single month. 

You combine that with the borrowing cost because 

we don’t want to sell investments. Our loan 

growth has been over 20 percent year over year.

So, we are funding that loan growth 

using the new Fed borrowing facilities. So, that 

comes at a cost today of about 5.15 percent. So, 

when you have one and a half percent yielding 

investments, you’re borrowing to fund loan growth 

at 5.15.

That really puts pressure on that net 

interest margin. So that’s what we’re feeling in 

a big way. Thirty-one percent of our deposits 
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are non-insured.

And, so the main competition that we 

feel for deposits, credit unions and U.S. 

treasury instruments. We haven’t seen as much 

outflow to the too big to fail banks. But, we 

are seeing that pressure for yield.

And, we’ve seen about 5 percent yearover-year of deposit outflow. So, I think 

liquidity, the resources are there to hold to 

maturity. But, when customers, like you say, are 

wanting 4 to 5 percent and you have a one and a 

half percent investment portfolio, that really 

constrains your margin.

MEMBER HORVAT: I’m Hal Horvat. I’m 

from West Warwick, Rhode Island. We’re about a 

2.2 billion dollar bank, and we do a lot of 

commercial loans in and throughout New England.

I would echo the comments about NIM 

and some of the deposit issues. But, the one 

thing I would add is what’s interesting right now 

is loan demand is through the roof right now. We 
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had anticipated probably a 20 percent drop in our 

commercial loan production for this year, and 

we’re probably looking at a 20 percent increase.

A lot of that is driven by other banks 

being out of the market. A lot of the regional 

banks that are our competitors, they’re kind of 

on the sidelines right now. They have loan to 

deposit issues that we don’t have.

So, we’re looking at more deals than 

we ever thought we would have to. What’s 

interesting, we also can name our terms a little 

bit more. We can kind of dictate a rate going 

forward. So, that’ll help us with NIM going 

forward. And, the structure is something that we 

can dictate as well which is kind of a nice issue 

to have as we go into this.

MEMBER BATES: My name is Thomas 

Bates. I’m from Clarksville, Tennessee. We’re 

a suburb of Nashville, and we participate in both 

communities.

I can echo a lot of the same 
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sentiments. Loan demand has been very strong 

this year. We have historically been a CRE bank, 

and so we’re getting overrun with requests and 

we’re having to really take a close look at 

things.

It’s really boiling down to trying to 

stick with fundamentals. I mean, just trying to 

focus on relationships and not transactions is 

what we’ve been trying to do. We’ve been able to 

hold on to our liquidity fairly well.

Prices or rates are obviously going 

up. We have several very large credit unions in 

our Clarksville market. We are home to a military 

base.

We have some of the largest in the 

country that we have to compete with. But, we 

have been able to hold on to a good amount of 

core deposits. And, the NIM is okay.

It’s not what we want it to be, but 

it’s better than I thought it was going to be. 

Our biggest issue, we can manage the cost funds 
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and the risk. It’s really the labor market, and 

the cost of banking talent has really grown.

Just the amount of money that we’ve 

had to do. And, special one-time raises to keep 

employees has really been a big factor. And, 

finding experienced talent, we have an older 

lending base.

So, we’re really having to focus on 

training new people that are younger because you 

can’t afford to go get a new lender from a 

competitor because you’ll have to pay a 

tremendous premium these days. So, we have 

really been focusing on trying to grow talent. 

But, it just takes time, and that’s a little 

frustrating. But, we think it’ll pay off in the 

long run. 

MEMBER RICHARDS: Good morning. I’m 

Troy Richards from Guaranty Bank in Northeast 

Louisiana. We’re in the Delta, so we’ve been in 

an economic slump for the past 100 years or so.

(Laughter.)
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MEMBER RICHARDS: But, we’ve seen some 

pressure on net interest margin. We’ve gone from 

about 4.16 to 3.91. So, I think we’re still doing 

pretty good on our margin.

We’ve seen a deposit rate increases 

much faster than loan rates, of course, like 

everybody. Been a lot of pressure to price loans 

at or below prime which, of course, we don’t want 

to do. Our customers want us to do that, but we 

don’t.

With consumer lending, there’s, as you 

know, no negotiating on loan rates. It’s 

strictly rate sheet only. On commercial loans, 

there’s a lot more negotiating that takes place 

on commercial loans.

1071 becomes reality. That’ll go 

away. And, so we’re not looking forward to that 

at all. For the majority of our loan officers, 

they’ve not experienced a time that we’re in 

right now.

This is all new to them. It’s harder 
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to sell money when rates are going up. And that’s 

what we do, we sell money. We don’t build 

anything. We just sell money.

It’s very easy to buy it, but it’s 

quite a different matter to sell it when rates 

are on the rise. As far as supporting a healthy 

NIM, we don’t try to be the highest rate payer on 

the block. And, we let some deposits walk as a 

result.

And, we’ve seen some of them walk. We 

make no apologies on the loan side for the higher 

loan rates and try to sell our quick decisioning 

and our one-on-one service to help soften the 

blow on the loan rate. The biggest aide I think 

for us and a healthy NIM has been our desire to 

stay short.

We don’t price loans for more than 

five years. We don’t buy investments with 

maturities longer than two. And, it’s been our 

motto and I think it served us well.

I think some of the banks that we’ve 
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been hearing about in the news could’ve taken 

that advice to heart and not extended those 

maturities. We’ve had banks in our market area 

when rates were so low for so long extend 

maturities on loans, pricing loans for ten years. 

It might’ve been a good decision when they made 

it, but not so good of a decision now.

As far as inflation, we’ve seen it. 

The cost of everything is going up, wage 

inflation, cost of healthcare. All that affects 

the bottom line. Our customers are finding it 

difficult as well to earn as much revenue so they 

can pay their loans the way they should.

We faired fairly well on our past due 

percentage. It’s a little higher but still at a 

comfortable level. Inflation to a business is in 

some ways like a business tax. They pass it on 

to the ultimate consumer.

The rise in interest rates has been 

positive for our bank. We’re a very asset 

sensitive bank. So, our CEO likes to say when 
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rates go up, we make more money.

And, we’ve seen that to be the case. 

We’ve never priced loans, like I said, for very 

long. And, we miss out on some deals because of 

that. We feel like that’s a decision that’s in 

our best interest and the best interest of our 

borrowers.

So, obviously, interest income on Fed 

funds has mushroomed as has the interest rates on 

our loan portfolio. The increase in the rates on 

loans, the whole point of the raising interest 

rates is to slow everything down. We’ve actually 

not seen too much of a slowdown as has been echoed 

by some of the other banks.

Our loan volume is up, and our 

deposits are down, which has put some pressure on 

our liquidity percentage. But we still feel like 

at about 22 percent we’re doing pretty good as 

far as liquidity. But, it is something that we’re 

watching.

Where’s the bottom going to be is the 
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question that we all have. When is the deposit 

runoff going to stop? And, if anybody has any 

words of wisdom on that, I’d like for you to share 

it.

MEMBER JAMES: Good morning, Robert 

James, II, Carver State Bank in Savannah, 

Georgia. We’re a little unique in many ways, 

Black-owned MDI bank, been around about 100 years 

in the Savannah market. I’m also CEO of our 

holding company.

And, last year, we acquired another 

institution, Alamerica Bank in Birmingham, 

Alabama. So, we’re a multi-bank holding company. 

So, on the labor conditions, yes, our customers 

and our institutions are impacted by the tight 

labor markets in both Georgia and Alabama. We’re 

at the lowest end of the spectrum in terms of 

unemployment rates.

And, I echo many of my colleagues’ 

concerns about the challenge of finding 

particularly bank talent, experienced community 
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NONPUBLIC//FDIC INTERNAL ONLY

bankers. Dominik and I had dinner last night. 

And, we’re talking about the fact that we have a 

handful of 60-plus year-old women who really run 

our banks. And, trying to find the people who 

can step into those roles and replace them is 

going to be a real challenge for us going forward.

Increasing wages, we’ve taken some 

steps to increase wages across the board, made 

those kind of special one-time increases to 

recognize the hard work of our staff over the 

last few years. In the Savannah market, in 

particular, we have some really huge 

manufacturing operations that are coming into 

that market and building -- there’s a giant EV 

charging -- an EV plant being built just outside 

of Savannah with all of the attendant suppliers 

that are going to locate. So, we have billions 

of dollars of new investment coming into the 

market which is fantastic.

But, we’re also bracing for the 

competition from these large multi-national 
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corporations that are going to come in and raise 

wages across our entire market. So, we’re 

bracing for that competition. So, we’ve taken 

some preemptive steps.

And, then we’re going to probably have 

to move wages higher. Because we’re in an 

expansion mode and we have the two-bank holding 

company structure, we can hire some remote 

workers. So, that’s taken some of the blow away.

But, when you start to hire people in 

Metro Atlanta or hire people in higher cost 

markets, then that just is increasing our costs. 

Yes, we are being impacted by inflation and 

rising rates. And, we don’t have a current 

liquidity problem.

But, we got capital that’s right now 

being held back in our holding company and not 

deployed directly into the bank because of the 

issues around hiring new people to be able to 

deploy that capital prudently, but also being 

able to acquire the liquidity that we we’ll need 
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to leverage that capital up and doing it at rates 

that won’t reset our cost of funds kind of 

fundamentally and structurally across the 

institution. So, there’s some challenges there. 

We have the benefit of being a mission-driven 

CDFI bank and people are attracted to the 

mission.

And, I think that we can attract large 

kind of mission-driven deposits at lower costs. 

But, it’s still going to end up being 150 basis 

points higher than our actual cost of funds. And, 

so, you’re talking about restructuring our 

overall cost of funds is something that we’re 

being really careful about.

In terms of NIM, historically, we’ve 

had very, very high NIMs. And, we have 

experienced some compression. But, a lot of that 

I think is being mitigated by the fact that we’re 

adding higher quality assets to the balance 

sheet.

So, as our bank has grown, we’ve 
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started to be able to sort of climb and be able 

to do larger, more sophisticated kinds of loans, 

which have generally speaking been better 

performing assets. So, we have also historic --

right now, we have -- we’ve always had pretty low 

loss rates on our balance sheet. But, we have 

historically low loss rates and past due 

percentages on our balance sheet right now.

So, I think that we’re benefitting a 

little bit from higher asset quality. Loan 

demand continues to be extremely strong. And, we 

need to stress opportunities to ensure our 

ability to perform -- ensure the customers are 

able to perform if rates continue to rise.

So, we’re seeing strong demand. But, 

we’re having to really stress those loan 

applications to make sure that those kinds of --

those businesses could perform if rates continue 

to rise. So, there’s a trick. I see some smiles 

here. It’s tricky math to do to make sure that 

you can -- that those customers are going to be 
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able to pay if the rates reset.

MEMBER PERRY: I’m April Perry with 

Kentucky Farmer’s Bank.

MR. ANDERLIK: April, we’ll do you and 

then we’ll go to the second half.

MEMBER PERRY: Okay. I was just going 

to say as far as being concerned about customers 

being able to perform, that’s something that 

we’ve really been looking at because over the 

past year, we know what interest rates have done. 

And, we had customers that took out construction 

loans to build houses. And, most of those 

construction loans have gone longer than what was 

expected because of supply chain issues. And, 

now you see your customers that thought that they 

were going to have a mortgage at a certain rate 

and a certain payment.

And, their rate is much higher. Their 

payment is going to be much higher. And, it’s 

concerning to think that a customer could build 

their dream home and then not be able to afford 
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it because of the rising interest rates.

And, although we’ve been told for 

years that we should stress our balance sheets by 

4 percent, who would’ve ever thought that it 

could happen in such a short period of time. And, 

I think that’s been very difficult for the banks, 

and also just for the people that have debt.

MS. SCHMIDT: All right. Thank you, 

April. And, we’ll move on to the next portion 

and discuss credit risk. Bob and I are going to 

make a few comments. And, then, again, you will 

have plenty of time to tell us what’s going on in 

your markets.

So, I’m going to start out with 

commercial real estate. That remains the bread 

and butter for many institutions. Ninety-eight 

percent of banks hold CRE loans, and CRE was the 

largest loan category for almost half the banks 

in the industry.

If you look at this chart, you can see 

that CRE loans held by the banking industry have 
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increased every single quarter since first 

quarter of 2013. And, they’ve reached a record 

-- an industry record of more than three trillion 

dollars at the end of March. CRE loans comprise 

a quarter of total loans held by the banking 

industry and about 13 percent of total banking 

assets.

Again, looking at the chart, you can 

see that loans for existing non-farm, nonresidential real estate properties, that green 

bar, make up the largest portion of the 

industry’s CRE loan portfolio at nearly 60 

percent. Multi-family loans are the second 

largest loan category. And, that’s followed by 

acquisition, development, and construction 

loans, that dark blue bar, also called 

construction and development or ADC.

This has historically been the highest 

risk CRE loan type. I haven’t shown it on this 

chart, but unfunded CRE loan commitments have 

been high. They decreased a little bit last 
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quarter, but they did hit a record high at the 

end of the year and remained above last cycle’s 

peak.

So, there’s plenty of CRE loans in the 

pipeline. On the next slide, Mike, I’m going to 

talk about the number of banks with CRE loan 

concentrations, and that’s certainly grown. 

Again, this is fresh off the press.

But, overall, 1,402 banks have a 

concentration of total CRE loans greater than 300 

percent of Tier 1 capital and reserves or of ADC 

loans greater than 100 percent. And, that’s as 

of March. This is up by 85 banks since last year.

As a percentage of banks, the figure 

sits it about 30 percent. That’s down from the 

35 percent that we saw at the end of 2009 going 

into the recession. I mentioned earlier that ADC 

has been the riskiest loan type.

Back in fourth quarter 2007, we had 

hit a peak. And, the number of banks with ADC 

concentrations was about 2,374. That’s just 
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below 400 now, so quite a bit different scenario. 

I’ve kind of set the stage for what we’re seeing 

in CRE loans. Now, I’m going to let Bob talk 

about what we’re seeing in CRE market conditions.

MR. DiCHIARA: Thank you, Camille. 

Good morning. So, if you look at this slide here, 

we like to look at commercial real estate markets 

through the lens of the property types. And, one 

fundamental measure, of course, is vacancy rate.

And, you can see here this is the 

vacancy rate by property type nationally over 

time. And, you can see that office really has 

the lead on everyone else. And, that makes a lot 

of sense with what’s happening in the office 

market.

That’s really been the most strained 

property type really coming out of the pandemic. 

We see that office attendance, which is actually 

foot traffic in offices, is about one-half of 

what it was pre-pandemic. Now, of course this 

varies by market but really not that much.
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There are some markets like San 

Francisco that are very low in terms of return to 

office. There are some markets in Dallas --

Houston and Dallas -- the City of Dallas are a 

little bit higher. But, it’s a fraction of what 

it was pre-pandemic.

So, there’s been a very slow return, 

and companies are looking at how much space they 

really need going forward as leases come due. 

And, when we talk about leases coming due, we 

look at really three risks in a given market at 

this point that are really causing some strain. 

So, we tend to focus on markets where there are 

a lot of leases coming due.

And, we’ve done some studies of that 

where there are a lot of loans coming due. And, 

we use the commercial mortgage-backed securities 

market to measure that, and then at the same time, 

a high vacancy or availability rate. If you have 

those three problems coming together at once in 

the midst of high interest rates that some of the 
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folks have talked about in their lending book, 

that becomes the issue.

So, for the next couple of years, we 

have what we call this refinancing risk which I’m 

sure you’re experiencing with your borrowers

where there’s going to be some strain, 

particularly in the office market where the 

fundamentals of the property income are not going 

to be there to support this new debt as leases 

come due at arguably one of the worst times you 

can come due when you have vacancy rates at 15-

20 percent. Some markets have the total 

availability rate which includes some sublet 

space that companies are still paying, but trying 

to get out of in excess of 25 percent vacancy. 

So, those are some areas that we watch in that 

area.

So, certainly office is a focus for 

us. You can see multi-family also if you just 

stay on that chart for a second. So, multifamily, the vacancy rate is even rising in multi-
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family nationally.

And, it may be surprising when you 

listen to the news and you see your own markets 

where demand for housing is through the roof. 

People are looking for apartments, either lines 

to get into apartments to rent or just heavy 

demand for rentals. What’s happening in the 

multi-family market, though, is that is demand 

starting to soften and the construction has been 

extremely high. We’ll take a look at that in a 

minute.

The other two property types I have on 

the chart there, industrial has been extremely 

strong with the demand for logistic space. 

Companies like Amazon, of course, have needed 

space to meet the demand of online shopping and 

all the delivery and everything that goes with 

it. But, even Amazon has said in the last year 

that they have too much space.

And, the construction and vacancy has 

-- construction in industrial has been 
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significant. There was more space built in the 

last four years in industrial than in the prior 

12-year period. So, it’s been significant.

But, with vacancies at 20-year lows, 

it looks like there’s some more room for that 

asset class and that property type to outperform. 

And, then finally retail, at the beginning of the 

pandemic, we started to see they could see rates 

go up. But, what really saved retail from the 

retail apocalypse that also of folks referred to 

when the pandemic hit was that there was not a 

lot of new construction in retail in the last 20 

years.

The 1980s were the decade that a lot 

of construction was built. A lot of new 

properties were built. And, then the ‘90s and 

2000s, not so much nationally.

There’s two real issues in retail I 

would just highlight quickly. One is the mall 

space, the superregional malls. They do have 

vacancy rates that are double the rest of the 
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retail sector.

And, we started to look at retail 

vacancy rates for properties in office buildings. 

So, even in an office building, you have four or 

five retail establishments. And, in every market 

we’ve looked at, the vacancy rates are a 

magnitude of double or triple what the vacancy 

rate is in retail for the rest of that market. 

So, that’s an area of focus too.

On the next slide, I know some of the 

folks in this room and I know regional and 

community banks have a fairly heavy investment in 

multi-family, especially in the Northeast and 

some of the markets where housing is a focus for 

them. And, if you look at this chart, you can 

see the completions have been very strong. 

That’s the blue bars.

Completions have really been strong 

for the past decade. And, up until now, 

absorption has kept up. That’s the shaded blue 

area.
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But, you can see in late ‘22 and 

really projected into the rest of 2023, 

construction is expected to outpace demand. And, 

that’s where we start to look, why we see the 

vacancy rate rising. Of course, this is worse in 

some markets more than others, but it’s certainly 

an area of focus for us and I know for some of 

you with multi-family lending.

And, then finally on the last slide, 

when we talk about what’s important to the 

community banks, we are showing here what the 

market share has been for community and regional 

banks across the property types. I get this 

question a lot. What types of lending are the 

community banks in?

Are they in office? Are they in some 

of the problem asset classes and property types? 

And, we don’t collect a lot of information from 

banks. Specifically, as you know the Call Report

is very blunt. It measures multi-family and it 

measures non-farm, non-residential as the other 
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category largely.

But, we use some other data and we’ve 

been able to ascertain that they’re really 

involved across the spectrum, retail and 

surprisingly hotel. This may be more hotelmotel. But, there’s quite a bit of market share 

in those property types and industrial as well 

which is why I mentioned some of those, the trends 

going on in industrial. So, I’ll turn it back 

over to Camille at this point, and we can throw 

out some questions and hope to hear from you.

MS. SCHMIDT: Thanks, Bob. I just had 

a couple more areas on the next slide. I want to 

talk about some key developments in the housing 

market area. As you all know, annual home priced 

growth was strong in 2022.

But, we saw it decelerating and it 

slowed down to single digits by year end. Home 

price growth is expected to continue to be slow 

in 2023. In fact, several housing experts have 

suggested a decline in national home prices by 
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the end of the year.

Forecasts range from a decline of 

between 1.6 percent up to a 10 percent lost in 

value. Of course, there’s still some other 

outliers that are predicting a positive but much 

slower actual growth rate of maybe even up to 3 

percent by January. Here at the FDIC, I think we 

think tight inventory and strong demand from

Millennials will likely support normalized home 

price growth going forward and limit any outright 

collapse in home prices.

As you know, the sharp rise in 

mortgage rates in 2022 made the cost of borrowing 

higher and led to a sharp decline in mortgage 

originations. And, I’m sure we’ll hear about 

some of those issues from you. So, that’s all 

I’ll say there.

I want to close with just talking 

about consumer a little bit. Consumer credit 

outstanding continues to grow and that includes 

auto loans, student loans, and other loans. 
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Credit card balances were flat this quarter, and 

that kind of bucked the trend for the first 

quarter.

Normally, we see those balances 

decline following the holidays. So, those were 

flat. But, we continue to see very good growth 

in auto loan balances, again, retail cards and 

other consumer loans and student loans balances. 

Those stand at 1.6 trillion and they were up this 

quarter.

Of course, we’ve all read a debt 

ceiling deal will probably reinstate those 

student loan payments. So, that’s something to 

watch. I want to talk about some emerging risk 

here.

In this chart, we look at the share of 

credit card borrowers that are transferring into 

delinquency by age. And, we’re looking at 

delinquency being over 90 days past due. And, we 

note that borrowers in their 20s and 30s are 

transitioning into some serious delinquency.
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Again, these are less established 

borrowers. And, I think this is kind of a sign 

of early emerging risk in the consumer area. 

Banks have tightened their lending standards on 

consumer loans in the past year.

And, according to the Fed’s senior 

loan officer survey, they plan to continue 

tightening through 2023. So, we’re also 

interested to know if that’s the case in your 

institutions. So, with that, we’ve got some 

questions.

Again, what risk trends most concern 

you? How would you -- some of you already alluded 

to the rough demand. But, I’d be interested to 

hear from all of you on that. And, then how are 

you adjusting your lending standards in this 

current environment? And any other thing you 

would like to talk about. 

MEMBER REIGELSBERGER: Does that work? 

Okay. Kim Reigelsberger with Preferred Bank in 

Rothville, Missouri. Primarily we’re an 
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agricultural bank. We see a lot of cattle herds 

and soybeans and corn.

Thinking about our cost of funds, 

before COVID, we were looking to increase our 

loan to deposit ratio. COVID hit. We got flush 

with deposits.

That made that ratio kind of seem 

poor. But, we still have a lot of those deposits. 

So, actually, we feel like the rising rate 

environment is going to be beneficial to us.

And, so as rates have gone up, we have 

tried our best not to be that bank that’s 

competing with our competition to who can have 

the highest rates. But, we’ve been able -- some 

of the bigger national markets have taken a few 

of our deposits, but not much. We still have a 

lot.

But, then on the lending side of it, 

because we’ve been able to keep some of our 

deposit rates somewhat where they were before the 

increase in Fed rates, we haven’t really adjusted 
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our loan rates up the same. We tried to keep 

that if we’re going to pay out lower, let’s maybe 

lend out a little bit lower. So, we’ve been able 

to do that this year for our farm operating loans.

Usually, if we think about prime rate, 

we kind of reserve that or below for our prime 

customers. But, right now, all of our farm loans 

are under prime just because our deposit rates 

are still low. So, we’re kind of keeping that in 

mind.

But, as far as agriculture, they’re 

really doing very well. If you remember as I do 

in the spring of last year, commodity rates hit 

almost the highest they’ve ever been. And they 

had -- those that have excess commodities on hand 

were able to take advantage of it. 

So, this year, we’re not seeing quite 

as many farm operating. Some of them we’re still 

funding a little bit. But, that’s part of the 

deposits that are sitting in our accounts is they 

were flush with the sale of grain last year.
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And, so, we feel like even though some 

of that would be used for -- to fund their 

operating, I assume it’s not hot money -- we think 

it’ll stay. But, one thing we have seen, we don’t 

do a lot of one-to-four family construction type 

loans. However, this year, we’ve only done two.

I mean, for us, a big year is maybe 

if we do a dozen. We’re thinking, oh, my gosh, 

what’s everybody doing building a house? But, 

right now, we’ve only done a couple.

And, the thing that’s changed, in our 

area, everybody builds with a basement. 

Everybody builds with a basement. The last year 

and a half, nobody -- all the brand-new homes 

we’ve seen have been a slab home.

The cost of building a home has just 

jumped up through COVID. So, that’s been 

something I’ve found very interesting. And, the 

last six or eight months, the borrowers have been 

50 and older, not that I’m keeping track.

I just know them. They are my 
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friends. So, I know how old they are. They’re 

getting ready for retirement. And, so, in their 

mind to kind of rein in the cost it is to build 

a new house these days and make it affordable so 

they can retire at a good time, they’re 

eliminating one thing and that’s a basement.

I know it sounds kind of silly. But, 

in our area, that is something that -- a basement 

these days can cost fifty, sixty thousand 

dollars. And, if you can chop that down by twothirds on that price.

But, anyway, right now, our loans seem 

to be -- they’re not strong. But, our interest 

rates are rather low. I think people are just 

more cautious. At least that’s kind of what we’re 

seeing at this time.

MEMBER PILARSKI: I’ll piggyback off 

Kim. So, Shane Pilarski, Alliance Bank which is 

in Northwest Indiana. So, primarily an Ag bank 

as well. But, over these last few years as the 

commodity prices have been really high.
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And, then operating interest rates 

have grown. Our farmers have seen the value of 

using their cash for their operations. So, our 

demand there as well as I’ll throw in the 

continued competition from farm credit, we’re 

just not seeing that demand or loan volume from 

our Ag. We’re under 60 percent loan to deposit.

So, we have money to loan, really low 

cost of funds. So, our CRE portfolio has grown 

because that’s where the opportunity is. So, as 

far as what’s most concern, what credit risk is 

most concern to our bank, it’s becoming a 

building CRE portfolio where we were more of an 

Ag bank. So, it’s increasing our knowledge, 

putting in those monitoring things that we 

haven’t really had to focus on before to make 

sure that we’re managing that risk in this 

growing area for our bank.

MEMBER KITNER: Good morning. I’m 

Cindy Kitner with Jefferson Security Bank. We’re

located in the eastern panhandle of West Virginia 
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which is about 90 miles from here and about the 

same distance from Baltimore as well. It creates 

some interesting -- different scenarios and 

circumstances is what I’ve heard this morning.

And, I’d like to go back to some of 

the labor focuses and others. What we’ve been 

used to over many years is the commuters that 

come into northern Virginia and Maryland and even 

into D.C. So, from a housing perspective, we’ve 

generally had strong housing demand.

And, obviously through the pandemic, 

some of the shifts and changes that we’ve seen is 

more in a remote work environment. That demand 

continued and is very strong. From a labor 

perspective, those wages have continued to push 

up.

So, where in the past we would have 

individuals in our market that understood, they 

may be able to get higher wages. But, that would 

come with an hour to two-hour commute, sometimes 

two hours each way. Now, that commute has been 
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eliminated, pushing our wages up even higher.

In addition to that, we are located in 

a proximity close to major interstates. And, 

that has brought in a lot of industry. And, so 

for us, some of our larger employers include 

healthcare and education.

But, then we also have one of the five 

distribution centers in the U.S. of Procter and 

Gamble. And, right across the state line, we 

have an Amazon distribution center. We also have 

a local horse racetrack with a casino.

And, Clorox is another manufacturer 

that just came in. So, there are ample employment 

opportunities in our area. We have the lowest 

unemployment within our state.

And, those wage pressures are 

certainly a big concern. Some of the other 

concerns I would echo so many of the comments 

that we’ve heard here today in regards to deposit 

cost and the cost of funds. From a credit 

perspective, I really hope that the housing 
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values do stay up.

That is a big concern for us. We are 

a large real estate lender. We watch those values 

very carefully. Some of the things that we have 

seen, and I’d be curious to see if others have 

heard or are seeing this.

But, we’re hearing that some of the 

national builders in our area who handled their 

own financing are continuing to sell lots at 

lower interest rates because their fear is that 

the supply will outpace and they don’t want to 

see that. So, they’re continuing to move the lot 

sales through lower interest rates, again, 

through their own lending programs. And, I’d be 

curious to hear others are seeing or hearing 

anything in that regard.

As far as looking at the credit risk, 

we had the opportunity to bring on some 

additional experienced credit management very 

recently and which we’ve done. And, we are 

certainly digging deeper into our portfolio and 
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looking at things in different ways. And, I think 

adding those resources when the opportunity 

presents itself is very important.

But, it is hard to continue to keep 

the right level of oversight on some of the credit 

concerns and issues. So, those are some of the 

key points that I just wanted to add this morning. 

Thank you.

MEMBER DRENTLAW: Good morning. Anita 

Drentlaw with New Market Bank, Elko, New Market, 

Lakeville, and Prior Lake, Minnesota, just 20 

minutes south of the Twin Cities area. So, we’re 

still in the suburban area I would say or the 

seven-county metro area, but right on the 

outskirts of farmland.

We really are a commercial real estate 

bank. I mean, back before the great recession, 

we did a lot of construction development because 

that was what we had around us, but have 

transitioned heavily into more of the commercial 

real estate, really owner occupied. So, to us, 
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it’s more of underwriting the business just like 

you would a C&I loan because it’s the business 

that’s repaying the loan.

Our credit risk trends for our actual 

bank are actually -- I see it more in the industry 

just as a whole. There’s been a lot of multifamily apartments basically being built in the 

Twin Cities area. We don’t have a lot of that.

We actually have zero past dues right 

now and have for the last few quarters. So, I 

think our underwriting is extremely strong and it 

has been because we learned some stuff during the 

recession and so have changed a lot of our 

underwriting and credit risk management 

practices. But, as far as demand for lending, 

it’s somewhat slower.

And, I think some of it is because of 

people being cautious right now. Rates are 

higher. We still have some demand, and I do --

somebody said it over there that a lower loan to 

deposit ratio which we have at around 60 percent 
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has really given us the opportunity to be a lender 

for people.

There’s a lot of banks in our --

several banks in our area that are running 90, 

95, 100 percent loan to deposit which is giving 

them not a lot of room to be able to extend 

credit. So, I feel like we have an opportunity 

to be able to underwrite prudently and still be 

able to actually do new credits. That being said, 

we have really not -- I’m not going to say 

tightened our lending standards except for really 

looking more at full relationships within our 

customer base, focusing on -- we want the deposit 

relationship just as much as the loan 

relationship and challenging our lenders to bring 

a deposit with them if they’re bringing on a new 

credit.

And, the participation market has 

dried up somewhat too in Minnesota I think 

because of higher loan to deposit ratios. So, 

people are holding on to that extra liquidity and 
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saving it for deals that are in their own areas 

rather than necessarily participating out. The 

final thing I would say is we do a lot of 

mortgages.

We have a large mortgage department. 

And, that has dropped quite significantly, mostly 

because of rate. But, talking with our mortgage 

lenders, they’re still having issues being able 

to get purchasers’ offers accepted.

So, there’s still quite a competitive 

market in our area for homes. So, you’ll still 

see multiple offers on homes. And, a lot of 

times, they’re just not being able to close loans 

because they can’t get their offer accepted 

because somebody else came in higher. So, 

there’s still a shortage, I guess, I would say of 

the moderately priced single-family homes in our 

area.

MEMBER RICHARDS: I would say a credit 

risk trend that’s a concern to us has been 

insurance. Primarily on two fronts, flood 
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insurance, a big one. We were in D.C. last year, 

met with the FEMA head. And, he was kind of proud 

of the fact that premiums might only increase 18 

percent for the next five years which is about 

100 percent increase in premium.

We’ve had borrowers who have had some 

sizable increases in their flood insurance 

premiums. We’re in Louisiana. I mean, what do 

you expect.

But, we’ve actually gone so far as to 

limit loaning on properties that are in a flood 

zone. So, that’s been a concern of ours. Not 

only that, but property insurance has been a 

major issue in our state.

Insurance carriers are leaving the 

state. If we have another named storm this year, 

then it’s going to be disastrous for Louisiana. 

We’ve seen premiums and deductible amounts really 

mushroom.

The church where I attend, our 

deductible went from 2,500 dollars to 25,000 
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dollars. Basically, they don’t want to pay for 

roofs. Insurance companies are depreciating 

roofs.

I never knew that was such a thing, 

but it is. And, so insurance, when we underwrite 

a loan now, we have to take into consideration 

what the insurance premiums are now and what they 

could go to. And, can they still make their note 

payment? Sometimes the flood insurance premium 

might be more than what the loan payment is. So, 

that’s a real concern in our part of the world.

MEMBER HORTON: If I could, on the 

three questions, the credit risk trends like your 

bank, we have zero non-accruals. And, over the 

last ten years have a net charge-off ratio of net 

recovery. So, really zero charge-offs over ten 

years.

Twenty-five percent of our loan 

portfolio is Ag. And, a lot of those are tied to 

prime production loans. So, they’re yielding 9.2 

percent.
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We have not gone subprime. We may 

have one or two borrowers at prime. But, we’re 

still able to charge based on prime.

That helped a little bit with that 

investment portfolio. But, a couple of trends 

that we’re really seeing, we’ve had strong 20 

percent loan growth. We are seeing credit unions 

have a bigger liquidity issue than the community 

banks and regional banks do.

And, for the first time, we’re seeing 

credit unions charge a higher rate on CRE loans 

than banks are. We’ve had borrowers come to us 

and express that and say they’re shocked with 

that too. And, so, credit is tight in our area.

So, we have also, because of liquidity 

and everything, tightened our credit a little bit 

through our policies. So, our debt service 

coverage ratios, where they were at 1.25, we’ve 

just recently tightened those to 1.35, for 

certain industries that we perceive to be higher 

risk. Hospitality, for example, would be one of 
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those.

So, we definitely are looking at that. 

We also aren’t doing large non-owner occupied CRE 

loans without a full primary deposit 

relationship. So, we’re really making sure that 

we’ve got that full relationship.

If we’re going to do that kind of 

lending, we tend to focus more on owner occupied. 

So, yes, we’ve adjusted our lending standards. 

Demand is very, very strong.

In terms of credit risk, it’s great. 

Credit quality is great right now. We’re seeing-

- Ag has been very strong. We’re seeing a little

bit of softening in Ag in certain commodities

where they have excess of inventory on hand from

the prior years and, of course, are growing this

year’s crop, in particular, I think the hay

market in Washington state.

And, so, we’re very diversified within 

Ag. And, we also have a lot of international 

exporters. But, we are seeing hay values drop. 
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Wheat is down.

So, we’re being cautious about the 

future of Ag because it’s been very, very strong. 

So those are kind of my responses to your 

questions. Thank you.

MEMBER CAMPBELL: Troy Campbell from 

Altoona First Savings Bank in West Central, PA. 

We have two things going on with commercial 

lending. First, we do work with a lot of 

restaurants.

And, so, it’s been trying to help them 

understand the cash flow and revenue and income 

are two different things. The government has 

flooded so much money into the system, especially 

for restaurants. So, they think they’ve had the 

greatest years of their lives.

And, we’re trying to explain, you’ve 

had a lot of cash influx, but the performance 

hasn’t been strong. The second thing is we’re 

very active in the revitalization of our 

community; we’re a mutual savings bank. And, so 
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we have very established borrowers that are very 

entrepreneurial and get into new ventures.

Now a lot of those new ventures are 

based on forecasts. And, so, with the higher 

interest rates, those forecasts don’t look as 

favorable as they did when you were back in the 

4 percent, 5 percent range. So, we’ve definitely 

experienced a slow down in loan demand.

I would say probably about 2 percent 

off year-over-year in our small business lending. 

We don’t get into non-owner occupied real estate. 

Pretty much everything we do is owner occupied or 

one-to-four family investment properties because 

we are located pretty close to Penn State 

University.

So, loan demand is off. We haven’t 

changed our underwriting standards because we 

have always had very strong underwriting 

standards. Our charge-off activity has been --

historically has been very low and it continues 

to be low. But yeah, so our biggest thing has 
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been the higher interest rates and the fact that 

we deal a lot with forecasts for projecting 

performance of a business has definitely resulted 

in a slowdown in demand.

MEMBER SHOEMAKER: Just a few more 

comments. Today marks the opening of hurricane 

season. And, so Troy, I echo those comments that 

we’ve had a lot of insurance carriers pull out of 

the Southeast and no longer willing to underwrite 

our properties.

Mortgage originations are definitely 

down. We are a consumer, CRE, and one-to-four 

family lender. What we’re seeing, Cindy, is that 

our builders are holding the properties in their 

inventory.

They’re not necessarily reselling 

them. But, what concerns me with the migration 

to the Southern states that we’ve seen throughout 

the pandemic that housing costs are almost 

unaffordable in the one-to-four family arena. 

But, wages to your comment are not -- they’re 
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traditionally lower in the south.

And, so, we’ve got to come up with a 

way to balance home prices versus wages. So, 

that’s definitely a concern. We’re definitely 

analyzing the full relationship with our 

borrowers, and we have always maintained very 

tight lending conditions.

MEMBER MAUST: Morning. Trey Maust, 

Lewis & Clark Bank, headquartered in the Portland 

market, so Oregon and southwest Washington. I 

wanted to comment on a couple of asset classes. 

So, when we look at -- we’ve been in the past a 

highly concentrated CRE bank.

It was our primary business model 

since the inception of the bank. Since then, 

we’re now below the threshold. So, that’s been 

kind of an interesting turn of events.

But, the discipline that’s been 

established since the financial crisis including 

enhanced risk management practices, separate 

committee to focus on lending risk and a lot of 
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other really forward looking and obviously 

historically looking practices. It’s been very 

helpful in us really assessing the trends over 

time. The two asset classes that I’m probably 

most concerned about on a macro scale, I don’t 

necessarily know it’s going to affect the 

community banking industry at large.

But, the office is a concerning, one 

from a return-to-work perspective or a returnto-office perspective, particularly in a central 

business districts of each of the major metros 

and even some of the Tier 2 and maybe 3 metros as 

well. I don’t know that we finance a lot of those 

as an industry. Institutional investors, REITs, 

et cetera, are probably going to get hit pretty 

hard when those leases come due for renewal and 

also as rates and repricing starts to happen with 

respect to interest rates and the debt service.

The one thing that was interesting to 

see, though, is it affecting the suburban markets 

or areas outside of the central business 
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district. And, what I can tell you is that I was 

in downtown Portland on Friday and I remember 20, 

30 years ago working in downtown Portland. It 

was packed with foot traffic.

There was maybe one person per block 

as I was looking around at 7:45 in the morning 

which is kind of shocking. As you move outside 

that just that central business area, parking 

lots are full. People are in the office. They’re 

in retail establishments. They’re obviously at 

home.

So, I feel pretty good about what that 

bodes from the standpoint of community banks and 

maybe some of the larger regionals as well. With 

respect to multi-family, I think we’re probably 

going to experience the impact of demographics, 

shifting through different life stages. So, we 

had the very large baby boom generation, very 

large millennial generation.

When it comes to Gen X and Gen Z, those 

are much smaller. I think those are the 
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individuals, talk about Gen Z starting to shift 

into that stage in life where they are looking 

for apartments. Millennials buying houses, 

buying a lot of goods and services.

I think that’s going to continue to 

put pressure on obviously the housing market and 

then, of course, the economy at large as well 

when you look at inflation and just demand for 

goods and services. But, I do have a concern 

about the ability for absorption to occur. I 

think we’re going to see elevated vacancy rates. 

And, again, I don’t know from a 

community banking perspective, it’s quite 

possible that we have a handle on that given the 

smaller projects that we typically finance as 

opposed to the very large buildings and projects. 

The one thing I will mention, and Doreen, I made 

this comment last time. It was about ALM where, 

as a bank, we are living that ALM.

It’s no longer a scenario analysis. 

We’ve expanded the number of scenarios because 
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we’ve now got experience with what happens if. I 

will say on the CRE side, it was a struggle, I 

think, during the financial crisis to deal with 

the adversely classified assets that were on the 

balance sheet, work through those with borrowers, 

and at the same time, start to enhance those risk 

management practices.

It was a lot of work that had to be 

undertaken by a bank and banks in general who are 

concentrated on CRE. I will say, though, that I 

do appreciate now the position it puts us in to 

be prepared for what’s coming next. And, we’ve 

expanded that.

I imagine everyone here has as well to 

any other loan area where there’s a concentration 

or an expected concentration or they’re entering 

into a new asset class. So, I did want to at 

least comment on that. Probably don’t get a lot 

of thank yous for forcing us to do something. 

But I do have to say it’s helped us a lot. So, 

thanks.
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MS. EBERLEY: Thank you, Trey. And 

we’ll have an additional conversation about that 

this afternoon. So, look forward to your input 

in that conversation as well.

This was a terrific conversation. 

Thank you. Really appreciate all the engagement. 

I think some of the themes that I heard from the 

conversation is that there’s some staffing 

challenges around the country.

Loan demand was mixed. So, some 

places, I heard very strong to not so much. Some 

new considerations in underwriting, or not new 

but additional emphasis in terms of the costs of 

insurance and the increasing rates on borrowers 

and kind of projecting that out with potential 

further increases.

Deposits, I think I would characterize 

from what I heard here. You can shake your heads 

yes or no. Kind of stable but costing more for 

sure, stable-ish. Stable-ish? Okay.

But, overall, strong asset quality. 
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Things are looking pretty good. So, still 

managing through. So, really appreciate the 

great conversation and the feedback from you. 

Thank you.

All right. And, thank you to our 

presenters. I really appreciate it. Next up, 

we’re going to recap a meeting we had yesterday 

with our Minority Depository Institutions 

subcommittee, or the MDI subcommittee.

And, Warren Huang serves on both this 

committee and the MDI subcommittee. And Warren 

and Betty Rudolph, the Director of our Office of 

Minority and Community Development Banking, are 

going to provide us with an update from 

yesterday’s meeting. So, I’ll turn it over to 

Betty.

MS. RUDOLPH: Thanks, Doreen. I 

wanted to briefly -- is my microphone on? How 

about now? Okay, great. I wanted to briefly 

remind the committee that the FDIC established 

the MDI subcommittee under the authority of the 
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Advisory Committee on Community Banking under 

this committee.

And, the Federal Advisory Committee 

Act requires that subcommittees like the MDI 

subcommittee provide advice or recommendations 

through their parent committees. So, the MDI 

subcommittee reports to all of you and not to the 

FDIC. So, our goals are to serve as a source of 

feedback for the FDIC on strategies to fulfill 

our five statutory goals with respect to MDIs, 

provide a platform to promote MDIs and 

collaboration partnerships and best practices, 

and identify ways to highlight the work of MDIs 

in their communities.

We have nine executives from across 

the country, MDI executives representing a 

diversity of types of MDIs. So, we have Native 

American, African American, Hispanic, Asian 

American, and a range of business model size and 

geographic mix. So, the nine members of our MDI 

subcommittee represent about 10 percent of all 99 
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MDIs that the FDIC supervises.

In addition, we have four MDIs 

represented on this committee, Robert James, II, 

Dominik Mjartan, Andrew West, Eagle Bank, and 

Warren Huang with Amerasia Bank. So yesterday, 

we met. And, Warren is going to give an update 

on our meeting from yesterday.

MEMBER HUANG: I got two mics. Thank 

you, Betty. At this time, the MDI subcommittee 

does not have any recommendations for the FDIC. 

But, the subcommittee does want to share a brief 

recap of yesterday’s meeting.

At yesterday’s meeting, we discussed 

current banking conditions and unique issues 

facing our institutions. Many of the themes 

included stiff competition on deposit pricing 

from other banks, non-bank online lenders and 

Fintechs, keeping a close eye on our commercial 

real estate, inflation, rising interest rates, 

significant labor shortages affecting our banks 

as well as the local businesses that we serve, 
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housing shortages, and rising cost of 

homeownership. There was overall little to no 

deterioration on asset quality and mixed 

experiences with loan demand.

Most of the MDIs did not experience 

deposit outflows from the events of the past 12 

weeks. Many of the banks indicated that they 

were resilient while positioned for the effects 

of the rising interest rates. During the MDI 

spotlight, we heard from three private funds that 

are supporting minority depository institutions 

with a variety of resources, including the MDI 

Keepers Fund, the Mission Driven Bank Fund, and 

the Black Economic Development Fund.

MDI subcommittee members found the 

member -- sorry. The subcommittee members found 

the presentations to be useful. And, the FDIC 

will place the videos on the website so MDIs 

across the country can learn about these 

resources.

We also had a brief briefing from FDIC 
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staff on the recent bank failures affecting the 

Deposit Insurance Fund, or DIF, followed by 

information on the FDIC’s Board’s recent vote on 

the special assessment to recoup losses to the 

DIF. And, we also received a briefing from staff 

on policy options for changes to the deposit 

insurance based on recent paper released by the 

FDIC. Next, we had updates on the results of the 

FDIC’s 2023 MDI program effectiveness survey.

A briefing and discussion about the 

2023 Interagency MDI CDFI bank conference and 

update on examiner training. The survey showed 

that the FDIC is generally meeting its 12 goals. 

MDI bank has found technical assistance to be 

useful or very useful and found it to be good, 

very good, or outstanding in enabling their 

institutions to address topics presented.

The survey showed that MDIs would like 

technical assistance to be more specific, but 

provided no further suggestions at this time. We 

learned about the 2023 interagency conference 
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which will be more interactive than in the past. 

The conference will take place in November at the 

Federal Reserve Bank of Dallas. And, the FDIC 

recently sent save the date information to all 

MDIs and CDFIs.

The FDIC is providing quarterly just 

in time refresher training for FDIC risk 

management EICs and other supervisory staff for 

upcoming examinations on the application of exam 

ratings to unique business models of MDIs. The 

training will include case studies on applying 

exam ratings to MDI business models, cover 

information about new mission driven capital 

inflows to MDIs, and supervisory expectations 

regarding management of capital and risk-related 

new capital. State examiners will also be 

invited to attend. And, that concludes the 

report from the subcommittee. And, Betty and I 

welcome any questions you may have.

MEMBER JAMES: Great report.

(Laughter.)
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MEMBER SHOEMAKER: It’s interesting. 

Your comments were exactly like our comments from 

the previous segment, same concerns.

MS. EBERLEY: They were, yeah. Okay. 

Well, next on our agenda is to transition to a 

break. We will take a break, and please return 

and be ready to start back up at 10:45.

(Whereupon, the above-entitled matter 

went off the record at 10:24 a.m. and resumed at 

10:47 a.m.)

MS. EBERLEY: All right. Welcome 

back, everybody. Before we being our next 

session, I’d like to acknowledge Rohit Chopra, 

Director of the Consumer Financial Protection 

Bureau and a member of the FDIC Board of Directors 

has joined us for this segment of the meeting. 

Thank you. And, I wanted to offer you the 

opportunity to say a few words if you’d like.

DIRECTOR CHOPRA: I’ll pause until the 

presentation part.

MS. EBERLEY: Okay. Thank you. All 
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right. So, next, we’re going to hear from 

representatives from the FDIC’s Division of 

Insurance and Research. Pat Mitchell, the 

Division Director; Mike Spencer, Associate 

Director of the Financial and Risk Management 

Branch; and Kayla Shoemaker, Acting Chief of the

Banking and Regulatory Section are going to 

provide us with an update of the FDIC’s Deposit 

Insurance Fund.

MR. MITCHELL: Just want to make --

okay. So, thank you, Doreen. And, as Doreen 

mentioned, I’m the Division Director for our 

Division of Insurance and Research.

And, I’m going to open up briefly, 

then I’m going to hand it over to Mike and Kayla 

to talk about the details. So, DIR, our Division 

of Insurance and Research, since the events in 

March have been quite busy. We weren’t actively 

involved in the resolution nor the supervision of 

the institutions. 

But, of course, there’s been some very 
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important follow-on work. And, we’re going to 

cover two of those areas over the next two 

sessions. So, first, these are back-to-back 

sessions, and they are related but they’re not.

First, we’re going to cover the 

Deposit Insurance Fund, and also the NPR, the 

notice of proposed rulemaking, on the special 

assessment related to the coverage of the 

uninsured depositors of Silicon Valley Bank and 

Signature. And, we’re also going to -- the second 

session, we’re going to cover options regarding 

deposit insurance. And, for those that aren’t 

aware, we have a paper out there.

And, so, we’ll cover that, and Jon 

Pogach will come up here and join me for that. 

Having said that, again, we’ve been busy. 

They’re related to each other and happy to 

connect the two and answer questions in advance 

of Jon.

But, we will cover in detail the 

options paper and talk through. And, we’d love 
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to hear your thoughts on kind of what we -- when 

we say we, it’s Congress really. But, what you 

think might work from a deposit insurance reform. 

So, with that, I’m going to hand it over to Mike 

to walk through the Deposit Insurance Fund update 

and the special assessment.

MR. SPENCER: Thanks, Pat. Good 

morning, everyone. First, I’ll provide a brief 

update for the DIF. And, then as Pat mentioned, 

after that, I’ll cover the special assessment 

rulemaking that was just recently proposed.

If you can turn your attention to the 

chart on the screen, I think you might also have 

a printout which illustrates the historical DIF 

reserve ratio. So, the black line matches up to 

the right axis and the DIF balance on the gold 

bars matching up to the left axis. As of March 

31st, the reserve ratio which is the fund balance 

relative to insured deposits, measure 1.11 

percent down from 1.25 percent at year-end.

And, the DIF balance was 116.1 billion 
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dollars, down approximately 12.1 billion dollars 

from year-end 2022. The vast majority of the 

decline in the DIF was driven by the failure of 

two banks and amounts set aside for the 

anticipated failure of First Republic Bank, which 

subsequently failed after the first quarter. The 

decline in the DIF balance was partially offset 

by assessment income, which increased by about a 

billion dollars from the previous quarter, 

largely because of the two basis point increase 

to the deposit insurance assessment rate 

schedules that became effective on January 1st, 

2023, and which we spoke about the last time we 

presented to you in mid-2022.

Insured deposits increased by 2.5 

percent during the first quarter, a little bit 

higher than the average we usually experience in 

a first quarter, bringing year-over-year insured 

deposit growth to 3.1 percent. So together, the 

decrease in the DIF balance and the increase in 

insured deposits is what caused the reserve ratio 
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to fall to 1.11 percent. We’re currently 

operating under a Restoration Plan that was 

adopted on September 15th, 2020, that would 

return the reserve ratio to 1.35 percent, the 

statutory minimum, by September 30th, 2028, as 

required by law.

And, in spite of the recent stress, 

the reserve ratio currently remains on track to 

reach 1.35 percent by that statutory deadline. 

We’ll continue to monitor factors affecting the 

reserve ratio such as insured deposit growth, 

potential losses due to bank failures, and 

related reserves as required under the 

Restoration Plan. And, we’ll continue to update 

the Board at least semiannually.

Importantly the decline in the DIF 

balance does not include the cost of protecting 

uninsured depositors pursuant to the systemic 

risk determination made for the two bank failures 

that occurred in March. The FDIC is required by 

statute to recover those losses through special 
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assessments which offsets the losses associated 

with protecting uninsured depositors and 

eliminates any effect on the DIF balance and 

reserve ratio.

So, I plan to discuss the special 

assessment next, but I can pause there if there’s 

any questions before heading into that. Okay. 

So, on May 11th, the Board approved an NPR to 

impose a special assessment to recover the losses 

arising from the protection of uninsured 

depositors again as required by law and in 

connection with the systemic risk determination. 

That was announced on March 12th, 2023, following 

the closures of Silicon Valley Bank and Signature 

Bank.

Specifically, the law requires us to 

consider the types of entities that benefitted 

from the action taken or assistance provided 

under the determination of systemic risk, the 

economic conditions, industry effects, and any 

other factors that we would deem appropriate and 
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relevant relative to the facts and circumstances 

at the time. Also, the law provides the FDIC 

with the discretion in the design and time frame 

of any special assessment to recover the losses. 

And, before covering these factors and the 

design, we’ll start with the losses attributable 

to covering uninsured depositors under the 

systemic risk determination.

And, currently, the estimated losses 

between the two banks total at 18.5 billion 

dollars. And, of that, the estimated loss 

attributable to protecting uninsured depositors 

was 15.8 billion dollars at the two banks. These 

loss estimates will be periodically adjusted as 

the receivership works through its processes and 

assets are sold, liabilities are satisfied, and 

receivership expenses are incurred.

To recover this amount, this 15.8 

billion dollars, the proposal would impose an 

annual special assessment rate of 12 and a half 

basis points on the applicable banks. So, 
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regarding that scope of application under the 

proposal an IDI’s assessment base for this 

special assessment would be equal to estimated 

uninsured deposits as of December 31st, 2022, 

adjusted to exclude the first 5 billion dollars 

of uninsured deposits. And, that’s applicable 

either to the IDI, if an IDI is not a subsidiary 

of a holding company, or at the banking 

organization level to the extent that an IDI is 

part of a holding company with one or more 

subsidiary IDIs.

And, under this methodology, we 

estimate that 113 banking organizations would be 

subject to the special assessment. Banking 

organizations with total assets over 50 billion 

dollars would pay more than 95 percent of the 

special assessment. No banking organizations 

under 5 billion dollars in total assets would be 

subject to the special assessment.

This approach and result is consistent 

with our statutory requirement to consider the 
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entities that benefitted from the systemic risk 

determination. In general, large banks with 

large amounts of uninsured deposits were the 

principal beneficiaries of the systemic risk 

determination. The largest banks also benefitted 

the most from the stability provided under the 

systemic risk determination.

So, as proposed, banks of larger asset 

sizes and that hold greater amounts of uninsured 

deposits will pay a higher proportion of the 

special assessment. As far as timing, the 

special assessment would be collected beginning 

with the first quarterly assessment period in 

2024, so that’s January 1st, 2024 to March 31st, 

2024. Since we collect in arrears on the first 

payment would be at the end of the second quarter 

of 2024, providing an appropriate amount of time 

for planning.

Also, to preserve liquidity and to 

keep the assessment consistent and predictable, 

the payments will be collected over eight 
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quarters. If prior to the end of the eight 

quarters, the loss is lower than the amount 

expected, the FDIC would cease collection. 

Alternatively, if the loss exceeds the amount 

we’ve collected at the end of that collection 

period, we can extend it as needed.

Pivoting to the effects on capital and 

income, while we would collect the estimated loss 

over this initial eight-quarter special 

assessment collection period under GAAP, 

applicable banking organizations may recognize an 

expense for the assessment immediately. So, 

because of this, it’s assumed that the effects to 

capital and income of the covered banks would 

occur in one quarter only. For those banking

organizations, we estimate that the proposed 

special assessment would result in an average 

one-quarter reduction in income of 17.5 percent 

and a decline in the dollar amount of Tier 1 

capital of less than one percent.

Finally, the NPR was published in the
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Federal Register on May 22nd. It’s open for a 

60-day comment period that ends on July 21st.

And, after this period ends, we’ll carefully

consider all the comments with the aim of

finalizing the rule in October of this year and,

again, with an effective date of starting in

January 2024.

And, so just as a reminder, we are in 

an open comment period. So, we encourage anyone 

who is interested in commenting, they can do so 

through the official comment process which can be 

done through our FDIC’s website. Thank you. Any 

questions?

MEMBER RICHARDS: Michael, we’re 

certainly appreciative of the fact that community 

banks are not going to be paying the special 

assessment. When all this came about, there was 

some worry that we might have to pick up part of 

the bill. Was that ever in the realm of 

possibility?

MR. MITCHELL: Yeah, we have 
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alternatives. I mean, and I guess we looked at 

the statute. And, again, looking at the statute, 

looking who benefitted the most, we thought the 

proposal that we put forth made sense.

But, of course, we look forward to 

comments. So, I think we were considering any 

type of possibility that would meet the statute. 

And, we do have a number of alternatives for 

people to comment on.

MEMBER RICHARDS: Is there a 

possibility that through the comments that you 

all might come to a different conclusion?

MR. MITCHELL: We’ll wait for the 

comments. That’s all we really can say. But, 

again, we put forth what we thought best met the 

statute and best met the statutory requirement 

that of course the Board will – the Board is the 

one that has to ultimately approve. But, we’ll 

wait for the comments.

MEMBER RICHARDS: So, you would 

encourage comments from community banks as well 
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and --

MR. MITCHELL: Absolutely.

MEMBER RICHARDS: -- keep it as 

planned?

MR. MITCHELL: I think that’s the 

case. We always search for comments from

everybody. But, yes, I think to the extent that 

you’re supportive of the proposal, yes, we also 

want to see those comments too. Sometimes people 

think, oh, we just want to see comments saying, 

oh, here’s what we think you should change. But, 

we also want to understand the support.

MEMBER PERRY: I appreciate the fact 

that the community banks will not have to pay for 

this through the special assessment. But, I 

don’t think we can kid ourselves into thinking 

that we’re not going to pay for it also because 

to the extent that we use these larger banks for 

correspondent services, those costs will be 

passed down to us. So, I think that’s something 

that everybody is going to be paying for, maybe 
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not directly but indirectly.

MR. MITCHELL: Sure. I mean, I think 

to be clear, I mean, I think obviously we would 

prefer not to have to do a special assessment. 

But, given the statutory requirement and again 

the circumstances, that’s the best solution. I 

think what we put forth is looking at the statute, 

so --

MEMBER WEST: Can I ask you a question 

real quick? What about flight to safety in terms 

of consumers coming under the impression that the 

FDIC is always going to bail out after bigger 

banks? Therefore, their money is safer in a 

bigger bank and they’re going to leave the 

community bank with their money.

Have you guys talked about that? Or 

I’m sure it’s been brought up. But, I’d like to 

hear your thoughts on that. I haven’t personally 

seen anything, but some of my colleagues have 

talked about that. And, it’s a grave concern to 

some of the smaller banks that people’s 
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perceptions are that if you’re at B of A or 

someone big that if they get in trouble, that 

your deposits are going to be safe, but not 

necessarily at a smaller bank where maybe nobody 

cares if we go under.

MR. MITCHELL: I mean, I think what 

we’ve seen and this was played out a little bit 

in the media. I think what we’ve seen, the actual 

results have not shown quite as strong of a pull 

to the larger institutions as what was played out 

in the public. So far, no, that’s true. But, I 

mean, I think there’s a catalyst there that was 

pretty strong. I think if nothing else, I feel 

like the community banks have proven very 

resilient in that we actually saw insured deposit 

growth this quarter stronger despite the event. 

So --

MEMBER WEST: That’s good news.

MR. MITCHELL: -- now I think we’re 

going to talk a little bit in the next session 

about options for changing deposit insurance 
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which we’ll love to hear your thoughts on that 

and address it.

MEMBER WEST: Thank you.

MEMBER JAMES: To Andrew’s point, I 

serve on a corporate advisory board. And, it’s 

a privately held company. And, I was in the 

meeting a couple weeks ago, and this company, 

they’ve got -- they wouldn’t be considered a 

small business technically.

I mean, they’ve got a couple hundred 

million dollars in cash reserves. And, so, we 

got to the portion of the meeting where the CFO 

was giving his report. And, he was walking 

through their banking relationships.

He was reporting out on their banking 

relationships. And, they keep their money in a 

couple of what I would consider to be 

superregional institutions. And, he talked about 

the due diligence they had done on those 

institutions, the fact that they’re monitoring 

what’s going on at SVB and Signature and First 
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Republic.

And, they were very confident in the 

strength of the institutions and the fact that 

they had reciprocal insurance where necessary on 

these deposits. It was really interesting to 

hear some of the non-banker members of this 

advisory board after he gave all of this report 

and he talked about the strength of these 

institutions which I consider to be extremely 

well capitalized, huge banks. They said, well, 

we should still look at moving our money to JP or 

Wells or a G-SIB.

And, I thought that was a really 

interesting, very telling comment. And, these 

were very sophisticated business people who 

listen to a report that said that their banking 

-- that their money was safe. The company’s 

monies were safe.

They had no exposure to SVB. This 

company has some technology, but they had no 

exposure to SVB. And, even after all of that, 
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they directed the CFO to look at moving the 

relationships.

And, I thought that was really 

telling. So, I do think -- and I mentioned this 

to the Chairman last night. I do think that what 

the FDIC and the other regulators did was the 

correct move. And, you stopped a run on banks 

that would have been catastrophic for all of us.

But, I do think that there is still 

vulnerability in the system. And, I think 

there’s this perception that the four or five 

largest banks in the country are being kept safe 

regardless. And, I think that the actions that 

the FDIC and the other regulators and 

policymakers take to communicate that our banks, 

community banks, are still extremely strong and 

extremely safe. I think that there’s more things 

that can be done to communicate that to the 

sophisticated folks who are moving money based on 

their perception that the G-SIBs are going to be 

kept whole regardless.
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MEMBER RICHARDS: I saw a letter from 

a large bank that they actually were sending out 

to their customers advertising the fact that all 

their deposits will be covered because they were. 

And, it’s one of the three that you mentioned. I 

saw it with my own eyes.

CHAIRMAN GRUENBERG: Yeah, we’d be 

interested in seeing that letter because that 

would be a misrepresentation of deposit 

insurance. So, that would be relevant for us to 

know.

MEMBER RICHARDS: It was being passed 

around, let’s say, among some of the community 

banks.

CHAIRMAN GRUENBERG: A couple of 

points probably worth making. The decision to 

protect the uninsured depositors at Silicon 

Valley Bank and Signature was a very 

consequential decision. As you know, it was not 

made lightly.

I think there was a genuine concern 
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that there was contagion risk triggered by the 

failure of Silicon Valley Bank, that it impacted 

Signature, and that other banks over that initial 

weekend were showing significant stress. So, 

that if we did not act, the risk of other 

institutions being significantly impacted up and 

down, the banking industry appeared to be 

genuine. And, I think that’s what prompted the 

Federal Reserve, the FDIC, and the OCC to 

recommend.

And, then the Treasury Secretary in 

consultation with the President to determine to 

exercise the systemic risk exception to protect 

the uninsured depositors. In retrospect, we 

certainly don’t second guess that decision. And, 

I think it benefitted the industry as a whole. 

And, we’d be in a more difficult position today 

if we had not done that.

And, I think community banks among 

others benefitted from that. So, I really don’t 

second guess that. It was a consequential 
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decision that raises serious issues in regard to 

deposit insurance.

We’re going to talk about that in the 

next part of this discussion as why the FDIC in 

a relatively compressed time frame produced a 

pretty comprehensive study of deposit insurance 

to try to inform the discussion around this 

issue. I will say and have said that while in 

the initial aftermath of the first two bank 

failures, there was impact on deposits that seems 

to have settled down. The third institution that 

failed, we were able to do under the least cost 

test without exercising a systemic risk exception 

which we thought was actually a significant 

example to set.

And, as a general matter as we’ve 

discussed and as we’ve noted, liquidity at 

community banks has generally remained stable 

during this whole period. And, no reason to think 

that deposits at a community bank are at any 

greater risk today than before. I think there’s 
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still communication around this issue to do.

But, it was a tough set of 

circumstances to deal with. I think we made, 

frankly, the best decisions available to us in 

the moment that have generally been proved out by 

subsequent events. Still things to pay close 

attention to.

But, I agree with the point that 

community banks have actually come through this 

quite well. Your deposits have remained stable. 

As a sector of our banking industry, you all 

continue to do quite well as you all have

discussed this morning.

So, we’ll take it a day at a time. 

That’s kind of my mantra here. But, I think --

and I do think the point and I think I could ask 

staff to comment further on this. To the extent 

there’s been movement of deposits, there’s been 

some to the larger institutions, but not frankly 

that much.

To the extent there’s been movement, 
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some of it has actually been to insured deposits 

because of this. Some of it has been outside of 

the banking system to money market funds is 

seeking higher yield actually. So, it’s not a 

simple picture. But, I do think from a community 

bank perspective, frankly it’s been a fairly 

positive one. And that’s --

MR. MITCHELL: Yeah, and I’ll just add 

on to what the Chairman said there. I mean, 

again, the numbers don’t fully bear out the story 

that’s being told in the press regarding this 

huge flow. And, you talked about earlier, I think 

there’s a bit of a -- some people have termed it 

as an awakening by depositors about receiving 

higher interest rates. And, you all talked about 

that.

And, some of them are going to money 

market funds. And, that seems to be the larger 

flow as opposed into the larger institutions. 

So, that’s the numbers. And, again, this is 

something we talked about this at the – the 
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Chairman mentioned this at the QBP yesterday. 

We’re going to be acutely interested to see what 

second quarter numbers look like because that’s 

going to tell a little bit more beyond the -- I 

guess more of the persistent story as opposed to 

the two- or three-week story at the end of the 

quarter.

DIRECTOR CHOPRA: Let me just offer a 

couple of comments as we transition to the next 

section. I apologize. I can’t see your name, 

sir. But I don’t want to -- I think what Mr. 

West has said regardless of whether the data is 

showing it, the perception he mentioned is a big 

problem.

You don’t want your depositors 

feeling, oh, it’s safer there. And, I think that 

is something we have a lot we’re doing to make 

sure that we take away that perception because 

the funding advantage for a too big to fail bank 

is not only in what they can actually execute. 

But, it’s also that perception that they benefit 
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from.

And, it is not a good thing. Let me 

also just say a couple of other points. The 

reason I really wanted to make sure I came here 

was that what Patrick just talked about, about 

thinking again about whether their deposits are 

insured or not, today the CFPB released an 

analysis of these very popular payment apps, 

Venmo, CashApp, all of them, Google Pay, Apple 

Pay.

And, what we find is about three in 

four adults are now using them. And, actually, 

I think it was about 85 percent of those 18 to 29 

use them. So, we expect that adoption will 

continue to surge.

And, we estimate that there are 

billions of dollars sitting in stored balances. 

And, the way it works, I’m sure most of you are 

familiar, when you send money, an ACH debits your 

account. It goes to the user.

But, when you receive, it does not 
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necessary go into your insured bank or credit 

union account. And, those payment apps are 

sitting on those balances. They are not subject 

to traditional bank regulation in terms of what 

they’re doing with it.

And, in our own analysis of the fine 

print, it’s very clear that not all of those funds 

are insured. It might be insured if they 

technically put it in a partner bank. And, it’s 

a little bit complex.

But, it’s one of many situations where 

you see that a consumer individual business might 

perceive, oh, this is just like a bank account. 

It is not. And, I think we are trying to figure 

out ways and we have published a nationwide 

consumer advisory today encouraging people when 

they receive funds, sweep it back to their 

insured account.

We encourage others to help with this. 

And, it’s another place where we fear there is a 

perception of stability in something that is not 
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in the meltdown of FTX and others. It was not 

just people who lost their crypto currencies. 

They also had dollar funds deposited in those 

accounts which were then not necessarily secure 

and segregated.

So, I encourage you to look at what 

we’ve published. I think it’s also useful. 

There’s a lot of issues with these apps including 

when something goes wrong, consumers can’t always 

get answers.

And, then they go to their local bank 

to say, help me with this, especially when 

there’s a problem. And, this is not sustainable. 

So, we will -- as you know, we will continue to 

talk about an CFPB community bank advisory 

committee.

But, I wanted to share that with all 

of you. Just two other brief points to build on 

what the Chairman said, I think that we really 

made -- it was a tough decision to do it. And, 

the proposal that we have voted on actually is 
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not a community bank exemption.

In fact, a large bank if it was 100 

percent insured deposits will not pay anything. 

So, it’s really on larger firms with more than 5 

billion of uninsured deposits which I think 

really maps well to our legal requirements. And, 

the Chairman and the staff I think really came up 

with a very, very good way to allocate the costs 

and the benefits.

Although, we will acknowledge that the 

failure of First Republic is not subject to that, 

I continue to look at that reserve ratio and think 

to myself really the hits to that fund come from 

big institutions, not from smaller ones. And, we 

have to, I think, over the long term assess, are 

the costs being put on the ones who really create 

those hits to the fund given the greater 

simplicity of resolution of smaller ones? So, 

sorry to go on and on, but I just want to keep 

everyone in mind about all of this other stuff 

that feels secure but is really uninsured.
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MS. EBERLEY: Okay. Thank you. We’ll 

treat that as a segue to our next topic. So, 

thank you very much. Pat is going to stay with 

us for our next agenda item, and he’s going to be 

joined by Jon Pogach, a senior economic 

researcher in our Division of Insurance and 

Research. And, they’ll talk about our paper on 

deposit insurance reforms. 

MR. MITCHELL: Even though she doesn’t 

have a name tag, I’m going to ask Rosalind to 

come up here also, please. So, Rosalind was out 

on vacation. And, Jon and Rosalind are the two 

primary authors of the deposit insurance paper.

It took a village for sure. But, Jon 

and Rosalind were the primary pen holders. So, 

now I think we’re really -- I think Jon’s going 

to help us touch on some of the aspects we were 

just talking about, about, for example, the 

customer you were talking about with business --

not to front run, but business payment accounts 

is what we call them and talk about the kind of 
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the characteristics in some of the things we 

think -- we’ve recommended to think about with 

regard to if we’re going to change. If deposit 

insurance is to change, what are some key things 

to consider?

I’ll mention that -- I think the 

Chairman mentioned we have a short time frame. 

Obviously, deposit insurance is a key part of 

financial stability. And, clearly, that did not 

work the way everybody expected based upon the 

events of Silicon Valley and Signature.

So, the Chairman asked us to help 

inform the discussion that we knew would ensure 

and asked us and asked me and the Division of 

Insurance and Research to produce an options 

paper. And, I said, okay, probably maybe four to 

five months. And, he said, how about four to 

five weeks?

And, by the way, I think that’s 

actually looking back, it’s important for us to 

have produced something. And, Jon and Rosalind 
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both delivered to help inform the discussion. I 

think we’ve done that. And, with that, I’ll hand 

it over to Jon, just talk about what we wrote in 

the paper.

MR. POGACH: All right. Thank you, 

Pat. So good morning, everyone. Thank you for 

the opportunity to present this overview of our 

report which is entitled Options for Deposit 

Insurance Reform. It appears on our website. 

And, we certainly encourage everyone to read it. 

That’s why we wrote it.

I also want to thank all the great 

staff that worked on it. It was very much a 

village effort. So, our report is a 

comprehensive overview of the deposit insurance 

system and presents options for reform to address 

the current risks facing the system.

So, I’ll spend about ten minutes 

highlighting and summarizing certain areas. And, 

then I can turn it over to questions. So first, 

the report analyzes relevant trends in deposits.
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In particular, uninsured deposits 

have trended up over time and have increased the 

risk of bank runs. At their peak in 2021, the 

portion of uninsured deposits in the banking 

system was also 47 percent, which is higher than 

at any time since 1949. Large concentrations of 

uninsured deposits increase the potential for 

bank runs and can threaten financial stability.

Technological changes such as the 

speed with which information or misinformation is 

disseminated. And the speed with which 

depositors can withdraw funds can also increase 

the risk of bank runs. The report examines the 

objectives of deposit insurance.

One primary objective highlighted by 

Pat is to promote financial stability. Bank runs 

destroy value and they disrupt the provision of 

credit. Individual depositors who lose access to 

their funds and bank failures may not be able to 

meet their obligations which can amplify stress 

to businesses and households. 
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In addition, a run at one bank can 

also lead to contagion as depositors at similar 

banks look to withdraw their funds. Even for 

banks that don’t experience a run, they can 

contract credit which can reduce economic 

activity and can lead to job losses. Deposit 

insurance reduces these risks.

Another objective of deposit 

insurance is protecting small depositors. As of 

year-end 2022, more than 99 percent of deposit 

accounts were under the 250,000 deposit insurance 

limit. Deposit insurance protects the savings of 

small depositors.

The report then describes possible 

consequences of deposit insurance. Banks 

practice in sound risk management, incorporate 

the risks associated with deposit withdrawals 

into their decision making. Deposit insurance 

reduces the need for banks to manage their risk 

taking in response to the risk of uninsured 

deposit withdrawals.
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Changes to deposit insurance must 

consider both the financial stability benefits of 

more coverage and the possible implications for 

risk taking in the banking system. The report 

also discusses additional consequences of deposit 

insurance such as possible changes to bank 

funding which also merit consideration when 

evaluating reforms. The effectiveness of deposit 

insurance depends on how it is used with other 

policy tools.

Regulation and supervision play 

important roles in constraining risk taking 

incentives and supporting financial stability. 

Tools such as capital requirements and 

supervision of bank growth can reduce risk taking 

incentives that might arise from deposit 

insurance. And, regulation and supervision of 

liquidity can also be used to help reduce run 

risk.

Long-term debt requirements can also 

increase financial stability by facilitating bank 
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resolutions and can also reduce risk taking by 

increasing discipline from debt holders. The 

report also discusses new policies such as 

requiring collateralization of large uninsured 

depositors or limiting their withdrawal capacity 

both of which may also complement the other 

reforms. Requiring the collateralization of 

large uninsured deposits with high quality shortterm assets would reduce the ability of banks to 

rely on concentrated uninsured deposits to fund 

their long-term assets.

As a result, banks and large uninsured 

depositors will be forced to share some of the 

financial stability cost that might be associated 

with such accounts. Limiting the withdrawal 

capacity of large uninsured deposits, for 

example, by requiring that a certain portion of 

such accounts cannot be withdrawn with a fixed 

time frame would also increase the exposure of 

large depositors to banks at failure. Limited 

withdrawal capacity would also increase 
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monitoring sensors for large depositors, but 

suppress incentives to incite panic and would 

encourage depositors possibly to diversify their 

funds more broadly across banks.

A more diversified depositor base may 

then contribute further to financial stability. 

The report discusses implications of the Deposit 

Insurance Fund or the DIF. Increases to the 

deposit insurance limit would increase the size 

of the DIF necessary for a given target reserve 

ratio.

Increasing the size of the DIF must be 

done through increased assessments on banks. The 

report then evaluates three options to reform the 

deposit insurance system. And, the order of the 

options that we present is just for clarity of 

discussion and not in order of preference.

The first option which we call limited 

coverage maintains the current structure in which 

there is a finite deposit insurance limit. So, 

that limit could be at the 250,000 dollar limit 
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we have today but could also be higher. The 

second option which we call unlimited coverage 

provides unlimited deposit insurance to all 

depositors.

The third option which we call 

targeted coverage allows for different levels of 

deposit insurance coverage across different types 

of accounts. And, going to some of the earlier 

comments, we focus on higher coverage levels for 

business payment accounts. Each of the options 

has relative strengths and weaknesses.

However, targeted coverage that 

focuses on business payment accounts captures 

many of the financial stability benefits of 

expanded coverage while mitigating some of the 

more undesirable consequences. Because each of 

the options has relative strengths and 

weaknesses, the report cautions that each of the 

options should be viewed alongside other policy 

changes. So, then go a little bit deeper into 

those three options.
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Limited coverage maintains the 

current system of deposit insurance at the 

current or perhaps a higher level of coverage. 

By itself, this option does not address the run 

risk associated with the high concentrations of 

uninsured deposits. Increasing the coverage 

limit by an order of magnitude to millions of 

dollars would benefit small and medium-sized 

businesses that hold deposits above the current 

limit, but it would be insufficient to cover many 

of the largest uninsured deposit accounts.

Therefore, achieving financial 

stability under limited coverage would likely 

require other policy tools such as 

collateralizing large demandable deposit 

accounts or limiting their withdrawal capacity. 

Unlimited coverage in which all deposits are 

fully covered effectively removes run risk. But, 

it may have large effects on bank risk taking,

deposit insurance assessments on banks, and 

broader financial market effects.
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Insurance backed by the federal 

government provides a strong deterrent to run 

risk. However, it would also remove depositor 

discipline and may induce excessive risk taking 

by banks. Policy tools such as regulation, 

supervision, and deposit insurance pricing could 

be used alongside unlimited coverage to reduce 

risk taking.

Given the current level of deposits or 

at least year-end 2022 when we wrote the report, 

full deposit insurance would increase the size of 

the DIF needed to achieve any given targeted 

reserve ratio by about 70 to 80 percent, leading 

to significantly higher assessments on banks. 

Targeted coverage provides substantial 

additional coverage to business payment accounts 

without extending similar insurance to all 

deposits. Payment accounts rarely involve the 

weighing of risk and return that is typical of 

investment accounts.

Further, losses on business payment 
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accounts are most likely to spill over to payroll 

and to other business expenses. Therefore, 

increased coverage to business payment accounts 

yields large financial stability benefits 

relative to its costs on risk taking. However, 

there are challenges to targeted coverage around

establishing a practical definition for accounts 

that would merit higher coverage and also 

limiting the ability of depositors or banks to 

circumvent whatever those distinctions might be.

Extending considerably higher deposit 

insurance coverage, the business payment accounts 

may require a significant increase in deposit 

insurance assessments, though less than if the 

limit is raised similarly for all accounts. In 

conclusion, I want to underscore that the deposit 

insurance system at its current coverage levels 

is limited in its ability to achieve financial 

stability objectives due to large concentrations 

of uninsured deposits. The policy options that 

we present in the report may be considered to 
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help reform a deposit insurance system and to 

meet those objectives.

And last, it’s important to note that 

changes to deposit insurance coverage would 

require congressional action. However, some of 

the other policy tools may lie within the 

rulemaking authority of the banking regulatory 

agencies. That’s it for me, at least for my 

scripted remarks.

CHAIRMAN GRUENBERG: I would just 

underscore that we made a completely unreasonable 

request. Our Division of Insurance and Research 

to produce a comprehensive report in six weeks or 

less. That’s a bit of an oxymoron by a normal 

context producing comprehensive anything in a 

five- or six-week time frame.

But, candidly, I think they managed to 

do it. If any of you’ve had the opportunity to 

take a look at the report, it’s really a 

thoughtful piece of work that places the recent 

events in the broader context of the long history 
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of the deposit insurance system in the United 

States, its evolution, and issues presented by 

these recent developments. And, I think it’s 

really helped to inform the public discussion 

around this issue. So, I just wanted really to 

acknowledge the exceptional job that was done 

here.

MEMBER RICHARDS: Required reading for 

our senior staff.

MEMBER MAUST: I just want to commend 

the team for putting that together. It was an 

impressive report. I read most of it.

Some of the history, I skipped over. 

But, what I thought was really nice was the 

combination of points and counterpoints, the

knock of effects and unintended consequences of 

each of the options. And, a couple I hadn’t even 

considered -- I mean, I haven’t even thought 

through it after reading, it was obvious.

But, when you get kind of laser focused in a 

particular objective, may miss a couple things. 
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A couple things came to mind. One is optional 

participation from the standpoint -- I know 

that’s something we had with the TAG Program, 

also supervisory expectations. That’s been 

something that’s been circulating in the industry 

is if it’s unlimited or if it’s a significantly

expanded deposit base that’s covered from an 

insurance perspective. Is that an equivalent 

increasingly expanded supervisory oversight or 

not? Just perception versus reality, just like 

in the public, there’s perception versus reality. 

The perception Director Chopra was 

commenting on relating to consumers thinking 

that, oh, yeah, this is insured or this is 

covered. I’ll be okay.

It’s funny because I was just thinking 

about that. Our younger son receives payments 

for his 1099, non-employee compensation. And, 

it’s not immaterial and it sits there until I can 

sweep it over to his bank account.

And, that concerns me now that that 
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was brought up. So, when I think about that being 

expanded to the general public, we live this. We 

know how deposit insurance works. But, the rest 

of the United States doesn’t.

And, making it as simple as possible 

because we do have tools. Small businesses, midsized businesses, we have reciprocal deposits. 

We have other ways of covering those, but it’s 

not well understood.

And, so, knowing there’s simple 

coverage particularly backed by the US government 

is very powerful. As far as a deposit base, we’re 

focusing pretty heavily on the operating accounts 

of businesses, payment accounts. And, I don’t 

know how thoughts has been given to the deposit 

base that the insurance premium would be assessed 

on because that money can move around pretty 

easily the same day almost.

And, so what’s covered, what’s not. 

Obviously, that’s going to be a determination for 

the bank. But, I’m of the sort of bent that just 
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any non-interest bearing DDA is probably --

whether it’s consumer or business.

Probably just takes that off the table 

and separates the operating funds from the riskreward decisions that somebody makes when it’s 

more of an investment/savings account. Anyway, 

I did want to at least bring that up. And, as it 

relates to consumers, yes, it’s not common that 

consumers exceed the deposit insurance limits.

But, they do have life events. 

Sometimes we’ll leave those funds in for a period 

of time. So, I think there is a case to be made 

for consumers to be incorporated in that as well.

MEMBER SHOEMAKER: And, I reiterate 

your comments. Lillous Ann Shoemaker, Magnolia 

State Bank, 450 million in assets. And, we do 

have several customers that it may be on December 

31st, they wire in 10 million dollars. And, they 

significantly impact our balance sheet. And, so 

that is a concern. But, we also want to keep our 

business customers that maintain high balances 
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with us. So, I appreciate the thought that went 

into these three options.

MEMBER MJARTAN: If I could add too, 

let me just thank you, Mr. Chairman and your team, 

for missing a few nights probably of sleep. And, 

I do think despite the consequences which I don’t 

think were -- I wouldn’t call them unintended. I 

think you were very aware of the risk.

But, I think you did a marvelous job 

weighing those risks. We had no exposure to SVB 

directly. But, indirectly, who knows. We know 

some of our customers had relationships. So, 

what does that to do ours?

So, I think that was the right call. 

So, I just want to recognize that. I think that 

was a tremendous move and very courageous move. 

So, I applaud that.

Two things I want to just comment on 

the options. Again, same thing. It was an 

incredible piece of work that your team pulled 

together in such short time.
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The story that is being told in the 

media I think is -- you pointed out the numbers 

may not fully prove out that story. But, what I 

would say for those of us that serve unique 

communities or subsets of our community could 

also say that the numbers also don’t tell our 

story. And, the numbers don’t tell the story of 

our communities.

And, so, my question as we ponder this 

is truly not just who benefitted but who is paying 

the price? Who benefitted from this current 

environment? And, who’s going to pay the price.

And Robert shared a wonderful 

anecdote. I’m not pretending to be half as good 

of a storyteller as he is. But, I do have several 

anecdotes at our bank, as a 400 million dollar 

mission driven bank.

And, I think I mentioned briefly, we 

did lose several opportunities. We haven’t lost 

any deposits. And, in fact, we’re up about 10 

percent just since the beginning of the year even 
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in core deposits.

But, we’re paying a huge price for it 

cost-wise. Our cost of funds is -- it’s still 

low relatively speaking. But, it’s multiple what 

it was last year.

So, the question is who is paying the 

price. And, to me, who is paying the price, going 

back to the previous discussion about the lending 

standards. So, we haven’t adjusted our lending 

standards at all.

We follow the same in the last five, 

six years. The loans that we’ve originated since 

I came to the bank, we’ve charged off less than 

0.08 percent of the loans. Of course, some of 

them are fairly new.

But also, a third of our loan 

portfolio is government guarantee. So, we’re not 

necessarily worried about credit risk unless the 

world falls apart. And, then we’ll have bigger 

problems to worry about anyway.

So, what we are gravely concerned 
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about is who is going to pay the price. And, 

I’ll give you an example of our most recent loan 

committee. We had an affordable natural 

occurring affordable housing project that we 

could’ve financed in North Charleston.

And, it was a participation with 

another bank. And, they would have even allowed 

us to take the whole loan. It was about a 10 

million dollar loan, but it was a construction 

and rehab.

So, it wasn’t pledgeable to the 

federal home loan bank during the construction 

period. The rate was about six and a quarter. 

We would’ve accepted the rate, had strong 

guarantors.

Our loan committee voted against a 

deal even though it was a CDFI LMI area, majorityminority area, great guarantors, great strength, 

good project, high impact. It hits all the marks 

for us as a mission driven bank. And, not a bad 

credit quality at all.
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But, the rate and the liquidity killed 

the deal for us. So, I’m going back to who’s 

going to pay the price for this migration of these 

deposits. Maybe small.

And, one other quick story and you’ll 

get the sense of why I’m making these points 

hopefully from it. But, I mentioned we had two 

bids outstanding for non-profit accounts, large 

non-profits in South Carolina, very mission 

aligned. And, at the top of the proposal, I put, 

all deposits are fully FDIC insured according to, 

and I linked to IntraFi, the reciprocal deposits 

because I didn’t want to break any FDIC 

disclosure laws.

So, I said, read more about this here. 

But we can ensure up 130 million dollars per 

depositor. Their board met and the feedback I 

received from the CEO was they were worried about 

their fiduciary duty.

And, I said, what do you mean 

fiduciary duty? They just moved the money to a 
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bank that’s not insuring the deposits at fraction 

of the cost we were willing to pay. So, going 

back to my point, who is going to pay the price?

So, if we had gotten that amount of 

money, we probably would’ve financed the project 

in North Charleston. Because it would’ve been 

core operating account, full relationships. So, 

there’s huge cost, I think, that is not baked 

into the FDIC insurance to our communities.

And, I don’t know how to quantify it. 

We struggle with it. MDI, CDFI banks always 

struggle. How do we put a price on the value 

that we create in our communities? And a lot of 

-- Magnolia State Bank, a lot of the rural banks 

and other banks, mutuals, all have significant 

impact.

But, you can’t price that into that 

and to the true cost that I believe is too big to 

fail. Even though it may be minor, it may not 

show up on the big numbers. But, when you 

translate it to that single mom in North 
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Charleston that would have had a house and she 

doesn’t.

MEMBER HORTON: I have a question. 

Good comments by everyone, and thank you so much 

for your work on this critical issue. Is there 

any chance that we could combine the third one 

with the targeted coverage with some increase in 

the 250,000 dollar limited coverage?

MR. POGACH: So, all of these are 

congressional decisions. They’re not us. The 

targeted coverage that we focus on doesn’t 

specify a particular level. I mean, doing a full 

analysis of exactly what any of those numbers 

would’ve been given the very great timeline that 

we were given.

It would’ve been, I think, a little 

bit much. So, we don’t preclude that as a 

possibility. I think the account -- 99 percent 

of all accounts are currently insured at the --

or, not insured, they’re below the 250,000 dollar 

limit which is not exactly the same on the Call 
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Reports as insured. But, 99 percent of accounts 

fall below the 250,000 dollar limit.

So, expanding coverage above the 250, 

who is it that is really important to capture? 

And, that’s why we focused on the business 

payment accounts because that’s where we thought 

the best benefit might be. But, nothing 

precludes Congress or from anyone thinking about 

where there might be benefits when thinking about 

other groups, for example, life events or other 

places where it might merit more coverage.

MEMBER HORTON: Yeah, I agree. I 

mean, I’d love to see something like the TAG 

Program re-instituted which I see is your 

targeted coverage. But, I think just considering 

the last time we raised it from 100 to 250 and 

inflation and everything else, I guess I’ll 

include that in my comments. I’d like to see 

both.

MR. MITCHELL: Yeah. As Jon 

mentioned, certainly they could all be combined. 
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I think what we tried to do is set aside three 

bite sized options to think through. They could 

be used in combination for sure.

On the TAG, just to talk to that 

because I think that’s been mentioned a couple 

times. And, this kind of works in line with 

talking about the rate environment when TAG was 

in place last time, including the -- I’m going to 

forget -- Reg Q and Reg D have both been 

eliminated since then. The interest rate 

environment during the TAG program was 

effectively zero.

And, now one of the concerns that 

we’ve talked about is if you use TAG as defined, 

given the rate environment change and the actual 

removal of Reg D and Reg Q that you may not get 

the same coverage and you may not get the same 

impact. And, again, people in this environment, 

are you going to be okay with a non-interest 

bearing transaction account? Maybe, maybe not. 

I think what we were trying to think through was 
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having something that’s durable through different 

interest rate environments because otherwise I’d 

say the targeted approach is largely intended to 

get to the same point which is TAG.

MEMBER HORTON: I will say at our 

bank, we haven’t lost any relationships. But, we 

definitely have seen lots of money going out and 

primarily into U.S. Treasuries. I mean, I think 

customers are feeling like that’s the safest 

place now.

And, so they’ll leave the core 

relationship with us. And, then they’ll skim it 

off. And the rates are higher. We can’t compete 

with the perception of no risk or the yields that 

are being offered.

MR. MITCHELL: And, as you’re all 

acutely aware of, the yield curve is very 

challenging right now with how steeply inverted 

it is. And, that, again, makes money market 

accounts even more -- money market funds even 

more attractive given the short-term nature, 
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higher yields. So, we recognize that 

competition.

MEMBER HORTON: Thank you.

MEMBER PERRY: I think maybe you 

mentioned that the 250,000 dollars was adequate 

for -- or seemed to be adequate for individuals. 

But, let’s not forget that a lot of individuals 

that have more than 250,000 dollars are 

structuring their deposits to have more than 

250,000 dollars in coverage. And, I think I read 

with the limited coverage possibly taking that 

away or looking at depositors based on their 

Social Security number, a different identifier.

If you’re going to leave it at 250,000 

dollars, don’t take that away. We’ve got to --

I mean, we have plenty of individuals that have 

more than 250,000 dollars. And, they take 

comfort even though our bank is a very safe bank, 

well capitalized. They take a lot of comfort in 

knowing that their deposits are covered, insured 

because they structure them to make sure they 
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are. So, if you’re going to take that away, we’ve 

got to raise that limit. 

MR. MITCHELL: I think -- Jon and 

Rosalind, correct me. I think when we talked 

about that, that was if there was some type of 

significant increase and level, you could look to 

reducing some of the complexities --

MEMBER PERRY: Okay.

MR. MITCHELL: -- of deposit 

insurance. So, I think that’s the way we framed

that it was in conjunction.

MEMBER PERRY: And, that might be 

helpful for our customers, and also for our 

personnel because we are constantly training our 

personnel on this. In fact, when the banks 

failed, we were making sure that our personnel 

understood how they could make sure that our 

customers felt confident in the system. And, 

like I said, even though we’re well capitalized, 

when the world seems to be falling apart, they 

don’t care.
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MEMBER RICHARDS: I think it is a good 

way though that you can prove that you’re taking 

care of your customers. And, our customers 

appreciated us helping them say, we can do it 

this way and that way. So, I’d hate for you to 

do away with that too because it’s just a good 

tool for us to attain and retain good customer 

base.

One of the questions I would have just 

real quickly is on the business payment account. 

We haven’t really touched on that. But, I would 

want to see more information on how that’s 

defined because if it’s going to be an account 

that has X number of transactions, people are 

going to game the system to get as many accounts 

as they have covered.

Or is it going to be not paying a rate 

above a certain amount? What is that going to 

look like? Because then we’ve got to come up 

with a coding mechanism to be able to somehow 

tell you guys how many business payment accounts 
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we have and how many we don’t have of our deposit.

And, what’s that going to look like 

and how’s that going to get reported. And, I 

mean, I like the targeted approach. But, leaves 

a lot of questions as to what do you mean? What 

are you talking about?

CHAIRMAN GRUENBERG: I think you’re 

quoting our report, by the way.

(Laughter.)

CHAIRMAN GRUENBERG: See, the report 

makes that precise point.

MR. POGACH: That is in the report 

that would seem as the major drawback is having 

very clear definitions.

MEMBER RICHARDS: I mean, if you make 

it too easy, then people are going to game it. 

If you make it too hard, then it’s going to be 

very difficult for us to be able to track how 

many we have and who we have.

MR. POGACH: And, you could use 

something like an interest rate as a basis for 
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defining it. Or there are millions of other ways 

that you can. From the timeline that we had, we 

didn’t specify all the different ways that that 

might be done.

But, if it’s something that’s going to 

be considered by Congress, that would certainly 

be something that would have to be worked out. 

And, to the point on simplification, I think it’s 

something that we discussed. The simplification 

is not designed to reduce the overall coverage. 

It is more to provide clarity and coverage, 

especially for events like March 2023.

If the system is not clear as to 

what’s covered and what’s not or consumers aren’t 

clear on what’s covered and what’s not, that 

doesn’t benefit, I think, banks or customers in 

the context of uncertainty. So, the goal is 

certainly not to -- especially given the way the 

reports are written to increase the amount of 

uninsured. That’s not the objective. But, just 

trying to make it clear to depositors so that 
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they know what is and what is not.

MEMBER REIGELSBERGER: That’s 

something that we have after March ‘23 on all of 

our employees’ computers, we made them save the 

website on the FDIC that where you calculate and 

you put the names in, the amounts, then you can 

print it out and you can hand it to your customer. 

And, they’re like just like he said, oh. They 

can see what -- then if they need to make changes, 

whether or not you change beneficiaries or 

whatever you need to do to make it under the 250.

So, that’s been a great tool in the 

last two months especially. So, I want to thank 

you for that. Our bank has used a lot.

MEMBER BATES: I think, overall, I 

think simplification is going to be the best 

because I think most everybody in this room is of 

a size where we have a lot closer relationship 

with our borrowers. They’re reaching out to us 

and they know us by name. And, I think that’s 

been very helpful.
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And, I do particularly appreciate the 

fact that you -- in this special assessment, you 

focused on the fact of the systemically important 

institutions. I think I don’t get much caught up 

into the small and the large. But, it is good to 

distinguish the folks that truly have that 

systemic advantage and pay that premium forward. 

If I was systemically important, I wouldn’t mind 

paying a premium for it.

(Laughter.)

MEMBER BATES: And, it also helped 

because the two basis points doesn’t sound like 

a lot when you say it. But, it was a meaningful 

number on our balance sheet. But, it’s like any 

insurance.

All our insurance has gone up. Our 

health insurance has gone up extreme amount. 

Property, casualty, cyber insurance is going 

crazy. So, it’s the cost of doing business and 

it’s a very important insurance to have.

MEMBER MJARTAN: Could you comment 
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real quick on reciprocal insurance role? Did you 

consider what role the IntraFis and the Reich & 

Tang programs, the Stonecastle kind of programs 

play? Have you all given any consideration to 

that?

MR. POGACH: We talk about it some in 

the report.

MS. BENNETT: Certainly, with 

unlimited deposit insurance, that changes that 

industry quite a bit. We certainly talked about 

it in that context, but definitely in the context 

of the other options as well.

MR. MITCHELL: And, even in the other 

option, we mentioned that and the beneficiaries 

and other ways and capacities that there are 

other ways for individuals to increase insurance. 

So, we didn’t really attack that or direct that 

specifically. I think there’s still some 

limitations of that for business accounts is kind 

of our general view.

MEMBER MJARTAN: There are 
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limitations. And, I guess the question we have 

some of us use it, we use it heavily, both the 

transaction ICS program and also the DDM and/or 

the CRS program. But, is there a role for the 

FDIC to play and not necessarily promoting that 

as -- I know these are private sector solutions. 

But, still, they are helpful and they definitely 

help with some of our customers. Like I said, we 

didn’t lose anything because we have a lot of 

deposits in those programs.

MR. MITCHELL: And, again, like you 

mentioned, those are private sector solutions. 

We know and understand they exist in banks to the 

extent that they want to take advantage of it.

MEMBER HORVAT: Can I ask what is the 

process from here? I know it’s a mission issue, 

but where does it go from here?

MR. MITCHELL: I mean, I think at some 

level what we hope to do and I think that was 

true, at least the Chairman when he testified. 

People mentioned to report it. I think it’s 
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helped inform and start -- maybe not just start 

-- helped inform the discussion.

CHAIRMAN GRUENBERG: Yeah, I mean, if 

we’re talking about adjusting the coverage, 

that’s really going to be up to the Congress. 

There is some interest. But, I think of the 

options presented, I do think this issue of 

coverage for business payment accounts probably 

has the most traction in terms of interest and 

appeal on a bipartisan basis. But, whether 

there’s sufficient interest there to actually get 

traction for a legislative vehicle, is not clear. 

And, at least at the moment, Congress has had 

some other things on its mind --

(Laughter.)

CHAIRMAN GRUENBERG: -- as well. 

We’ll really have to see how that plays out. But, 

I think in terms of the issues raised by uninsured 

deposits, it does raise some significant 

supervisory issues that will be -- that we do 

have existing authorities and tools to address. 
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And, it’s very much a focus of attention for us 

now, both on the supervisory end and on the 

deposit insurance pricing as well. So, that’s 

something we do have authorities we can bring to 

bear and I think fair to say very focused on that.

MEMBER MJARTAN: One last question. 

I’m sorry about just going back to the 

calculation. Is there any flexibility about how 

the insurance fees are calculated since they’re 

based on total deposits, right? But, there’s 

significant uninsured deposits some banks have 

versus others. And, then a lot of our deposits, 

we do either run through the reciprocal or we 

collateralize. Public funds, we collateralize.

MR. MITCHELL: So, there’s two 

components first to that. So, it’s all by rule, 

and we have a statistical model that calculates 

the risk again for small banks, for those below 

10 billion. It’s covering literally over, again, 

4,500 banks or so.

Just one point of clarification. In 
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terms of once that price -- the premium is 

calculated using the calculator, it’s then 

applied against -- the assessment base is 

actually largely all liability. It’s assets 

minus tangible equity. So, it actually gets 

applied against all liabilities, whether they’re 

insured or uninsured or other types of funding 

mechanisms. So to that extent, banks are paying 

on their uninsured amounts on the risk base rate.

MEMBER MJARTAN: Is there any appetite 

for revisiting that? Because a lot of us have 

other liabilities in addition to deposits. Of 

course, you have borrowings and then of course 

you have uninsured. So, technically those would 

not be covered but we still pay --

MR. MITCHELL: Right. So the --

MEMBER MJARTAN: -- insurance.

MR. MITCHELL: So that actually is a 

-- that’s congressional. That was changed in 

Dodd-Frank. So, that’s under Congress, it was

congressionally mandated. It’s in the statute.
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MEMBER MJARTAN: Okay.

MR. MITCHELL: So, it would have to be 

changed by Congress.

MEMBER MJARTAN: Thank you.

MS. EBERLEY: All right. Well, thank 

you very much for the great discussion. I hope 

that was a helpful overview for you. And thank 

you to Pat, Jon, Rosalind, Mike, and Kayla for 

presenting for the last hour on these two topics.

We’re going to break for lunch. But 

before we go upstairs to lunch, I’m going to ask 

everybody to go downstairs to the lobby. And, 

we’re going to take a group photo. And then we’ll 

move up to the seventh floor for lunch. So, thank 

you very much. We’ll be back at 1:15.

(Whereupon, the above-entitled matter 

went off the record at 11:56 a.m. and resumed at 

1:22 p.m.)

MS. EBERLEY: -- policy discussion 

with an update -- there it goes -- on interest 

rate risk, credit risk, and liquidity risks. And 
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these are three risks that we’ve been talking 

about together over the past decade. The 

conversation and concerns have shifted over time 

with changes in interest rates, yield curves, and 

bank balance sheets.

And, it’s appeared in our guidance, 

our supervisory priorities, our supervisory 

insights, journal articles, annual reports, and 

quarterly banking profile briefings. In 2013, 

after an extended period of low interest rates 

and that was a target range you’ll recall of zero 

to 25 basis points. We cautioned about the need 

to manage interest rate risks as banks reached 

for yield to achieve greater net interest income.

We issued a reminder in 2013 to 

institutions about the need for careful 

management of sensitivity to interest rate risk. 

And, this built on the 2010 interagency guidance. 

Trey, you mentioned it earlier, about one of the 

items in the guidance was doing a 400 basis point 

shock.
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And, we included a copy of that 2013 

financial institution letter in your packet. 

It’s titled Managing Sensitivity to Market Risk 

in a Challenging Interest Rate Environment. The 

guidance covered four kind of things that we 

wanted to reemphasize or highlight which were the 

need for board oversight over interest rate risk, 

having a board policy and limits, having systems 

from measurement and monitoring of interest rate 

risk, and having risk mitigation strategies.

We also began talking about this risk 

in our quarterly banking profile briefings and as 

we saw institution balance sheets lengthen. The 

guidance talks about the risks of unrealized 

losses and longer-term securities that could 

impact liquidity and capital. It noted that 

although unrealized losses on securities may not 

flow through to regulatory capital, under certain 

circumstances, examiners still considered the 

amount of unrealized losses in the investment 

portfolio and institutions exposure to the 
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possibility of further unrealized losses when 

qualitatively assessing capital adequacy and 

liquidity and assigning examination ratings.

It further noted that adverse trends 

in an institution’s gap equity can have negative 

market perception and liquidity applications. 

So, we issued that in 2013. Rates didn’t start 

rising till 2015.

But, they did rise gradually from 2015 

through the end of 2018, reaching a peak target 

range of two and a quarter to two and half percent 

in December of 2018. And, banks managed these 

changes well over that period. Really, with any 

negative impacts largely confined to net interest 

margin compression. And, we issued some other 

cautions over that same period.

In December of 2015, we issued an 

interagency statement reminding institutions of 

the prudent management of commercial real estate 

as that asset class was undergoing rapid growth. 

And, we said that we would be focusing our 
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examination activities on financial 

institutions’ implementation of the prudent 

principles in the 2006 commercial real estate 

guidance as well as other applicable guidance 

relative to identifying, measuring, monitoring, 

and managing concentration risk and commercial 

real estate lending activities. And, again, 

Trey, I think you referenced this, this morning.

And, Anita, I think you alluded to it 

in your comments as well. We also altered our 

supervisory strategy for liquidity as we saw a 

general decline in balance sheet liquidity 

between 2016 and 2017. This decline led us to 

first embark on a visitation program and later 

issue a summer of 2017 Supervisory Insights 

article about liquidity stress testing and cash 

flow analysis, including a stress testing 

template that could be used by institutions.

During 2019, the target range dropped 

by 75 basis points. And, then in March of 2020, 

with the onset of the pandemic, the target range 
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dropped another 75 basis points back to the zero 

to 25 percent range. The industry experienced 

record deposit growth in the second and third 

quarters of 2020, initially held in cash and 

later invested into high quality securities.

So, I think it’s fair to say that as 

we’ve been through the interest rate increases 

over the past 14 months, it’s been a little bit 

different than the experience between 2015 to 

2018, with the increases occurring at an 

unprecedented rate. And, that’s what we wanted 

to talk about to start us off this afternoon, 

changes in deposit behavior, items to reconsider, 

and contingency liquidity funding plans, and 

impacts of rising interest rates on loans and in 

particular commercial real estate. We’ll also 

discuss the conversations we’re having with our 

examiners, and we’ll be interested to hear from 

you about what you’re experiencing and seeing in 

your markets.

So, joining me is Ryan Billingsley, 
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Deputy Director for Capital Markets and 

Accounting Policy. He’s going to kick us off 

with a discussion of asset liability management 

and liquidity. And, then Rae-Ann Miller, Senior 

Deputy Director of Supervision Policy, and Tom 

Lyons, Associate Director for Risk Management 

Policy are going to discuss commercial real 

estate. So, Ryan, I’ll kick it over to you.

MR. BILLINGSLEY: Great. Thanks, 

Doreen. It’s good to be here. I haven’t been in 

front of this group in quite some time. So, it’s 

good to be back.

So, as Doreen mentioned, I’m going to 

spend some time talking today about asset 

liability management, interest rate risk, and 

liquidity. I don’t think any of this will come 

as a surprise to you. But, I hope it serves as 

a good reminder in light of the environment we’re 

in.

I think there’s a few slides in front 

of you, a handful of slides. Okay, great. Even 
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better. So, I’m going to dive in this really 

quickly. Doreen mentioned kind of the 

unprecedented level of interest rate increases 

we’ve seen. And, I think this chart does a great 

job of showing that.

Doreen talked about the ‘15 to ‘18 

sort of gradual increase. And, as you can see, 

we’ve been doing something special. So, I think 

this chart does a good job of showing that.

I think the important thing to note 

here is that the higher market interest rates 

have the potential to cause rising deposit costs, 

which will put pressure on margins, potentially 

for coming quarters. And, Doreen mentioned also 

when interest rates were near historic lows prior 

to the takeoff here on the dotted blue line, some 

institutions extended their maturities in their 

bond portfolios to increase yield, which leads me 

to the next slide which graphs essentially the 

ten-year treasury in the dotted blue line against 

unrealized losses on securities portfolios over 
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that time. Again, the dark blue represents 

unrealized gains and losses on AFS securities.

The gold or yellow represents 

unrealized gains and losses on HTM securities. 

And, you can see, as the Chairman has kind of 

pointed out in QBP briefings over the last year 

or so, unrealized losses started escalating early 

last year when the Fed started increasing 

interest rates.

It appears based on this that we’re 

heading in a good direction. But, nevertheless, 

losses are still quite large. So, I think where 

I want to go from here is to talk about what all 

this means, right?

I don’t want to insinuate that there’s 

poor credit quality in these portfolios. There’s 

not. Most of it is very high quality, government 

securities, GSE paper, things like that. So, 

that’s not really a concern.

But, I think the important thing to 

look at is that some of these investments, 
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because of their unrealized losses may not be 

able to be sold for liquidity purposes because 

you have to recognize the loss in that case. And, 

thus, important losses can lead to reduced access 

to efficient liquidity and less flexibility to 

sell those securities. So, these factors need to 

be thoughtfully considered from a risk management 

perspective and an on balance sheet liquidity 

perspective.

There’s some potential funding 

consequences as well. There’s some kind of 

parties could curtail funding commitments if 

institutions reported low levels of gap equity. 

That’s something that Doreen kind of mentioned in 

her opening remarks as well.

So, in light of all that, we’ve 

encouraged institutions to revisit and update 

their contingency funding plans in light of the 

environment we’re in, which is probably no 

surprise. For example, reliance on unstable 

funding sources and concentrated funding sources 
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can lead to rapid runoffs when customers are 

concerned about an institution’s condition. And, 

then we’ve experienced the portability of visual 

banking and the social media influences, high 

yielding investment alternatives that are out 

there today, both bank and non-bank.

So, we’re encouraging our supervised

institutions to review their deposit base just to 

see how they feel about in light of the 

environment we’re in. And, consider potential 

stressed outflow assumptions that they’ve made in 

the past and whether or not they’re right for the 

current environment. And, then encouraging 

boards and senior management to take a look their 

asset-liability management frameworks. So, some 

things to know there are interest rate risk 

management and monitoring efforts including, 

like, what you think deposit stability is or what 

it has been in the past. Is that right for today?

Interest rate risk modeling, so to 

ensure you are aware of the potential impact on 
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your capital and earnings when we see rate 

increases like we’ve seen. Sufficiency of market 

liquidity and secondary funding sources, I’ll get 

to some of those in a minute. I think they’re 

important to highlight.

Cash flow analysis, again, on your 

deposit side and prudently managing growth and 

earnings in this environment. And, then lastly, 

I’ll spend probably the rest of the time on this. 

And, that is effective contingency funding plans 

or CFPs. And, you can show those are up to date 

in light of the environment we’re in.

So, when I think of a CFP that’s a 

robust one, I think of something that’s a strong, 

written plan. They outline key indicators, when 

you’re going to activate the plan, funding 

strategies that are consistent with the bank’s 

size and risk profile. It’s got highly 

alternative funding sources when stress events 

are encountered.

So, here, access to the Federal Home 
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Loan Banks, Federal Reserve Discount Window, and 

the new bank term funding facility. BTFP, you 

might hear me call it that. And, we’ve been 

encouraging banks to make sure that those 

secondary funding sources are verified, ensure 

all the documentation is in place, you’ve 

actually tested them out, even if a nominal

amount to make sure it worked as you intended it 

to work.

I would emphasize that during a stress 

event is not the appropriate time to try to set 

that up. It can take a matter of days and not 

hours like you might think it might. So, getting 

that arranged and operationalized, make sure your 

staff is aware of how to do that when you need 

the money is important.

And, then maybe the last thing I’ll 

leave you with is some of these secondary funding 

sources like the Federal Reserve’s Discount

Window and the bank term funding program 

unfortunately have this negative stigma attached 
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to them. And, I think we intend to tell you 

that’s not how we think about it. We think there 

are a very good part of a robust and well managed 

liquidity risk management program.

And, you should use them if you need 

them. They’re there for that purpose. And, the 

last thing I’ll say, we and the Fed and the OCC 

and the Conference of State Banking Supervisors 

participated in an ask the regulator a call I 

think on May 24th. Hopefully, you’re aware of 

that.

If you’re not, you can go listen to 

the recording of that. I think that presentation 

goes through a lot of the same stuff. More 

slides, more resources are linked there as well. 

I think that’s just, again, a good reminder for 

how we’re collectively thinking about liquidity, 

interest rate risk, and ALM in this environment. 

So, I’ll stop there, but I’m happy to take any 

comments or questions or any reactions to 

anything I’ve said.
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MS. EBERLEY: Okay. We can move on, 

unless did you have a comment?

MEMBER MAUST: I was just curious if 

one of the considerations we’ve incorporated in 

each of the -- I’ll say sort of CAMELS components. 

It obviously doesn’t include management. But, in 

each of the areas where there might be 

calculations from a sensitivity or scenario 

analysis is the impact on capital, if we were to 

exercise something. From a CFP perspective -- I 

assume that’s -- and also incorporated into some 

of the thought processes around having a sound 

program there.

MR. BILLINGSLEY: Yeah, I think that’s 

right. I think some of the things that I -- I 

think the thing that I would emphasize is to make 

sure that all banks have these plans, right? The 

question is, is it right for today?

Should it be updated? Should some of 

the ongoing assumptions you’ve had in the past be 

challenged given what we’ve seen in the last 
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year? So, I think you’re thinking about it right. 

I think I just would emphasize go back and take 

a look and see is this right for today. And, 

maybe it’s fine. Maybe it needs to be tinkered 

with. I think that’s kind of high level point I 

would make.

MEMBER MAUST: Thank you. The reason 

kind of for my question is from an examination 

perspective also. Is that part of the 

discussion? 

MR. BILLINGSLEY: If you want to take 

that one.

MS. MILLER: Yeah, I mean, it’s part 

of the discussion, yeah. I think just to 

emphasize, maybe from experience a little bit 

more about what he’s talking about is you might 

need to change your contingency funding plan. 

And, we will be checking to make sure that you’ve 

tested it, that it fits today’s scenario. And, 

I can’t emphasize enough that waiting until 

Friday night at 4:30, I’m a little bit scarred. 
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But, it doesn’t really work.

MEMBER DRENTLAW: I am curious. Anita 

Drentlaw from New Market Bank in Minnesota. From 

a non-maturity deposit perspective, it’s very 

hard to gauge or estimate how much fluctuation is 

in your non-maturity deposits going in and out.

And, I fear with FedNow coming on, 

that’s just going to exasperate and stuff. Do 

you have -- obviously, I know you don’t tell us 

what to do. But, do you have any recommendations 

or ideas on how we should be looking at that or 

how we should maybe change what we’ve looked at 

in the past?

Because I know if you -- a lot of the 

models use numbers from decades ago. And, for a 

bank our size, that’s kind of what we’ve 

typically done. But, just curious if there’s 

thoughts.

MR. BILLINGSLEY: Yeah, I mean, I 

think that’s a great question. So, I think what 

I would do -- how I think about it is, one, I 
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would think about it from, like, your deposit 

structure, your deposit strategy. So, if -- do 

you have concentrations in certain sectors, 

certain businesses, if it’s more diversified, 

maybe that’s different.

But, I do think that the outflow 

assumptions you make, sort of the -- we talk about 

this a lot. What are your core deposits? We 

talk about whether or not it’s the right way to 

think about it.

But, challenge that assumption. It 

may be stress what you thought was reasonable. 

And, see what the output looks like. Do some 

scenario analysis around, like, just maybe even, 

like, reverse stress testing a little bit, if you 

know what I mean.

So, I think there’s ways you can do 

that without trying to come up with the exact 

right answer, right? Just stress some of the 

parameters. I think that’s how I would think 

about it rather than pick an output or pick a 
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stress and say, is this the right stressor? Just

take that and maybe add onto it a few other tweaks 

and see what happens. See if it causes you to 

have discomfort.

MEMBER RICHARDS: Kind of a follow-up 

on what Anita was saying. We’ve looked -- we run 

a liquidity test every day, a number, and we send 

it out to senior management. We’ve been doing 

that for years.

And, we’ve recently started looking at 

our uninsured deposit amount because I know you 

can get preferred deposits on the Call Report. 

But, that’s not uninsured deposits. You have to 

adjust and take different things into 

consideration to get your number.

We’ve got our number. It’s 33 

percent. What do I do with that number in 

relation to my contingency funding plan? In 

other words, if I know that number equates to 10 

million dollars in deposits, do I need to input 

something into my contingency funding plan for a 
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certain percentage of uninsured deposits?

I know it’s different from bank to 

bank and there’s no, like, okay, if your number 

is X, then you do Y. But, it’s hard for us to 

know. You say do all this reverse stress testing. 

That’s beyond my pay grade.

You know, but we know our banks. But, 

I did not know that I was going to lose the amount 

of deposits that I’ve lost over the past 12 

months. And, how much more am I going to lose 

before we see a bottom?

And, I guess I’m looking for any sort 

of assistance that you all could provide to the 

community bank bankers to say this is what you 

need to be looking at. This is the range you 

need to be looking at. We have a contingency 

funding plan, obviously.

We’re borrowers of FHLB. And, they 

have a complete lien on our whole loan portfolio. 

So, for me to use the Fed’s discount window, the 

only thing I have is investment so that I can put 
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up. And, I have four investments in my whole 

bank.

So, we’re not talking about a whole 

lot of -- but I might be able to cover what you 

all would consider to be a prudent amount with 

our borrowing line at FHLB. So, I might not need 

the discount window. But, are you all going to 

say, you haven’t signed up for the discount 

window. You need to do it just in case.

Well, if I don’t really need it for my 

number, what my number is. It’s just a whole lot 

of unknown out there right now. And, so we don’t 

know what’s going to happen. So, we don’t know 

how to plan for it.

And, I asked an examiner this. And he 

said, well Troy, it’s just kind of hard to plan 

for a bank run because it’s sort of a catastrophic 

event. So, how do you really plan for that? But 

you all are going to expect us to make some kind 

of plan for worst case scenarios I would imagine. 

And, it’s just there’s not a whole lot of 
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information out there as to how we do that, if 

that makes sense.

MR. BILLINGSLEY: No, it does make 

sense. And, this is super helpful to hear for 

me. It really is. I think having this 

conversation here and your feedback on how your 

bank thinks about this, having four investments, 

having all of your collateral at a Federal Home 

Loan Bank. That makes sense. 

So, I think it gives us something to 

think about to take back and see. Maybe there’s 

ways we can tighten things up and help out and 

provide a little bit better clarity on those sort 

of situations. That’s a fair ask.

MS. MILLER: Can I pipe in, Ryan? 

Because I’m dying to pipe in. It is really 

helpful to hear. And, I probably don’t have one 

answer for all of you, and that’s what he’s 

getting at.

But, being able to cover. And, it’s 

interesting. I’d love to chat with you after 
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about your experience in losing deposits and what 

did that mean. Did it mean that they left or 

they wanted more money or how did that work? 

Because that’s kind of the two flavors that we’re 

seeing.

And, so I would be more concerned 

about not what we’re looking at but how to get 

yourselves more prepared and how to cover. And, 

what the level of coverage is. And, I can tell 

you from experience that having your securities 

at the Federal Home Loan Bank is helpful.

But, having a plan that if you need to 

quickly get them to the Fed, the Federal Home 

Loan Bank is not the lender of last resort. So, 

if you need that, setting that up ahead of time 

is crucial. And, that’s a lesson that we learned 

and we can certainly amplify that to other 

institutions.

MEMBER RICHARDS: You might be 

interested to know that our CEO is on the board 

of FHLB Dallas. And, they were recently told 
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some information that’s from FHLB that FHLB 

considers themselves to be lender of last resort. 

And, so what is that going to mean for us going 

forward?

Are they going to have a rule change 

that says we’ve got to sign up for the discount 

window and borrow from them first before we take 

out advances? That would be a complete change in 

the way we’ve always done it. So, there’s some 

movement happening there that I don’t know has 

been fully vetted yet.

MS. MILLER: Yeah, I hadn’t heard 

that. But, we can certainly look into that.

MEMBER SHOEMAKER: Lillous Shoemaker, 

Magnolia State Bank. My comment is more of a 

comment, not necessarily a question. But, we 

updated our CFP recently. We just finished a 

state exam on Tuesday.

It always had the elements of 

communication, who’s going to communicate. As 

bank examiners, you look at us and exam us 
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retrospective and prospectively. Communication 

and social media in light of the most recent 

failures, they did try to communicate.

And, I know you cannot give us 

specific guidance. But, that is something of 

concern. You do need to communicate. 

Traditionally, it’s been customers calling us.

We hear this is going on the news, and 

you comfort them. But, with the widespread quick 

communication, are we evolving in this industry 

enough to get out the right message? And, are we 

getting out the right message quickly enough?

MEMBER DRENTLAW: I don’t know if it’s 

helpful. But, I set up the bank term funding. 

It was a fairly painful process. So, I do echo 

and appreciate your comments because it took a 

long time to be completely honest to get the 

paperwork, put in and stuff. So, I keep trying 

to tell colleagues and stuff the same thing. And, 

I do appreciate your comments about it because I 

wish they could streamline that process a little 
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more.

MS. EBERLEY: Thanks. We’ll move on 

to commercial real estate, and we can come back 

to more general conversation at the end.

MS. MILLER: Sure. Would you like me 

to take the commercial real estate? So yeah, I’m 

going to talk a little bit about commercial real 

estate priorities. I know you had your 

presentation this morning about some macro 

findings and what’s going on with the industry. 

And, hopefully, that was interesting to you.

Hopefully, nothing is a super surprise 

to you. We’ve been looking at commercial real 

estate since there was commercial real estate and 

since there were examiners. But, certainly, the 

crisis of the ‘80s and the ‘90s and the 

legislation and regulations that emanated from 

that, in particular, Part 364 of our rules and 

regs which are the safety and soundness standards 

and 365 which set forth our real estate lending 

standards. 
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That’s sort of, like, our baseline 

that we work off of in our examination 

priorities. And, then just before the previous 

crisis, it was December 2006. I believe we 

finalized a pretty significant piece of 

supervisory guidance on CRE where we talk about 

heightened monitoring and not thresholds.

But, we described some thresholds and, 

excuse me, some criteria where it’s prudent to 

increase your attention to commercial real 

estate. And, so right before the previous 

crisis, we issued that. And, we’ve really been 

examining for commercial real estate.

I can’t say to that guide, but it’s 

been very helpful to us. And, we supplemented 

that with an advisory in 2015. And, in 2015, 

Doreen just went over the interest rate history.

We were in a low for a long -- and we 

saw building exposures in commercial real estate. 

And, at that time, we saw kind of meek 

provisioning and building of those exposures 
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using wholesale funding. So, we issued an 

advisory.

And, at that time, at the FDIC and the 

other agencies, we engaged in what I would call 

sort of a -- like, a perpetual horizontal review. 

So, maybe some of you have been subject to this 

is when we have concentrated institutions. We do 

enhanced examination procedures and use that to 

kind of come away with observations about 

underwriting and other risk management practices.

And, last summer in August, we 

published an SIJ. If you have a chance to go 

back and look at that, it talks about some of our 

findings -- weaknesses we observed and stress 

testing and provisioning. And, we also talk 

about our supervisory priorities.

And, I want to read because I was just 

going back and looking and saying, I hope I said 

this in our exam -- in our article. And, of 

course, I didn’t put it in here. So, we talk 

about supervisory approach to CRE.
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In particular, examiners will be 

testing numerous CRE credits, credits within 

stress subcategories and geographies, and credits 

with payments vulnerable to rising rates and 

rising costs. So, that was in August of 2022. 

And, so that’s probably what you’ve been seeing 

examiners doing.

This is still -- pandemic is still 

with us when we wrote this article, although it 

was certainly waning. But, we say again an 

increase in exposures with a flush of -- influx 

of cash related to the stimulus programs. And, 

frankly in a lot of the sectors, housing in 

particular, there was probably kind of a hangover 

from the last crisis of demand.

So, we saw a lot of activity during 

the pandemic in CRE. If you had asked me when I

was sitting my kitchen those few days what would 

happen, I would’ve thought we would’ve had some 

disruption prior to this. So, we’ve been 

thinking about this for a while.
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We issued some general guidance about 

workouts and working with your borrowers right as 

the pandemic hit. And, then Tom is going to talk 

about some proposed CRE guidance that we intended 

to be longer term that would update some workout 

guidance that we issued in 2009. But, whether or 

not we update this article, I’m thinking about 

it.

But, the priorities really do remain 

the same in the rest of 2023 into 2024. You heard 

about office. We’re certainly concerned about 

office space and some of the trends that we’re 

seeing, particularly in our gateway cities about 

occupancy levels, about the amount of loans that 

are coming due, people giving up space, people 

wanting less space, and at the same time 

demanding basically cuts in rent.

So, at the same time, you’ve got these 

loans coming due. You’ve got smaller rent rolls. 

And, so that’s going to impact the value of those 

properties. It’s going to impact the cash flow 
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of those properties.

And, again, like I mentioned, 

certainly the gateway cities are most affected. 

We were super focused on retail and hotel when 

the pandemic hit. And, certainly some of those 

have recovered.

Retail was a long-term trend. And 

we’ve actually seen a little boost in retail. 

You might’ve heard today. Retail in office 

buildings is sort of a subcategory that’s in our 

cities again having a problem.

You can just walk around here and see 

some of the vacancies in our office buildings 

here. So, office, you can expect to see sampled 

pretty goodly here in this next exam cycle. 

Acquisition, development, and construction, we do 

have -- as I mentioned, it was sort of a pent-up

demand.

We had a long period where there was 

very little ADC done. After the last crisis, 

there was a lot to absorb, and people got burned 
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pretty badly. That was the most troubling 

category.

But, we definitely saw an uptick 

during the pandemic, and now we have some banks 

with significant balances. We will be sampling 

those. Obviously, we always do.

But, depending on the phase, if we 

have projects that were started, sort of in this 

rising interest rate environment, we’re certainly 

going to be focusing on those. Tract development 

was another. In certain areas of the country 

when we saw migration patterns, people moving out 

of California, people moving out of other heavily 

populated areas to less populated areas.

We saw boom in building. And, 

certainly looking at those areas so far, they’ve 

held up quite well. I mean, demand has still 

been very high for housing.

But, with affordability issues with 

rates rising and looking like they’re going to 

stay up at least for a while, affordability 
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issues on those houses have certainly declined. 

So, we always are focused on ADC. But, 

particularly, that sub-segment has got me -- I 

can’t say concerned, but certainly got our

attention.

And, then another category that I’m 

not sure if you guys talked about this morning, 

I didn’t have a chance to look at the 

presentation. I’ve heard it before. But, the 

multi-family segment is typically very strong.

Then we say, we can have a crisis. 

But, people need places to live. But, in our 

cities again, we’ve seen some softness in 

affordability. Vacancy rates have been going up. 

Delinquency rates have been going up.

It’s just people have a hard time 

meeting ends meet with inflation and just are 

more likely to get behind on their rents. So, 

another category that we’re definitely looking at 

is multi-family. So, I think that’s kind of what 

we’re seeing. I talked a little bit about 
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historical policies and what our supervisory 

processes are. I wanted to get Tom to talk a 

little bit about policy matters.

MR. LYONS: If I don’t break it first.

MS. MILLER: I did that.

MR. LYONS: Sorry about that. No 

worries. All right. So, thanks, Rae-Ann. So, 

we do a lot of looking back in history in policy 

and all those things. What goes around, comes 

around.

Mr. Bock and I were talking a little 

bit about that just before we started the 

session. So, CRE is a classic with that. So, we 

only have the one slide for CRE workout guidance. 

It’s still proposed.

But, we think we’re getting very 

close. We thought with all the rest that we were 

talking about today, we thought this is a really 

good opportunity to kind of talk a little bit 

about what we’ve been doing with that proposal. 

So, as Rae-Ann had mentioned back in October 30 
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of 2009, the FFIEC agencies had issued and 

adopted a policy statement on prudent commercial 

real estate workouts as a useful resource for 

both agency staff and the institutions in 

understanding risk management and accounting 

practices for CRE loan workouts.

So, we’ve been seeing that over 90 

percent of banks engaged in CRE lending and CRE 

loans are the largest loan portfolio type on 

nearly half the banks that are out there. The 

dollar volumes are at historic highs. Nearly 30 

percent of banks have concentrations exceeding 30

percent of capital plus loan loss reserves, and 

acquisition and development construction loans 

that exceed 100 percent.

And, so those are those areas that 

we’re focused on in that 2006 guidance as really 

areas to kind of focus in on and pay more 

attention to because the exposure is there. More 

risk when things go -- or the economic starts 

souring. In 2020, the COVID-19 pandemic led to 
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stress across several property types, as Rae-Ann 

was mentioning, including hospitality, retail, 

office, and entertainment sectors.

The office sector remains 

particularly vulnerable. Some borrowers may have 

difficulty refinancing given the structural 

decline in office demand. I know it’s one of the 

things we noticed quite a bit when we’re walking 

around town here is since coming back into the 

office, there’s a lot less people walking around 

even here. It’s quite noticeable.

In the 2021 shared national credit 

review reflected a higher classified rate for CRE 

as well as increasing levels for CRE loans listed 

for special mention. While the 2022 review 

identified some improvement within the pandemic 

impacted industries such as CRE. The report made 

note that the results do not reflect the full 

impact of increasing interest rates and softening 

economy -- economic conditions that started to 

impact borrowers in the second half of 2022.
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So, regardless of the CRE sector, CRE 

borrowers’ abilities to manage through the period 

of softer economic conditions including supply 

chain imbalances, labor challenges, geopolitical 

attentions, inflation, rising rates will impact 

the level and direction of risk in 2023 and 

beyond. So, to assist financial institutions 

given these challenges and risks facing CRE 

lending, the agencies in consultation with the 

state bank and credit union regulators decided 

that this was a good time for us to go back and 

update and expand the 2009 statement. The timing 

was right.

And, so we issued in third quarter 

last year for public comment the updated 

proposal. So, the proposed statement discusses 

the importance of working constructively with CRE 

borrowers who are experiencing difficulties --

financial difficulties. And, it would be 

appropriate for all supervised institutions 

engaged in CRE lending.
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The agencies recognize that the 

prudent CRE loan accommodations and workouts are 

often in the best interest of both the 

institution and the borrower. Accordingly, the 

proposed statement reaffirmed the key principles 

that were in the 2009 statement such as financial 

institutions that implement prudent CRE loan 

workout arrangements, after performing a 

comprehensive review of borrowers’ 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 classification.

And, another key principle is 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 would be less than the loan balance. So, 

the proposed statement adds a new section on 
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short-term accommodations. Short-term and less 

complex CRE accommodations are a tool that can be 

used before a loan requires a longer term or more 

complex workout scenario.

We built in a lot of the messages that 

we had in some of the pandemic accommodation 

guidance that we had issued. The proposed 

statement reflects changes in the GAAP accounting 

rules that have happened since 2009. There’s 

been a lot of those.

And, it includes those in relation to 

the current expected credit losses. So, that’s 

been built in. The proposed statement also 

updates the original six examples that we have in 

there for showing different scenarios of how to 

treat them. And, it adds three new examples for 

multi-family, acquisition, development, and 

construction for residential, and income 

producing for hotels.

So, those were three added examples 

with various scenarios of how to think about 
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those from a classification and accounting 

treatment. So, we received 22 unique comments on 

the proposal. We’re in the process of revising 

based on industry feedback that we received.

And, we’re hopeful to have that out in 

the near term. But, anything with interagency 

whenever I’m asked to try to predict those 

things, I can never do it. But, what we’re 

wanting to do is just get that on your radar 

screen, know that it’s coming. Hopefully, it’s 

coming very, very soon. But, even the stuff 

that’s in the 2009, all those principles are 

really very important.

MS. EBERLEY: So, that is our 

presentation on interest rate risk, liquidity, 

and commercial real estate, the challenges of 

managing in a rising interest rate environment. 

I’m happy to open it up for additional discussion 

and any feedback you have for us on things that 

we can do that can be helpful to you. So, we 

heard some good comments already relative to 
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contingency funding plans and some things that 

would be helpful relative to interest rate risk 

management. So, any other feedback that you have 

for us as we update existing guidance to kind of 

reflect the current situation would be most 

helpful and welcome.

MEMBER HUANG: I’m just personally --

that proposed statement, pretty excited for it to 

come out. During the pandemic, the FDIC’s 

workouts, I think, we had meetings actually with 

the MDI Subcommittee at the beginning of the 

pandemic where we were all predicting that there 

would be quite a lot of non-accruals on our 

portfolio. And, luckily, that hasn’t happened.

I think the workouts really worked as 

intended for us. In New York, we’ve been stress 

testing our office vacancies, hospitality. We 

also have branches in Florida. And, so 

hospitality was quite a large portion of our 

portfolio at one point.

Same with offices, multi-family. And, 
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so we were running all kinds of doomsday stress 

testing for the last two years. And, luckily, 

knock on wood, hasn’t materialized yet.

But, having the proposed statement 

would allow us some flexibility without having to 

-- how do I say -- for the lack of a better word, 

TDR, right? So, we are CRE-heavy, but we’re also

cognizant of certain things like construction 

softening because of delays in construction and 

materials.

Industrial for in our area has become 

two to three times what it was pre-pandemic. 

Those levels can’t stay there. So, we’re very 

cognizant of that. Offices, we’ve started to 

step away from that in the last couple of years.

New York, we recognize that. Most of 

the leases are on a lag five, ten years, and 

they’re all coming due soon. Personally, from my 

apartment, I can look into an office building 

that’s about 50 stories tall, and it’s probably 

half empty still. And, I don’t think it’ll ever 
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get full again. So, I’m looking forward to that 

proposed statement.

MEMBER HORVAT: I would have to say I 

agree with Warren completely. We’re looking 

forward to it as well. We do a lot of CRE 

lending. I think we all learned a lot.

You mentioned the ‘80s and ‘90s. I 

know I certainly learned a lot from the real 

estate crisis, and I think you guys have as well. 

And, I think the way you handled the workouts 

during the pandemic, we also had an overhang of 

hospitality loans. And, knock on wood, they’ve 

all come through pretty well.

But, we gave them the time to do that. 

And, the FDIC certainly gave us the time to do 

that as well. So, I am just curious, though. 

You mentioned multi-family and the softening. Is 

that national issue, or do you see it in pockets?

MS. MILLER: We definitely see it in 

pockets. It’s sort of our gateway cities. And, 

definitely in like the C and B space where people 
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just have a hard time making ends meet.

And, then the A, there’s probably more 

A being built than can be absorbed. So, sometimes 

people from A will see a good deal in B and slide 

over. I don’t know if you have the same 

experience or if things are holding up well.

MEMBER HORVAT: Things are holding up 

really well in New Orleans. 

MS. MILLER: That’s great, yeah.

MEMBER HORVAT: At least from --

MS. MILLER: Yeah. I mean, there’s a 

reason why the 2006 kind of calls out multifamily as maybe not as risky as some of the other 

segments because that’s historically been the 

case. But we are definitely seeing softness in 

some of our cities.

MEMBER BATES: We’re a CRE bank also. 

Of course, we don’t have to deal with the office 

space. But, we are fairly heavy in hospitality 

end and some multi-family.

But, we’ve seen more multi-family 
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going to non-recourse. So, we haven’t been able 

to hold the really -- the big stuff. So, most of 

the stuff we hold is smaller.

I would be interested in your thoughts 

because my feeling is that appraisal should 

already be being impacted. We’ve not see cap 

rates go up to the level I thought they would and 

impact the values the way I thought they would 

have by now. I didn’t know if you were seeing 

that in other areas. But our area, things are 

still fairly similar.

MS. MILLER: Cap rates don’t want to 

go up, do they? It is definitely lagging. But, 

it’s definitely something that examiners are 

looking at.

And, banks need to have policies about 

when to reappraise. And, obviously, we have our 

regulations about when reappraisals are 

necessary. So, I think that issue will be forced 

at some point as these portfolios get repriced.

But, it definitely behooves folks that 
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with portfolios where, hey, this hasn’t moved, to 

do your own work on that and make sure that things 

are priced appropriately. And, that makes sense 

for your stress testing as well. In our article 

last year, what we saw was lagging cap rates and 

lagging updated rent rolls and things like that.

Examiners and bankers, there was some 

uncertainty during the pandemic. But, as things 

have settled down now, those updated metrics 

should be in place as you’re doing your stress 

testing. That was a really kind of notable thing 

in our findings last year, just not having 

updated metrics. A lot of overlays too because 

we didn’t really know what the pandemic was going 

to bring. But, now that things have settled down, 

I think banks should really start to update 

those.

MEMBER BATES: We’re finding that 

disconnect in loan to value and debt service 

coverage. So that tends to be where --

MS. MILLER: Yeah, that should tell 
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you.

MEMBER BATES: -- we bump heads 

because we’re, like, we can do 60 percent. We 

can’t do 75 because we need the 125 or the 130.

MS. MILLER: Yeah.

MEMBER BATES: And, so that’s caused 

a lot of tension in the market.

MS. MILLER: And, how can it be 60 if 

the debt service coverage isn’t there, right? So 

--

MEMBER BATES: Right.

MS. MILLER: We have late breaking 

news too. So, Tom is going to talk a little bit 

about something that we just issued today. We 

issued an update to our manual on our 

instructions on special mention designations. 

And, we did this to basically update our 

instructions to our examiners.

The definition of special mention 

stays the same. But, we recognize that we were 

a little bit different than the other agencies. 
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And, kind of out of step, with more modern sort 

of credit risk rating systems. So, Tom, we’ll 

turn it over to you.

MR. LYONS: Okay. Thanks, Rae-Ann. 

So, exam instructions fall into my bailiwick as 

well. So, we’ve got a whole lot, a host of 

different things here. So, special mention, as 

Rae-Ann had mentioned, we differed a little bit 

in some of our instructions.

The definition is the same with the 

Fed and the OCC. Back in 1993, when there’s an 

interagency statement that was issued on special 

mention, our instructions really related to what 

was management -- correctable by management 

whereas the Fed and the OCC got more into some of 

the economic factors that could be out there as 

well. But, the definition, just to remind 

everybody, is a special mention asset, has 

potential weaknesses that deserve management’s 

close attention.

If left uncorrected, these potential 
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weaknesses may result in deterioration of the 

repayment prospects for the asset or in the 

institution’s credit position at some future 

date. Special mention assets are not adversely 

classified and do not expose an institution to 

sufficient risk to warrant adverse 

classification. So, with our instructions, we’re 

really focused in on those management correctable 

whereas the Fed and the OCC were a little bit 

more broad and they would consider other factors 

as well.

And, so what that resulted in is --

you didn’t see all that much special mention in 

FDIC’s reports. And, there’d be more so with the 

Fed and the OCC. So, one of the reasons that we 

did that was there was some concern way back in 

‘93 that examiners might overuse special mention 

as opposed to adversely classifying or passing 

loans during their loan review.

But, there’s been a lot of work with 

credit risk -- excuse me, credit systems and 
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rating systems. And, sophistication has come a 

long way since ‘93. And, some of our concerns in 

that space are no longer there.

So, what we did want to do so that 

there’s supervisory parity across the board is to 

get our instructions in line with the Fed and the 

OCC. So, we’ve updated our manual instructions 

for our examiners. We didn’t expect it to get 

done, but it did get done and quickly.

So, that just happened today to get 

that out. So, we’ve updated our instructions. 

We’re going to be training our examiners in how 

to think about that. But, given the 

instructions, you might see that there’s going to 

be a little bit more special mention where you 

might not have seen that in the past.

And, some of that is going to relate 

to -- our examiners focus in on your credit risk 

rating systems, right? And, if we’re in 

agreement with your credit risk rating system and 

it has a definition that aligns with the 
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interagency statement, we’re fine with how the 

bank is rating their loans with a special 

mention. We’re going to be putting that into the 

report.

So, you’ll see that reflected there. 

If the bank does not have a rating system, a 

rating that equates to that, well, then what 

you’ll see in the report is going to be special 

mention as our examiners are seeing that and 

defining that, just like with a classification. 

It will be applying that and you’ll be seeing 

that in the report of exam.

So, essentially, that’s in a nutshell 

that we’ve just updated that. And, you may be 

noticing that, and you may have some questions 

for examiners. And, we’re going to be prepping 

our examiners for those conversations.

MS. EBERLEY: Okay. Well, thank you, 

Rae-Ann, Ryan, and Tom. Next, I’m going to be 

joined by Martin Henning and Chris Finnegan. 

Martin is the Deputy Director of Operational Risk 
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in the Division of Risk Management Supervision, 

and Chris is the Senior Deputy Director of 

Compliance and CRA Examinations in the Division 

of Depositor and Consumer Protection.

We’re going to start with Martin who’s 

going to cover ransomware controls and 

cybersecurity resources. And, Chris is going to 

discuss guidance on charging overdraft fees for 

authorized positive settle negative 

transactions. Martin?

MR. HENNING: Great. Thanks, Doreen. 

Glad I don’t have to talk about cybersecurity as 

the last thing you hear today. I want to talk 

about two things, ransomware attacks.

Again, some of you have been here for 

a while, but some of you are new. So those who’ve 

been here for a while have heard some of this 

before. I just want to hit the highlights for 

those of you that are new about some of the work 

we did with regard to ransomware attacks and 

understanding them.
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And, secondly, provide you some 

information about how or what we’re doing to help 

you defend and recover if there is an incident. 

So, if we could go to, yeah, that background 

slide. Some of you have heard me brief before.

But, what we did a couple of years ago 

and I wanted to highlight again as really a 

horizontal review of attacks at FDIC supervised 

banks. We looked at a period of two years and 

really dug down deep, talked to the bankers that 

dealt with these situations after the fact, 

looked at forensic reports.

Really tried to understand deeper than 

we would just in a regular IT examination. And, 

there were a couple reasons why we wanted to do 

that at least. Are there defense mechanisms 

working that aren’t widely known?

Is there something new out there that 

is making a difference for banks that are able to 

really defend well and yawn and pull a server 

back up and no impact on customers, that sort of 
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thing? So, that was one of the things we 

wondered. Is there something new out there that 

other bankers don’t know about?

The second reason we did it is we 

wanted to find out are there any examination 

changes warranted to help banks identify 

weaknesses? Always looking to make our IT 

portion of the exam better. Ransomware is a big 

threat.

It is not a good day when we get an 

email from a banker from their Gmail account 

saying that we’re down. And, that gets our 

attention. So, is there anything we can be doing 

better to help?

So, again, I said -- looked at two 

years worth of attacks on FDIC supervised banks. 

We categorize them into three categories, high, 

medium, and low. The high attacks were those 

where a ransom was paid or there was a loss of 

services or data or there were significant 

remediation costs and time involved.
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A moderate, a medium attack was one 

where there was internal movement. So, the 

attacker got into the bank’s network and was able 

to move laterally. There was persistence. The 

evidence was that the attacker was there for a 

long time. But, there was no loss of services or 

data. And, there wasn’t significant remediation. 

So, that was a moderate.

And, a low were attacks stopped before 

there was any significant or cost or impact which 

I’d like to pause there. Cybersecurity is part 

of my work. And, the headlines and the ones that 

I focus on are the ones that were big impacts, of 

course.

But, there are a lot of banks that are 

attacked that brush it off. It gets into a server 

on the perimeter. Their IT folks stop it. They 

shut the server down very, very quickly, rebuild 

it from backups, and no customer ever knew 

anything happened.

So, what we’ve found, those are 
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categorizations. What did we find? There were 

36 up here on the second bullet -- sub-bullet, 36 

ransomware attacks of interest.

Four of those were at service 

providers, didn’t get over to the bank at all. 

And, then 32 were attacks against banks directly. 

So, focusing in on that count of 32, 18 of those 

32, or 56 percent, were in the high category.

Fifty-six percent were in that high 

category. It’s a lot. Four, or 13 percent, were 

moderate, and nine, or 28 percent, were low. 

There were nine banks out of 32 that shrugged and 

went on.

In five of the attacks categorized as 

high, the bank paid a ransom. And, those ransoms 

totaled thirteen million two hundred dollars 

total, in aggregate. So, if we could go to the 

next slide.

In the nine low impact attacks, where 

the banks successfully defended, these were the 

controls that made a difference in containing the 
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attack. These are pretty technical. But, 

hopefully as you look at this list, there’s one 

or two controls here that look familiar to you.

I remember back in the day when multifactor authentication was viewed as a pain. Even 

customers, I think, might view -- the knowledge 

of multi-factor authentication to get access to 

their money is a very good thing today. Relative 

to the first reason why we horizontally reviewed 

ransomware attacks, none of these controls are 

new or novel.

They’re all widely known, widely 

available, widely publicized. For your IT folks, 

there’s nothing new under the sun here. So, let’s 

move to the next slide.

Second reason why we did it, are there 

adjustments we can make to IT examinations? And, 

what we did is created technical examination aids 

that guide or examiners deeper in those nine 

control areas from the previous slide. So, an IT 

exam is a relatively small portion of the safety 
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and soundness exam.

We’re not going generally deep in an 

area unless there’s a reason to -- there’s a risk 

reason to. But, in these nine areas, there’s 

definitely a potential reason to go deeper. We 

field tested these examination aids.

And, maybe I should back up and just 

say the examination aid is really designed to 

help the examiner go deeper to ask better 

questions in these nine control areas and focus 

on those. So, we field tested these technical 

examination aids in eleven banks in the fourth 

quarter of last year. We used them in banks of 

all complexity levels, community banks, bigger 

banks.

We tested them in various IT rating 

categories of ones, twos, and threes. Banks we 

think are doing a great job, medium job, maybe 

needs some improvement in IT. Really with the 

idea of coming to a conclusion about how 

practical examiners using technical examination 
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aids like this would be.

So, eleven banks. We’re making some 

refinements to the aids for examiners right now. 

And, this year, we intend to use them in 22 

community bank exams and actually in all of our 

large bank exams this year. And, in terms of the 

22 that we’re choosing, again, risk focused 

institutions where there’s some indication that 

there could be greater risk.

Again, a previous IT exam rating might 

be a good reason to spend some time deeper in 

these areas. So, that’s our ransomware 

horizontal review, why we did it, what we found, 

what we’re doing about it. I’ll move down to 

what we’re maybe providing to you, not only on 

ransomware and that threat, but any cybersecurity 

threat.

There’s an FFIEC Cybersecurity 

Resource Guide for Financial Institutions that we 

published first in 2018. And, the FFIEC members 

came together and updated that recently. I 
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highlight that there are resources in this guide 

that not only help you defend but also help you 

exercise, even that second bullet up there.

Perform exercises to test 

cybersecurity readiness. And, the FDIC has got 

some vignettes on our website still that you can 

use in internal testing. And, thinking about the 

liquidity discussion earlier, same thing here.

You really need to -- one thing that 

really makes a difference is banks are prepared 

if their defenses aren’t successful. Things as 

basic as could your branches run manually for a 

few days. And, if your answer to that is yes, 

how do you know?

Have you actually tried that? Have 

you actually practiced that? Another thing you 

don’t want to be doing when it’s absolutely 

necessary to avoid a tweet or something. You 

want to be confident that you can do that ahead 

of time. If we could turn to the next slide.

We put this out in October of last 
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year. There’s a lot of information about 

ransomware and other resources. We’ve 

highlighted some of them here, and that’s really 

one of the focuses of the update to this guide.

I’d focus on this slide on the last 

one, the fourth bullet there, Conference of State 

Bank Supervisors. And, they did this with the 

U.S. Secret Service and the Bankers Electronic 

Crimes Task Force. It’s a ransomware selfassessment tool.

It’s really something that you could 

use I think at the board level. It’s very simple. 

There’s 16 questions. They’re very basic things.

It’s not technical. It’s something 

that you could -- if you were concerned in this 

area, you could have the team use and then present 

at the board level. If we could go to the next 

slide.

Another thing I’d like to highlight in 

the guide that’s there in this revamp is a service 

available from CISA, the Cybersecurity and 
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Infrastructure Security Agency. It’s called 

cyber hygiene scanning. Especially Treasury, but 

all of the agencies and again in the FFIEC guide 

have emphasized the availability of this free 

resource.

And, what it is, is CISA going and 

scanning the perimeter of your IT environment, 

the things that touch the internet that they can 

scan just automatically to see how it looks. For 

example, how updated those servers are. They’ve 

got the latest version of the software.

A lot of your IT folks will argue 

that’s only as good as far as it goes. There’s 

a reason why that server isn’t updated even 

though this CISA scan or there’s commercial 

services available too that identified an issue. 

But, I think it is a good starting point.

And, CISA uses that information from 

those scans to analyze and then publish back out 

to the public what they’re seeing in terms of 

weaknesses and what needs to be done about those, 
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what those weaknesses could result in. So, we’ve 

seen a big uptick in banks taking advantage of 

this cyber hygiene. Again, there’s no cost to 

the bank.

So, something, again, that you’ll see 

perhaps new in the guide that we put out. And, 

I think we can go to the next slide. We share 

this guide in a financial institution letter.

The FFIEC has got a cybersecurity 

awareness web page. The FDIC does too. I love 

the name of CISA’s website with regard to 

ransomware resources. It’s called 

StopRansomware.gov, easy one to remember. But, 

those are areas I thought I might cover that might 

be helpful to you. Happy to take any comments, 

questions.

MEMBER MAUST: Thank you, Martin, for 

that insight. The RSAP is -- I know it was 

published a couple years ago. There’s a -- or a 

year and a half ago. There’s a new version, I 

think, that I can’t remember if it’s this month 
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or next month we’re expecting it to come out. 

Maybe a couple revisions in that.

It was intended to be blocking attack 

and very easy to achieve for banks to understand 

and fill out. I had a question, though, in 

addition to that, more comprehensive 

cybersecurity and information technology, 

infrastructure assessment tool, the old CAT. I 

know it’s been around for a long time and in my 

perspective a fantastic comprehensive tool for us 

to use.

As an industry, completely voluntary, 

but really easy to then in a consolidated format 

present to a board to explain, here’s our 

inherent risk. Here are the mitigating controls 

that we have in place in order to make sure that 

we’re compensated for that risk. Is there --

what’s the FDIC’s thoughts around updating that?

I know it’s not intended to be, I 

don’t believe, an interagency effort going 

forward. But, certainly being involved and maybe 
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providing input. If industry were to take that 

up or if maybe CSBS or others were to kind of 

sponsor the effort, but with industry 

participation. Is the FDIC interested in 

providing input there? What are the thoughts 

around CAT and its use going forward specifically 

from an updated standpoint?

MR. HENNING: Yeah. Well, thanks for 

the question. And, maybe the first thing to 

highlight for everybody is we still do feel like 

a consistent cybersecurity -- comprehensive 

cybersecurity assessment like that is really 

important. Something that the IT folks are 

saying some year in the budget cycle we’re good.

I’d really question that. And, those 

assessments are something they can get at where 

the next improvement is necessary. So, they’re 

really important still.

I think the second thing that comes to 

my mind is when the FFIEC members including the 

FDIC created it, there wasn’t much around. There 
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was really a need for it. The members did an 

assessment of their own before they put that out.

It was about the same time that the 

NIST -- the cybersecurity framework was coming 

out. Now there are quite a few of those. And 

so, one that comes to mind that’s industry 

sponsored started off with the Financial Services 

Sector Coordinating Council is the -- they call 

it the profile. It was called a financial 

profile.

But, the Cyber Risk Institute now 

manages something that’s similar. And, it’s very 

good, and they come to us and ask us about its 

quality. And, is hitting on all of the things 

we’re concerned about?

So, that’s the second thing I would 

say. But, it does leave -- I think the concern 

I would have and maybe underneath the surface of 

your question is for a community back that’s been 

using the FFIEC cybersecurity assessment tool, 

where do they go from here? And, we don’t have 
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a -- I don’t have an answer for that question 

today, but that’s definitely something that’s on 

our mind.

Personally, I want to do things other 

people aren’t doing. Nobody else is examining. 

It’s us and states. And, I want those to be 

great.

And, if there are other great 

cybersecurity assessments out there and it’s 

relatively easy for a community bank to move to 

them from the CAT, that could be a good solution. 

Or, like you say, potentially another 

organization taking on the update of it, as you 

probably know, NIST with their big assessment 

that’s getting ready to publish a pretty big 

update to that. And, that would be an important 

thing to look at in terms of the current state of 

assessing yourself and knowing how prepared you 

are.

MEMBER MAUST: Thank you. Just one 

thing I’d like to add with respect to how the CAT 
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differentiates from, say, NIST or the sector 

profile, the sector profile I think is very 

helpful on the kind of equivalence of the 

maturity levels in a CAT. So, what are those 

mitigating controls?

It’s focused for which ones should you 

use or have in place. It’s focused on sector 

impact. And, what I would like to know from a 

community bank is, what is my inherent risk as an 

organization? 

And, the sector profile doesn’t have 

that component. So that might be what we suggest 

we focus on, CSBS and others, in coming up with 

an update for the CAT and maybe incorporating 

what’s already there in, say, either NIST or 

sector profile since sector profile already 

mapped to pretty much everything that exists 

today on the mitigating control side. So, I think 

it still leaves a hole on the assessment piece 

which, I mean, obviously critically important. 

So, thank you very much for that input.
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MS. EBERLEY: Very helpful comment. 

Thank you. Okay. Chris, you’re up.

MR. FINNEGAN: Well, hello, everybody. 

Good to be back with you. And, several of you 

all I’ve had conversations with on a variety of 

issues since the last time we met. So, it’s good 

to see everything in person.

And, before I get started on 

authorized positive settle negative issue that I 

want to give you kind of a highlight today, I 

wanted to highlight and promote our -- since we 

met last, our Consumer Compliance Supervisory 

Highlights that we do yearly. This came out at 

the end of March. And, it’s a pretty quick read, 

and it talks about a lot of the issues that we’ve 

identified in the previous year.

And, it’s pretty high level. It gives 

you good insights on what we’re identifying from 

a consumer compliance perspective, and also a 

little bit of insight as well on what’s coming 

up. So, this is good.
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You can sign up for it at our FDIC.gov 

website. And, it’s good in there. Some of the 

information in there that I really wanted to 

point out is that our banks are doing really well 

with the compliance management system.

I think it’s 98, 99 percent are rated 

1 or 2 for consumer compliance. So, doing a 

really good job with managing your consumer 

compliance risks. But, today, I did want to talk 

about one issue that has -- it’s not new in that 

it’s been out there for a few years.

And, it’s dealing with a particular 

overdraft issue. And, I may have mentioned this 

when I met with you all last time. But, we 

referred to it as the authorize positive settle 

negative.

And, so when you hear APSN, that’s 

what that stands for. And, a few weeks ago, back 

at the end of April, we issued a FIL, a financial 

institution letter, out to the industry dealing 

with this particular issue. Again, because we 
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had gotten feedback that even though we have 

highlighted this or put it in our highlights and 

this particular issue was in our June 2019 

supervisory highlights that some issues, we need 

to put out a FIL on to get more granularity into 

what the issue it.

And, so we did put out this FIL in 

April. And, so what it is, it was just reminding 

banks of the consumer compliance risk associating 

with assessing overdraft fees on a transaction 

that was authorized against a positive balance, 

but later settled against a negative balance. 

So, when we talk about APSN, that’s what we’re 

talking about.

So, I’m going to go a little bit 

about the background of what this is, the risks 

there, some of the mitigation practices that you 

can do. And, then we have several resources that 

I wanted to point out as well. So, a little bit 

about the background, we have identified banks 

that assess overdraft fees on debit card 
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transactions that authorize when a customer’s 

available balance is positive, but later posts to 

the customer’s account when their balance is 

negative.

In this scenario, a customer’s account 

has sufficient available balance to cover a debit 

card transaction when the transaction is 

authorized. But, due to one or more intervening 

transactions, has an insufficient balance to 

cover the transaction at the time it settles. 

So, that’s basically the issue that we’re talking 

about.

I did want to point out because I did 

say available balance a few times there. As I 

pointed out in the slide here, this can happen 

both on available and ledger balance. So, 

depending on how you have it set up, how you 

charge your overdraft or set your overdrafts, 

they can actually happen on either/or.

It’s less pronounced in the ledger 

balance. But, it can actually happen with a 
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ledger balance as well. But, it’s more 

pronounced, like I said, on the available 

balance. But, wanted to make sure we point out 

that it can happen on the ledger balance as well.

And, basically when we see this, in 

the instances that this has come up, we consider 

this to be an unfair practice. And, I’m going to 

go over what that means. And, I know that’s never 

an easy thing to hear when we talk about deception 

or unfairness.

But, this particular practice, we have 

seen it being an unfair practice. And, I’m going 

to go over what that means next. So, when we 

talk about different things, when I talk about an 

unfair or deceptive practice, it is dealing with 

Section 5 of the Federal Trade Commission Act.

And, also, we have it under the DoddFrank Act, which is the UDAP which adds the 

abusive factor in there. But, we have the ability 

under both of those to be able to cite violations. 

This particular practice as I said when it 
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happens has come out as unfair.

And, so if you look on the right part 

of the slide, that’s what it means. It’s an 

unanticipated, unavoidable overdraft that may 

cause substantial injury to consumers. And, we 

believe that is because of the fees.

It’s not reasonably avoidable because 

the consumer does not have the ability to control 

the payment systems or overdraft processing 

systems. And, they’re not outweighed by any 

countervailing benefits to the consumers or 

competition. So, when I talk about unfairness, 

and this is a standard that the different 

agencies use when we talk about under Section 5 

of the FTC. Okay. All right.

And, this is -- we’re going to get to 

the heart of the matter. What we would like and 

what we recommend that banks should do is several 

things to mitigate this because a lot of times 

when we go in to the banks, the banks don’t know 

if this is happening or not. And, so we’re 
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definitely recommending that all our institutions 

review their overdraft practices that deals with 

this to see if it’s happening or not as part of 

your system.

And, like I say, a lot of times, the 

bank doesn’t realize this is going on. And, so 

we’re trying to get out more and more information 

about this to make sure banks are looking at it, 

seeing what your system has, and then correcting 

it when necessary. As always, we recommend that 

you review your disclosures and account 

agreements and make sure they reflect actually 

what’s happening at the institution so that 

there’s no deception type of activity.

And, that’s on anything, whether it’s 

APSN or any other type of fee. You always want 

to make sure that your disclosures and your 

account agreements actually reflect what the bank 

is doing and what you want it to do at your 

institution. Sometimes that pops up as well 

where that doesn’t realize exactly how the system 
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is set up and the disclosures don’t match up.

So, you got to be real careful with 

that. And, a lot of times, you have your core 

providers and you want to make sure that you’re 

looking at your system to see how it is set up. 

And, a lot of times, these systems come in and 

the banks, you can adjust them and do different 

things.

So, you want to, again, have it do 

what you’re wanting it to do. And, so when we 

recommend on this third party is to go in there 

and to see is this happening at your bank where 

these debit card transactions do come in. And, 

there may be a positive balance when it’s 

authorized. But, when it actually comes in and 

clears, it hits on a negative balance and that 

overdraft fee gets charged.

I mean, that’s basically what it comes 

down to. So, you want to make sure that your 

system is set up. And, what we have learned 

throughout this process going through talking to 
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different banks and talking to the core 

providers, there are a lot of fixes out there 

that the core providers have.

But, sometimes you actually have to 

make sure you get the update and you do the 

update. And, then sometimes you have to ask them 

to do it. So, it’s not maybe something that 

they’re sending automatically.

So, one, you need to make sure you 

know what your system is doing and then get with 

your core provider. And, if it is doing this 

authorized positive negative situation, you want 

to make sure you go in there and get it corrected 

so that these kind of situations are not 

happening. But, there are a lot of fixes out 

there.

But, we talked to a lot of 

institutions, and they didn’t realize that was 

out there. And, they hadn’t actually done the 

fix to it. So, you want to make sure you’re aware 

of that. Okay?
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The last thing is several resources 

that I wanted to point out dealing with this issue 

and other issues. Like I mentioned, we put out 

this particular guidance in 2023. That’s the 

last thing on there.

But, the OCC has recently put out 

guidance on their overdraft protection. And, 

this APSN issue was in there. And, of course, 

the CFPB had their circular earlier that talked 

about these type of issues.

Now our particular one is just dealing 

with APSN. But, different agencies had different 

things they put out. Questions?

MEMBER RICHARDS: I do.

MR. FINNEGAN: Okay.

MEMBER RICHARDS: Help me understand 

because I have a real problem with the whole 

unavoidable. It’s unavoidable on the customer’s 

part. It’s avoidable what I’m trying to say. 

They can just not spend the money.

If you have a situation where customer 
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has 100 dollars and they run their card for 75, 

we’ll approve the transaction. Their available 

balance will show then 25 dollars. Their ledger 

balance is going to be 100 until that transaction 

comes in and posts.

They have a 50-dollar check that comes 

in the cash letter, and that comes in before that 

debit card. Sometimes the merchants don’t 

release those debit card transactions for a 

couple of days. The check comes in and clears 

for 50, leaving them 50.

When the debit card hits, they’re 

overdrawn. They spent 125 dollars. Why is that 

not an overdraft? And, we can’t return the debit 

card transaction. We have to pay it.

Believe it or not, they don’t always 

pay their overdrafts. And, so the fees help 

offset some of the risks that we take in having 

to pay the overdrafts. I’m concerned about --

the representments was the first shoe to drop.

Now we have this shoe that’s dropping. 
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You’re going to eliminate overdraft fees. The 

unintended consequences are going to be we’re not 

going to pay overdrafts. We’ll just return 

everything because why pay somebody in an 

overdraft if we can’t be compensated for it.

I just don’t understand, and it just 

galls me every time I see you all use the wording 

unavoidable because it’s avoidable. Help me 

understand in that scenario of 100 dollar, 75 

dollar debit card, and a 50 dollar check why we 

shouldn’t be able to charge an NSF fee. They’re 

insufficient.

MR. FINNEGAN: And, you make good 

points, and thank you. And, I can tell when I 

was saying it that got your attention. One of 

the things is our concern about the fees, make 

sure things are disclosed properly and they’re 

not unfair.

I mean, that’s what we’re doing. And, 

the shoe drops. I mean, we’re talking about one 

particular issue here. And, this, yeah, we 
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talked a lot last time about the representment 

issue and we’ve had lots of discussions about 

that over the last year or two.

The APSN is something that we’ve 

talked about for several years. I mean, this is 

something that we did put in our 2019 highlights 

and it was something that we’ve actually had

banks where this has been cited for over the last 

several years. So, this is not something that -

- a subsequent event like representment and this.

This APSN issue has been out there. 

But, what we wanted to do is get more guidance 

out to the industry on it because we keep seeing 

it. It’s still out there.

And, our responsibility is, again, 

just like yours to make sure that the customer 

knows specifically what the account does. These 

are the fees. These are the kind of fees they’re 

going to get charged and what the process is.

Our view on this is the way that is 

set up and that scenario is that the customer 
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doesn’t have enough information at that point to 

know when things are going to come in and when 

they’re going to clear and all of that. And, our 

view is that that is why we don’t think that’s 

reasonably avoidable.

MEMBER RICHARDS: I disagree.

MEMBER PERRY: But, they know what 

they’re spending or they should, so --

MEMBER CAMPBELL: I think I agree with 

what you’re saying and the timing. But, if they 

would use a thing called a check register.

MEMBER RICHARDS: They would be able 

to avoid it.

MEMBER CAMPBELL: My mom never bounces 

a check. Right. Everything goes into checks. I 

had to explain to her. She said what number I 

put in my check register for a debit card? Just 

put DC, you know.

And, so, yeah, they know they’ve spent 

that money. The problem is they don’t know what 

their balance is because so many of don’t keep a 
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check register now. So, I agree. I think it’s 

avoidable because they chose to write the check.

MEMBER RICHARDS: Would you rather us 

charge the NSF fee on the check when the check 

comes in before the debit card hits? Because 

there’s two transactions. Both of them together 

equal an overdraft. Should we charge the NSF

fees on the intervening transactions that come in 

knowing that a debit card is going to be coming 

in later?

MR. FINNEGAN: You know, and I can’t 

really answer that, I mean, as far as -- we don’t 

dictate how banks handle the transactions. I 

mean, that is something --

MEMBER RICHARDS: You’re trying to.

MR. FINNEGAN: -- that each individual 

has to do. No, we actually want them to be able 

to have the information that they have in order 

to make their decisions as they go through.

MEMBER SHOEMAKER: Focusing on the 

word unavoidable, I think the disclosures are 
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very important. But, also the methods that the 

banks use to communicate to the consumer their 

balance, whether it be mobile banking, text, 

telephone, paper. I hope there’s some deference 

to the banks when we’re being examined that we 

have done through these efforts to make it 

avoidable.

Number two is I serve on the ABA’s 

Core Platforms Committee. And, I hear a lot of 

complaints about core processors. And, I think 

there tends to be a disconnect between what the 

core processors are saying they provide to the 

banks and in reality what they actually do for 

the banks because it is consistently, on that 

committee I hear, well, we talked to our core and 

they said that’s not possible.

And, I know these are banks that are 

updating their systems, doing the patches, doing 

everything necessary. But, on some of these 

transactions, the cores just aren’t able. So, I 

want to make sure that you all are putting the 
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pressure on them to the extent you can to 

accommodate the community banks. And, if they do 

it, if they do it, they’re extorting additional 

fees for said service.

MR. FINNEGAN: And, thanks for those 

comments. And, we do reviews from a consumer 

compliance perspective on the core providers. 

So, this kind of information is help for us as we 

do those reviews.

MEMBER HORTON: Just a quick comment.

MR. FINNEGAN: Sure.

MEMBER HORTON: I think the net effect 

of this is that overdraft fee income is going 

away because in our market, Chase eliminated all 

overdraft fees. It was all over TV, right? And, 

then the large superregional in our market 

followed.

And, so I think what’s going to happen 

is that source of non-interest income is going 

away. And, I feel we provide a valuable service. 

It’s a lot better than going to a payday lender 
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or some of the other things that people resort 

to.

So, hopefully -- I mean, because with 

competition, how do we continue to charge fees if 

the big banks who have so many other sources of 

non-interest income, investment banking and 

wealth management. They could live without that. 

For us, community bankers who are so dependent on 

our net interest margin, it has been an important 

source and an important service that customers 

truly value and actually sign up for. They can 

opt out of it.

MR. FINNEGAN: Yeah, I mean, that’s 

right. I mean, with the Reg E opt-ins. And, one 

of the things I didn’t -- well, we’ve already 

passed on one of the resources.

Our guidance on overdraft -- from 

2010, it’s still out there. And, we have some, 

I think, good recommendations out there. If 

you’re doing overdrafts and things that you could 

do to help address some of the risk that are 
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associated with it.

So, that guidance is still out there, 

and I think it still has some good things to do 

to encourage education to the customers, to 

ensure they’re not constantly overdrawing and all 

of those kind of things. So, education and 

discussing with the customer and having other 

alternatives other than overdrafts. So, there’s 

a lot of things that we still recommend as part 

of our guidance from so many years ago now that 

I think would be good as alternatives to 

overdrafts.

MEMBER HORTON: Well, and if 

overdrafts go away, I see free checking going 

away. I mean, somehow these things have to get 

paid for. And, you see a bank like Chase, I don’t 

think that all of their accounts are free.

So, there’s just a difference there. 

And, I think then you’re penalizing everyone 

instead of charging those that actually use the 

overdraft protection service. So, I share your 
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concerns that I’ve heard around the table.

MEMBER BATES: Well, I think it 

becomes a difficult situation in that even though 

we want the consumer to be informed, they tend to 

learn how to use the system to their advantage. 

I mean, it’s a very -- most people take their 

stack of paper we give them and they toss it when 

they leave. But, they learn how to use the system 

and how to avoid.

We will see patterns with certain 

customers. So, I mean, we try as best we can. 

We’ve actually modified our overdraft and return 

policies. And, we’ve given up a lot of NSF income 

voluntarily to try to get ahead and really try to 

probably, I guess, be more -- where they’ll come 

to us instead of going to a payday lender. It 

costs us money, but it’s lessened the burden on 

them. But, that doesn’t lessen the risks that 

we’re having to take.

MEMBER RICHARDS: Are you all not 

worried that if you eliminate the NSF fees that 
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it will encourage more overdrafts? Because in a 

large sense, NSF is our deterrent. People don’t 

write hot checks and use money they don’t have 

because they don’t want to get the fee.

If they know that we’re not going to 

charge the fee, can you bar the door? I mean, 

they’re just going to be writing checks 

everywhere. And, that’s going to create more 

harm than us charging the fee.

MR. FINNEGAN: And, you know, on NSF 

fee, we have -- that is not an issue that -- the 

first NSF fee is not something that we have had 

concern with. We’ve talked a lot about the 

representment part of it. But, it’s the 

represented NSF fee.

But, we have not had any issue or 

findings dealing with an NSF fee as long as its 

disclosed and all those kind of things. But, we 

have not had an issue with the NSF fee if they 

did it and it comes in and meets what’s disclosed 

and all of those kind of things. Our concern had 
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been it remains the representment part of that.

MEMBER REIGELSBERGER: In our bank 

whether the check or whatever it is, ACH comes in 

the first time, the second time, or the third 

time. There’s days. We go through each account. 

I’ll even look up their account and wonder when 

they get paid.

I wonder if we can go ahead and pay 

this today because they’re going to get paid on 

Friday. So, okay, it was just a day or so away. 

I hate to turn back this mortgage check or their 

insurance.

We go through the exact same steps for 

every check that’s presented, whether it’s a 

first, second, or third. I don’t go through any 

less steps because it’s a second or third. I go 

through the exact same steps because you get to 

the point.

You know the same people are on there 

every week. You know when they get paid. You 

know Susie gets paid on Friday and hubby gets 
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paid on Monday.

And, even though it’s not -- they’ve 

opted out of the program, they’re still in the 

program because they’re still writing checks. We 

do have an overdraft program. And, one example 

the other day was we had a gentleman call.

He was all out of breath and all 

excitable. He had gone down the road 120 miles 

to see somebody and didn’t take any cash with 

him. But, he had his debit card.

He had his overdraft line. He was 

going to gas up his car and take the kids out to 

lunch with his line using his debit card. He 

couldn’t understand why he couldn’t gas up his 

car.

Well, and I think usually we have it 

set up to where if they have a line, it’s not

going to show up on the ATM as available. They 

just have to -- kind of have to know what’s there. 

If they go to the store, they can use it, but 

it’s not going to show up as available to them. 
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They just have to know it’s there.

Well, he just knew it was there, and 

it ended up being a card issue. But, he was 

counting on that overdraft line. He said, I’ll 

pay you twice the fees. And, we charged 35 

dollars.

He said, I’ll pay you 70 dollars. Let 

me have it. But the difference was that wasn’t 

the issue. I mean, he had the line available. 

It was more of a card issue with where he was at.

But anyway, it’s -- I don’t know. 

It’s really -- do you discontinue all the fees? 

Are we just not going to do it? I don’t know. 

It really gets -- now on the authorize now, pay 

later, be honest with you, we quit doing that ten 

years ago probably or maybe a little bit longer.

As a result of an exam, we were 

probably one of those people didn’t quite realize 

what was going on after some very strong words of 

encouragement. Anyway, we discontinued -- we 

changed our -- our core could change and it did 
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because we asked them to. We just did it the way 

it was presented to us when we went to the core. 

So, we should’ve known better probably.

But, we did get that fixed. So, we 

haven’t been doing that for a long time. But 

when I think about the unavoidable, the 

unanticipated, I think it’s a burr under all of 

our saddles because we know good and well that 

people could probably avoid it if they kept that 

checkbook.

Or now they just look on their phone 

and swipe through. Oh, yeah, I have 100 dollars. 

They don’t think about the other times they’ve 

used it. And, the checks are coming in.

I said, well, if you’re going to do 

that, keep excess money in that account to cover 

it. You’re not going to remember every check you 

wrote or every time you used your debit card. 

So, just have a cushion in there if you’re not 

going to keep track. It doesn’t always work 

either.
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MEMBER WEST: I just want to make a 

really quick comment. We just eliminated 

overdraft fees, and it just happened a couple 

weeks ago. I’ll let you know in six months how 

it’s going.

(Laughter.)

MEMBER WEST: We anticipated that it’s 

essentially -- I don’t want to use the word 

forced. But, we’re going to be forced into it 

anyway at some point, kind of like what you’re 

talking about. And, I just figured why not.

It’s not that big of a -- after we 

came to the meeting last time, we were properly 

-- weren’t you tell us last time? So, I’m sitting 

under the table texting my EVP, hey, are we 

disclosing this? Freaking out.

And, she gets back, yeah, we’re 

disclosing it. But, I went back. And, I said, 

we’re not charging anymore for second 

presentments. Just wipe it off.

So, we changed our disclosures. Well, 
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we left our disclosures but changed our practice, 

right? So, we could, but we’re not. And, then 

I started thinking about it. And, the more I 

thought about it, well, it’s not that much money 

anyway.

You’re right. It is for a community 

bank. It’s non-interest income. But, I thought, 

eventually, we’re going to get -- it’s going to 

become onerous to try to do it right. So, we 

just got rid of it. I’ll let you know because I 

don’t think there’s probably anybody else in here 

that has eliminated overdraft fees.

MEMBER REIGELSBERGER: So, are you 

continuing to pay overdrafts? Or do you have a 

limit set?

MEMBER WEST: I’m not going say 

anything out loud. 

(Laughter.)

MEMBER WEST: I think it’s a know your 

customer situation. And, there may be some that 

we cover. We try not to let people use their 
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checking accounts with a line of credit. But 

when there’s no fee, I would say that unofficial 

position is probably not very inclined to be 

paying overdrafts unless it’s somebody that we 

really know is going to make good on it.

MEMBER REIGELSBERGER: Yeah, that’s 

always a challenge sometimes.

MEMBER WEST: Yes, it is. And it’ll 

be interesting to see how it goes.

MEMBER RICHARDS: I just don’t think 

we think about the unintended consequences of 

these actions. Kind of, like, 1071, unintended 

consequences is going to be commercial lending is 

going to go pfft.

MEMBER WEST: It’ll change it for 

sure.

MEMBER RICHARDS: And, then unintended 

consequences of this is if the consumer is 

ultimately harmed and it limits the services 

available to consumers and services that they 

want and that they ask for. But, they’re going 
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to be gone.

MEMBER WEST: But, I’ll let everybody 

know. I’ll report back and let you know how it 

goes, hoping that it’s going to be good. I’m 

kind of excited because two of our biggest 

regional banks are in my town. And, I’m going to 

put a billboard up.

(Simultaneous speaking.)

MEMBER WEST: That’ll be kind of fun. 

I told my new accounts crew, better strap in. 

You’re going to be busy.

MR. FINNEGAN: Well, thanks for the 

comments, and always a pleasure to see everybody.

MS. EBERLEY: All right. Well, thank 

you to all of our presenters and to the committee 

members for the insights that were shared today 

and for the robust conversation. Really do 

appreciate it throughout the day today. It 

really has been terrific and very helpful to us.

So, Vice Chairman Hill, before we 

close out, I wanted to give you an opportunity to 
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make any final comments if you would like. Okay. 

Thank you. So, I will turn things over to 

Chairman Gruenberg for some brief closing 

remarks.

CHAIRMAN GRUENBERG: Thank you, 

Doreen. I’ll be very brief. Thanks, everybody, 

for your time and participation. From my 

standpoint, it’s been a terrific day and a 

terrific and informative set of conversations.

Really, I think we’ve learned a lot. 

I hope you’ve benefitted as well and appreciate 

the candid conversation, whatever the issue may 

be. There’s real value in that. So, thank you 

for that.

I did want to acknowledge that we had 

one member of our committee whose term expired in 

April. And, I just wanted to acknowledge his 

service, Anthony Capobianco who’s President and 

CEO of American Community Bank of Glen Cove, New 

York. We’re very appreciative to him as we are 

to all of you.
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I think we’re going to get back 

together in the fall and we look forward to it. 

And we’ll see what things are like then. Thank 

you all very much.

(Whereupon, the above-entitled matter 

went off the record at 2:57 p.m.)