WEBVTT NOTE This file was generated by Descript 00:00:00.469 --> 00:00:02.380 Samantha: Hello, this is Samantha Shares. 00:00:03.039 --> 00:00:06.469 This episode covers the Office of the Comptroller of the Currency's 00:00:06.469 --> 00:00:09.170 Semiannual Risk Perspective Spring 2025. 00:00:10.147 --> 00:00:12.717 The following is an audio version of that document. 00:00:13.287 --> 00:00:16.487 This podcast is educational and is not legal advice. 00:00:17.037 --> 00:00:21.017 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:21.017 --> 00:00:24.067 team has over two hundred and forty years of National Credit 00:00:24.097 --> 00:00:25.987 Union Administration experience. 00:00:26.517 --> 00:00:30.127 We assist our clients with N C U A so they save time and money. 00:00:30.507 --> 00:00:34.467 If you are worried about a recent, upcoming or in process N C U A 00:00:34.467 --> 00:00:38.787 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:39.327 --> 00:00:43.667 Also check out our other podcast called With Flying Colors where we provide tips 00:00:43.667 --> 00:00:46.247 on how to achieve success with N C U A. 00:00:46.961 --> 00:00:50.701 Before we dive in, it's worth noting that while this report focuses on 00:00:50.701 --> 00:00:55.491 O C C supervised institutions, the principle-based guidance and risk insights 00:00:55.821 --> 00:01:00.091 it contains serve as an excellent tool for credit unions to assess and manage 00:01:00.091 --> 00:01:02.371 similar risks in their own operations. 00:01:03.095 --> 00:01:04.075 And now the document. 00:01:04.865 --> 00:01:08.185 The Office of the Comptroller of the Currency charters, regulates, 00:01:08.245 --> 00:01:11.945 and supervises national banks and federal savings associations and 00:01:11.945 --> 00:01:16.075 licenses, regulates, and supervises the federal branches and agencies 00:01:16.075 --> 00:01:17.885 of foreign banking organizations. 00:01:18.445 --> 00:01:22.185 The O C C supervises these banks to ensure that they operate in a 00:01:22.185 --> 00:01:26.785 safe and sound manner, provide fair access to financial services, treat 00:01:26.785 --> 00:01:30.935 customers fairly, and comply with applicable laws and regulations. 00:01:31.591 --> 00:01:35.471 The O C C's National Risk Committee monitors the condition of the federal 00:01:35.471 --> 00:01:37.951 banking system and identifies key risks. 00:01:38.571 --> 00:01:42.711 The N R C also monitors emerging threats to the federal banking system's 00:01:42.711 --> 00:01:46.961 safety and soundness and banks' ability to provide fair access to financial 00:01:46.961 --> 00:01:49.201 services and treat customers fairly. 00:01:49.926 --> 00:01:53.906 This spring 2025 report presents data in three main areas: 00:01:54.286 --> 00:01:58.056 trends in key risks, operating environment, and bank performance. 00:01:58.706 --> 00:02:04.446 The report reflects data as of December 31, 2024, unless otherwise indicated. 00:02:05.189 --> 00:02:07.949 Let's start with the executive summary and the key themes for 00:02:07.949 --> 00:02:09.369 the federal banking system. 00:02:10.091 --> 00:02:12.981 The strength of the federal banking system remains sound. 00:02:13.561 --> 00:02:17.261 Consumer sentiment, geopolitical risk, sustained higher interest 00:02:17.261 --> 00:02:21.131 rates, and downward movement in some macroeconomic indicators have 00:02:21.131 --> 00:02:23.071 increased economic uncertainty. 00:02:23.841 --> 00:02:25.841 Commercial credit risk is increasing. 00:02:26.361 --> 00:02:30.151 This is driven by growing geopolitical risk, sustained higher interest 00:02:30.151 --> 00:02:33.621 rates, growing caution among businesses and their customers, and 00:02:33.621 --> 00:02:35.621 other macroeconomic uncertainty. 00:02:36.111 --> 00:02:40.201 Pockets of risk remain for some commercial real estate property types and vary 00:02:40.201 --> 00:02:42.301 by geographic market and product type. 00:02:42.971 --> 00:02:46.061 Refinance risk remains high for loans underwritten during a 00:02:46.061 --> 00:02:47.851 period of lower interest rates. 00:02:48.507 --> 00:02:52.397 Retail credit risk remains stable despite economic uncertainty. 00:02:52.917 --> 00:02:56.807 Most consumer borrower segments continue to withstand elevated prices, 00:02:56.957 --> 00:03:01.257 interest rates, and growing debt levels, supported in part by growth in wages 00:03:01.377 --> 00:03:04.117 exceeding aggregate inflation since 2019. 00:03:04.667 --> 00:03:09.237 However, wage growth is decelerating, and economic uncertainty is driving 00:03:09.237 --> 00:03:11.397 adverse changes in consumer sentiment. 00:03:12.177 --> 00:03:14.227 Market and liquidity risk are stable. 00:03:14.837 --> 00:03:19.107 Net interest margins in O C C supervised banks improved in the latter half of 00:03:19.107 --> 00:03:24.027 2024 as effective federal funds rate cuts enabled banks to lower funding costs. 00:03:24.697 --> 00:03:28.737 Robust interest rate risk scenario analysis and sensitivity testing 00:03:28.797 --> 00:03:32.097 are critical due to uncertainty surrounding inflation and future 00:03:32.097 --> 00:03:34.077 effective federal funds rate movement. 00:03:34.777 --> 00:03:39.357 Asset-based liquidity was stable in 2024, but unrealized investment 00:03:39.357 --> 00:03:41.477 portfolio losses remain a focus. 00:03:41.957 --> 00:03:46.777 Deposits were also stable, but deposit competition warrants continued monitoring. 00:03:47.552 --> 00:03:49.292 Operational risk is elevated. 00:03:49.862 --> 00:03:53.662 Banks continue to seek opportunities to gain efficiencies and respond 00:03:53.662 --> 00:03:57.172 to an evolving and increasingly complex operating environment. 00:03:57.732 --> 00:04:01.632 Failure to upgrade systems and digitize may result in loss of market 00:04:01.632 --> 00:04:05.532 share to competitors offering faster and cheaper payment alternatives. 00:04:06.032 --> 00:04:09.122 Criminals continue to exploit traditional payment methods. 00:04:09.582 --> 00:04:13.602 Fraud schemes commonly target checks, wire transfers, peer-to-peer 00:04:13.602 --> 00:04:15.692 payment platforms, and insiders. 00:04:16.102 --> 00:04:19.372 Evolving cyber threats by sophisticated malicious actors 00:04:19.372 --> 00:04:23.582 continue to target banks and their key service providers, emphasizing the 00:04:23.582 --> 00:04:25.672 importance of operational resilience. 00:04:26.322 --> 00:04:29.652 Recent disruptions across many sectors, including the financial 00:04:29.652 --> 00:04:33.592 sector, highlight the importance of sound third-party risk management. 00:04:34.409 --> 00:04:36.399 Compliance risk remains elevated. 00:04:36.989 --> 00:04:41.149 This is due in part to Bank Secrecy Act anti-money laundering and consumer 00:04:41.149 --> 00:04:45.339 compliance risks associated with elevated fraud levels, account access 00:04:45.339 --> 00:04:47.799 concerns, and evolving business models. 00:04:48.541 --> 00:04:52.631 The report notes that adoption of new technologies, products, and services, 00:04:52.901 --> 00:04:56.201 and or engagement with financial technology companies to deliver 00:04:56.201 --> 00:05:00.551 banking products and services, can offer benefits to banks and customers. 00:05:01.061 --> 00:05:04.271 These benefits can include gaining efficiencies, furthering 00:05:04.271 --> 00:05:08.081 digitalization efforts, and meeting evolving customer expectations. 00:05:08.491 --> 00:05:12.451 That said, these engagements potentially introduce complexities to the operating 00:05:12.451 --> 00:05:16.471 environment, with implications for banks' governance, change management, 00:05:16.591 --> 00:05:18.231 and risk management programs. 00:05:18.939 --> 00:05:22.849 Now let's look at the global and domestic economic operating environment. 00:05:23.577 --> 00:05:28.547 Global economic growth is forecast to slow in 2025 with uncertainty stemming from 00:05:28.547 --> 00:05:30.997 trade policy and geopolitical tensions. 00:05:31.537 --> 00:05:35.507 Moreover, asynchronous monetary policy decisions by global central 00:05:35.507 --> 00:05:39.047 banks could result in currency and bond market volatility. 00:05:39.788 --> 00:05:44.658 After the brief pandemic-era recession in the second quarter of 2020, U S real 00:05:44.658 --> 00:05:49.338 gross domestic product has grown solidly and, by the first quarter of 2025, 00:05:49.668 --> 00:05:54.018 was 12 percent above its pre-pandemic peak in the fourth quarter of 2019. 00:05:54.528 --> 00:05:58.388 Payroll employment in April of this year was fifty-five million above its 00:05:58.388 --> 00:06:03.578 pre-pandemic peak, while unemployment remains near historical lows, at 4.2 00:06:03.578 --> 00:06:04.058 percent. 00:06:04.558 --> 00:06:08.868 However, the first quarter of 2025 saw a slight decline in economic 00:06:08.868 --> 00:06:12.958 activity, driven by a sizeable increase in the volume of imports. 00:06:13.558 --> 00:06:17.768 At the same time, job creation continued at pre-pandemic levels, with 00:06:17.768 --> 00:06:21.668 177,000 jobs created in April 2025. 00:06:22.572 --> 00:06:26.122 The near-term economic outlook remains cautious as economic 00:06:26.152 --> 00:06:27.352 uncertainty has grown. 00:06:27.942 --> 00:06:31.592 Some forecasters note that consumers appear poised to slow spending as 00:06:31.592 --> 00:06:35.062 households have depleted much of their excess savings built up during 00:06:35.062 --> 00:06:39.472 the pandemic, wage growth continues to slow, and job gains have eased. 00:06:40.022 --> 00:06:44.282 The Blue Chip Consensus Forecast projects full-year growth to be 1.2 00:06:44.282 --> 00:06:46.852 percent in 2025 and 1.3 00:06:46.852 --> 00:06:48.232 percent in 2026. 00:06:48.852 --> 00:06:51.812 The Consensus projects personal consumption expenditure 00:06:51.812 --> 00:06:54.252 inflation to accelerate to 3.6 00:06:54.312 --> 00:06:57.882 percent at an annual rate by the third quarter of 2025. 00:06:58.502 --> 00:07:03.952 By the fourth quarter of 2026, P C E inflation is projected to fall to 2.2 00:07:03.952 --> 00:07:07.682 percent, only slightly above the Board of Governors of the Federal 00:07:07.682 --> 00:07:09.622 Reserve System's 2 percent target. 00:07:10.440 --> 00:07:14.450 Moving to bank performance, the report states that profitability for the federal 00:07:14.450 --> 00:07:16.620 banking system was stable in 2024. 00:07:16.620 --> 00:07:21.450 For 2025, the earnings outlook will depend on how banks navigate 00:07:21.450 --> 00:07:25.360 an uncertain economic climate and the future path of interest rates. 00:07:25.990 --> 00:07:29.480 The federal banking system remains resilient and well-positioned to 00:07:29.480 --> 00:07:34.420 absorb stress, with capital ratios and liquidity high by historical standards. 00:07:35.101 --> 00:07:38.981 Recent changes in banks' balance sheets have positioned banks to potentially 00:07:38.981 --> 00:07:43.281 benefit more from a decline in interest rates relative to prior periods when 00:07:43.281 --> 00:07:45.111 the Federal Reserve lowered rates. 00:07:45.769 --> 00:07:51.069 Loan growth for the federal banking system remained weak in 2024, growing by 1.6 00:07:51.119 --> 00:07:51.619 percent. 00:07:52.189 --> 00:07:56.079 Behind the tepid growth was a decline in commercial and industrial loans. 00:07:56.569 --> 00:08:00.949 Federal banking system deposits grew at the same pace as loans, 1.6 00:08:01.009 --> 00:08:01.519 percent. 00:08:02.129 --> 00:08:06.839 The loan-to-deposit ratio, one measure of liquidity, remained below the pre-pandemic 00:08:06.879 --> 00:08:08.779 level for the federal banking system. 00:08:09.339 --> 00:08:14.069 For banks with assets less than 10 billion dollars, loan to deposit ratios have 00:08:14.069 --> 00:08:16.359 nearly returned to pre-pandemic levels. 00:08:17.084 --> 00:08:20.154 Now let's dive into Part One, which covers trends in key 00:08:20.154 --> 00:08:22.054 risks, starting with credit risk. 00:08:22.823 --> 00:08:26.533 Commercial credit risk is increasing, driven by growing geopolitical 00:08:26.533 --> 00:08:30.143 risk, sustained higher interest rates, growing caution among 00:08:30.143 --> 00:08:34.023 businesses and their customers, and other macroeconomic uncertainty. 00:08:34.683 --> 00:08:38.603 This environment may implicate certain effective risk management practices, 00:08:38.843 --> 00:08:42.793 including prudent concentration risk management, loan and portfolio 00:08:42.793 --> 00:08:46.933 level stress testing, accurate risk ratings, and appropriate allowance 00:08:46.933 --> 00:08:48.823 for credit losses methodologies. 00:08:49.614 --> 00:08:53.754 Pockets of risk remain for some commercial real estate property types and vary 00:08:53.754 --> 00:08:55.864 by geographic market and product type. 00:08:56.484 --> 00:09:00.304 The multifamily market is projected to stabilize later this year and 00:09:00.304 --> 00:09:04.844 the industrial market is expected to stabilize within the next 12 to 18 months. 00:09:05.454 --> 00:09:09.844 Office vacancies are projected to continue to rise into 2026, and 00:09:09.844 --> 00:09:13.604 property values may continue a slow decline before stabilizing. 00:09:14.074 --> 00:09:17.104 Hotel performance is bifurcated by asset class. 00:09:17.564 --> 00:09:21.844 Economy hotels continue to experience declines in demand, while luxury 00:09:21.844 --> 00:09:24.024 hotels are experiencing demand growth. 00:09:24.594 --> 00:09:28.514 Regardless of asset class, average daily room rates remain below 00:09:28.564 --> 00:09:33.064 pre-pandemic averages, reflecting limited pricing power in hospitality. 00:09:33.544 --> 00:09:37.124 Retail properties, except malls, continue to remain in demand 00:09:37.124 --> 00:09:38.584 due to limited new supply. 00:09:39.144 --> 00:09:43.024 Banks have generally recognized the riskiest commercial real estate properties 00:09:43.204 --> 00:09:47.124 and have written down loans or put in place loss mitigation strategies. 00:09:47.604 --> 00:09:51.804 However, geopolitical risks and economic uncertainties remain that have the 00:09:51.804 --> 00:09:55.804 potential to impact various type of commercial real estate properties. 00:09:56.539 --> 00:10:00.469 Refinance risk remains high for loans underwritten during a period of lower 00:10:00.469 --> 00:10:04.189 interest rates and to companies with higher leverage and marginal repayment 00:10:04.189 --> 00:10:08.989 capacity, smaller and lower-rated firms with near-term debt maturities, and 00:10:08.989 --> 00:10:11.349 firms with limited financial flexibility. 00:10:11.899 --> 00:10:15.769 Refinance risk is also high for commercial real estate loans underwritten 00:10:15.769 --> 00:10:19.859 during the period of lower interest rates, often with interest-only terms. 00:10:20.439 --> 00:10:23.679 These loans are typically secured by properties with significant 00:10:23.679 --> 00:10:27.189 declines in property values or lower net operating income. 00:10:28.060 --> 00:10:31.950 Trade disruptions due to tariffs and geopolitical risks may compress 00:10:31.950 --> 00:10:35.470 margins across numerous industries with lower ability to pass through 00:10:35.470 --> 00:10:37.730 costs on imported goods and materials. 00:10:38.270 --> 00:10:42.120 In addition, industries with heavy exports may be adversely affected by 00:10:42.120 --> 00:10:44.350 changes in global tariff policies. 00:10:45.147 --> 00:10:48.697 Given the continuing growth in private capital markets, examiners 00:10:48.697 --> 00:10:52.537 continue to monitor banks' involvement in venture lending activity and 00:10:52.537 --> 00:10:56.377 novel lending structures to private capital providers, such as net 00:10:56.407 --> 00:10:58.637 asset value and hybrid facilities. 00:10:59.375 --> 00:11:03.145 Agricultural commodity prices remain below the long-term average, 00:11:03.355 --> 00:11:07.115 increasing risk to banks with concentrations in agricultural lending. 00:11:07.665 --> 00:11:11.535 While farm bankruptcies have increased, farm cash income is expected to 00:11:11.535 --> 00:11:15.595 increase in 2025 due to government disaster assistance payments and 00:11:15.595 --> 00:11:17.395 a modest decrease in expenses. 00:11:18.015 --> 00:11:21.635 Increased farmland values support a relatively low debt-to-assets 00:11:21.685 --> 00:11:23.935 ratio across agricultural borrowers. 00:11:24.325 --> 00:11:28.425 However, agricultural producers heavily reliant on export products, 00:11:28.555 --> 00:11:32.645 such as soybeans and corn, may experience additional challenges from 00:11:32.645 --> 00:11:34.735 changes in global trade policies. 00:11:35.536 --> 00:11:39.216 For retail credit, the report states that retail credit performance 00:11:39.216 --> 00:11:43.156 remains satisfactory, and overall retail credit risk is stable. 00:11:43.666 --> 00:11:47.086 Most consumer segments continue to withstand elevated prices 00:11:47.086 --> 00:11:50.926 and interest rates, supported in part by growth in wages exceeding 00:11:50.926 --> 00:11:53.146 aggregate inflation since 2019. 00:11:53.566 --> 00:11:57.976 However, wage growth is decelerating and economic uncertainty is driving 00:11:57.976 --> 00:12:00.136 adverse changes in consumer sentiment. 00:12:00.586 --> 00:12:04.496 This adverse sentiment has the potential to impact personal consumption, 00:12:04.776 --> 00:12:08.666 which has been one of the main drivers of past, robust G D P growth. 00:12:09.472 --> 00:12:12.932 Currently, bank delinquency and loss rates remain manageable. 00:12:13.482 --> 00:12:17.332 Consumers continue payment prioritization of low-rate mortgage loans with 00:12:17.332 --> 00:12:21.902 historically low, albeit increasing, levels of delinquency and loss rates. 00:12:22.512 --> 00:12:26.632 Delinquencies in other retail asset classes, namely credit cards and 00:12:26.662 --> 00:12:31.322 automobile loans, reflect an increasing trend, but are forecast to stabilize 00:12:31.322 --> 00:12:33.202 during the first half of 2025. 00:12:33.792 --> 00:12:37.652 However, delinquency rates may be higher than reported due to some banks 00:12:37.652 --> 00:12:41.632 temporarily freezing delinquencies to provide borrowers time to qualify 00:12:41.632 --> 00:12:45.092 for the re-aging of accounts as part of loan workout programs. 00:12:45.552 --> 00:12:49.342 Such practices can be used to help borrowers overcome temporary financial 00:12:49.342 --> 00:12:54.132 difficulties but can obscure the true delinquency status of the portfolio if 00:12:54.132 --> 00:12:56.132 not prudently structured and controlled. 00:12:56.925 --> 00:13:00.175 Banks reported tighter lending standards for the year across most 00:13:00.175 --> 00:13:02.015 categories of consumer lending. 00:13:02.545 --> 00:13:07.395 Portfolio growth was generally flat for 2024 across all consumer portfolios. 00:13:07.985 --> 00:13:12.305 Flat loan growth, desire to increase lending margins, and current housing and 00:13:12.335 --> 00:13:16.665 automobile affordability challenges may impact a bank's credit risk appetite. 00:13:17.215 --> 00:13:20.305 Changing market and economic conditions can also affect the 00:13:20.305 --> 00:13:22.435 performance of retail credit models. 00:13:23.188 --> 00:13:27.768 Recent hurricanes, wildfires, and other natural disasters have increased risks 00:13:27.768 --> 00:13:31.648 concerning insurance and residential real estate collateral administration, 00:13:32.048 --> 00:13:36.098 including risks from lapses in coverage, collateral coverage sufficiency, 00:13:36.408 --> 00:13:40.528 nonstandard coverage related to perils, riders, and exclusions, and 00:13:40.528 --> 00:13:44.508 blanket bond insurance sufficiency in recovering uninsured losses. 00:13:44.998 --> 00:13:48.758 Affordability pressures in some geographies, notably increases in 00:13:48.758 --> 00:13:53.198 taxes and insurance premiums including significant increases in premiums for 00:13:53.198 --> 00:13:57.558 flood and homeowners' insurance, are more material and may adversely affect 00:13:57.558 --> 00:13:59.588 borrowers' ability to repay debts. 00:14:00.239 --> 00:14:04.929 Moving to market risk, the report explains that market and liquidity risk are stable. 00:14:05.499 --> 00:14:09.649 Net interest margins improved in the second half of 2024 as banks were able 00:14:09.649 --> 00:14:13.579 to pass on lower rates to depositors due to effective federal funds rate 00:14:13.579 --> 00:14:15.749 reductions and improved funding mix. 00:14:16.439 --> 00:14:19.969 Asset-based liquidity and deposits in O C C supervised 00:14:19.969 --> 00:14:22.359 banks were fairly stable in 2024. 00:14:22.939 --> 00:14:26.799 Deposit competition and deposit assumptions warrant continued monitoring 00:14:26.799 --> 00:14:30.049 through liquidity and interest rate stress testing and modeling. 00:14:30.489 --> 00:14:33.839 Unrealized investment portfolio losses remain a concern and 00:14:33.839 --> 00:14:37.029 heighten the importance of banks' access to operationally ready 00:14:37.029 --> 00:14:38.639 contingent funding sources. 00:14:39.109 --> 00:14:43.189 Inflation uncertainty and impact of effective federal funds rate movement 00:14:43.219 --> 00:14:47.309 heighten the importance of robust interest rate risk scenario analysis 00:14:47.399 --> 00:14:49.229 and assumption sensitivity testing. 00:14:50.018 --> 00:14:54.158 Banks with assets greater than one billion dollars reported a 17 basis 00:14:54.158 --> 00:14:58.298 point decline in earning asset yields in the fourth quarter, while margins 00:14:58.298 --> 00:15:02.918 improved due to a 21 basis point decline in funding costs as banks began 00:15:02.918 --> 00:15:06.978 to benefit from the 100 basis point reduction in the federal funds target 00:15:06.978 --> 00:15:09.368 rate that started in September 2024. 00:15:09.868 --> 00:15:13.488 Funding costs in the fourth quarter also benefited from less reliance 00:15:13.488 --> 00:15:15.538 on brokered deposits and borrowings. 00:15:16.256 --> 00:15:20.336 Elevated unrealized losses in investment portfolios remain a concern. 00:15:20.876 --> 00:15:24.976 Fluctuations in the yield on 10 year U S Treasury securities resulted 00:15:24.976 --> 00:15:29.326 in large quarter-to-quarter changes in unrealized losses, particularly 00:15:29.326 --> 00:15:31.086 in held-to-maturity securities. 00:15:31.546 --> 00:15:35.186 The 10 year U S T market yield declined to 3.81 00:15:35.186 --> 00:15:40.506 percent as of September 30, 2024, and unrealized losses in held to maturity 00:15:40.506 --> 00:15:43.226 securities fell to two-year lows of 10.4 00:15:43.226 --> 00:15:44.786 percent and 6.5 00:15:44.786 --> 00:15:48.016 percent in banks with assets greater than one billion dollars 00:15:48.016 --> 00:15:51.786 and banks with assets less than one billion dollars, respectively. 00:15:52.346 --> 00:15:57.046 The 10 year U S T market yield subsequently moved back up to 4.58 00:15:57.046 --> 00:16:02.686 percent by year-end 2024 and unrealized losses rose above year-end 2023 levels. 00:16:03.427 --> 00:16:07.657 Banks are reducing unrealized losses in available-for-sale portfolios. 00:16:08.147 --> 00:16:11.977 Unrealized losses in banks with assets greater than one billion dollars 00:16:11.977 --> 00:16:17.447 declined from 5 percent at year-end 2023 to 4 percent at year-end 2024 despite 00:16:17.447 --> 00:16:22.127 volatility and the large fourth-quarter increase in the 10 year U S T yield. 00:16:22.647 --> 00:16:26.647 Unrealized losses in available for sale portfolio losses in banks with 00:16:26.647 --> 00:16:31.247 less than one billion dollars in assets rose back to year-end 2023 levels of 00:16:31.247 --> 00:16:35.807 approximately 9 percent despite the 10 year U S T yield being 70 basis 00:16:35.807 --> 00:16:37.717 points higher than one year prior. 00:16:38.277 --> 00:16:41.987 Exposure to unrealized losses in investment portfolios continues 00:16:41.987 --> 00:16:45.307 to underscore the importance of operational readiness to access 00:16:45.367 --> 00:16:46.947 alternative funding sources. 00:16:47.427 --> 00:16:51.107 Banks can use liquidity stress testing as part of contingency planning 00:16:51.107 --> 00:16:55.077 to help identify model reliability and access investment portfolio 00:16:55.077 --> 00:16:59.047 liquidity without exposing earnings and capital to realized losses. 00:16:59.806 --> 00:17:03.576 Uncertainty surrounds the direction and magnitude of inflation and what, 00:17:03.676 --> 00:17:07.286 if any, effect this may have on the direction and impact of Federal 00:17:07.316 --> 00:17:10.526 Open Market Committee decisions on the federal funds target rate. 00:17:11.196 --> 00:17:15.256 This uncertainty continues to heighten the importance of a robust suite of interest 00:17:15.256 --> 00:17:19.846 rate risk stress testing scenarios in both rising and falling rate environments as 00:17:19.846 --> 00:17:21.896 well as assumption sensitivity testing. 00:17:22.376 --> 00:17:26.986 Scenarios involving yield curve flattening and inversion may also be effective to 00:17:26.986 --> 00:17:28.846 consider in light of recent history. 00:17:29.582 --> 00:17:31.592 Now let's examine operational risk. 00:17:32.132 --> 00:17:35.842 The report states that operational risk remains elevated as cyber 00:17:35.842 --> 00:17:39.442 threat actors continue to target banks and their service providers. 00:17:39.992 --> 00:17:43.442 Simultaneously, banks continue to increasingly rely on third 00:17:43.442 --> 00:17:47.432 parties, including fintech firms, expanding the cyberattack surface. 00:17:48.002 --> 00:17:51.502 The risks posed by the increasing reliance on a few third parties, 00:17:51.632 --> 00:17:55.892 in certain instances, increases the likelihood of a single point of failure. 00:17:56.372 --> 00:18:00.322 A single point of failure due to an operational disruption or cyberattack 00:18:00.402 --> 00:18:04.332 could trigger widespread and cascading effects across the financial sector. 00:18:05.068 --> 00:18:09.248 The O C C continues to observe cyber threat actors targeting banks of 00:18:09.288 --> 00:18:13.678 all sizes with ransomware attacks, emphasizing the importance of operational 00:18:13.678 --> 00:18:18.348 resilience, including testing business continuity and incident response plans. 00:18:18.768 --> 00:18:22.928 Cyber threat actors are also increasing their use of double extortion attacks. 00:18:23.548 --> 00:18:28.048 This tactic pressures the bank into paying a ransom even if it can restore impacted 00:18:28.048 --> 00:18:30.588 systems and data from unaffected backups. 00:18:31.262 --> 00:18:35.582 The United States Secret Service alerted financial institutions to an increase 00:18:35.582 --> 00:18:40.862 in automated teller machine jackpotting, or A T M cashout, attempts in 2024. 00:18:41.422 --> 00:18:45.102 Criminals, sometimes disguised as service technicians, access 00:18:45.152 --> 00:18:49.262 and alter the A T M's security controls to illegally dispense cash. 00:18:49.772 --> 00:18:54.952 Jackpotting can involve using a universal A T M key to open the A T M units, install 00:18:54.952 --> 00:18:59.542 malware to the A T M's system, connect the A T M to an unauthorized external 00:18:59.542 --> 00:19:04.282 device called a black box, or install an unauthorized device between the A T M's 00:19:04.282 --> 00:19:06.462 computer and network cable connection. 00:19:07.032 --> 00:19:10.672 Examples of controls that may be relevant to mitigating risks related 00:19:10.672 --> 00:19:15.292 to A T M jackpotting attempts include cybersecurity and technology controls, 00:19:15.572 --> 00:19:19.992 such as installing software updates and patches in a timely manner, and physical 00:19:19.992 --> 00:19:25.052 security controls, such as security cameras, alarms, changing universal keys, 00:19:25.332 --> 00:19:28.032 and ongoing monitoring of A T M activity. 00:19:28.742 --> 00:19:31.712 Banks are exposed to a wide range of potential disruptive 00:19:31.712 --> 00:19:36.232 events, including technology-based failures, cyber incidents, pandemic 00:19:36.292 --> 00:19:38.362 outbreaks, and natural disasters. 00:19:38.872 --> 00:19:43.142 While advances in technology have improved banks' ability to identify and recover 00:19:43.142 --> 00:19:47.692 from various types of disruptions, cyber threats are increasingly sophisticated 00:19:47.692 --> 00:19:51.472 and interdependencies with counterparties and service providers are growing. 00:19:52.132 --> 00:19:55.282 These operational risks highlight the importance for banks to 00:19:55.282 --> 00:19:58.912 ensure continued maintenance of effective operational resilience. 00:19:59.601 --> 00:20:03.651 The report discusses innovation and adoption of new products and services, 00:20:03.951 --> 00:20:07.971 noting that banks continue to adopt new technology and innovative products 00:20:07.971 --> 00:20:12.541 and services to gain efficiencies, in furtherance of digitalization efforts, and 00:20:12.541 --> 00:20:14.871 to meet evolving customer expectations. 00:20:15.401 --> 00:20:18.771 Incorporating new products and services can assist with marketplace 00:20:18.771 --> 00:20:23.121 competition, lower consumer costs, and enhance customer experience. 00:20:23.581 --> 00:20:27.331 While adoption of new technologies and novel business arrangements with third 00:20:27.331 --> 00:20:31.881 parties to deliver products and services to end users can offer benefits to banks 00:20:31.881 --> 00:20:36.001 and their customers, these activities may add additional complexity to the 00:20:36.001 --> 00:20:40.451 operating environment, impacting banks' governance, change management, and risk 00:20:40.451 --> 00:20:44.791 management needs depending on the bank's size, complexity, and risk profile. 00:20:45.562 --> 00:20:49.012 Banks have approached artificial intelligence, including generative A 00:20:49.012 --> 00:20:53.832 I adoption cautiously, but overall, global adoption continues to increase, 00:20:54.012 --> 00:20:57.922 with banks, businesses, and governments exploring various use cases. 00:20:58.252 --> 00:21:02.392 Responsible A I use can help banks make more informed decisions, enhance 00:21:02.392 --> 00:21:05.912 efficiency, and provide better and more customized services to 00:21:05.912 --> 00:21:08.322 households and businesses of all sizes. 00:21:08.622 --> 00:21:12.802 A I in banking currently includes real-time fraud and anomaly detection 00:21:12.802 --> 00:21:16.572 and prevention; some components of credit underwriting, such as 00:21:16.572 --> 00:21:21.242 financial analysis and collateral evaluation processes; document reading 00:21:21.242 --> 00:21:25.232 and information extraction; and personalized customer recommendations. 00:21:25.832 --> 00:21:30.002 Banks continue to explore the use of generative A I and implement use cases. 00:21:30.482 --> 00:21:34.542 A I may also be helpful for regulatory compliance management, enterprise 00:21:34.542 --> 00:21:36.722 risk management, and data analysis. 00:21:37.352 --> 00:21:41.702 While beneficial, using any form of A I, whether produced internally or by 00:21:41.702 --> 00:21:46.322 a third party, can introduce model, cybersecurity, and compliance risks. 00:21:46.972 --> 00:21:50.692 The O C C is attentive to ongoing developments regarding digital 00:21:50.722 --> 00:21:52.762 assets in the federal banking system. 00:21:53.372 --> 00:21:58.162 On March 7, 2025, the O C C issued Interpretive Letter 1183 00:21:58.162 --> 00:22:01.082 rescinding Interpretive Letter 1179. 00:22:01.642 --> 00:22:05.212 Interpretive Letter 1183 reaffirms that the crypto-asset 00:22:05.212 --> 00:22:09.122 custody, distributed ledger, and stablecoin activities discussed 00:22:09.122 --> 00:22:10.932 in prior letters are permissible. 00:22:11.372 --> 00:22:17.212 On May 7, 2025, the O C C issued Interpretive Letter 1184, providing 00:22:17.212 --> 00:22:21.872 further clarification on bank's authority regarding crypto-asset custody services. 00:22:22.412 --> 00:22:26.942 As with all novel banking activities, the O C C expects banks engaging in 00:22:26.942 --> 00:22:32.042 crypto-asset activities to do so in a safe, sound, and fair manner; consistent 00:22:32.042 --> 00:22:36.302 with effective risk management practices; in alignment with the bank's overall 00:22:36.302 --> 00:22:41.052 prudent business plans; and in compliance with applicable laws and regulations. 00:22:41.714 --> 00:22:45.714 Many banks and service providers face challenges with maintaining legacy 00:22:45.714 --> 00:22:50.194 technology architectures while responding to increasing digitalization demands. 00:22:50.664 --> 00:22:54.964 Innovations in payment systems using emerging technologies, such as distributed 00:22:54.964 --> 00:22:59.804 ledger technologies and mobile payment platforms, can bypass traditional legacy 00:22:59.804 --> 00:23:04.284 banking infrastructure and disrupt fee revenue streams that banks rely upon. 00:23:04.674 --> 00:23:09.084 There is a risk that failure to upgrade systems and digitize may result in loss 00:23:09.084 --> 00:23:13.394 of market share to competitors offering faster and cheaper payment alternatives. 00:23:13.924 --> 00:23:17.484 Additionally, there is a risk that prolonged use of older or legacy 00:23:17.484 --> 00:23:21.904 systems could increase the likelihood of operational outages, introduce security 00:23:21.904 --> 00:23:26.584 vulnerabilities, create system maintenance challenges, and create other concerns 00:23:26.584 --> 00:23:28.874 that could reduce operational resilience. 00:23:29.542 --> 00:23:33.152 The board of directors may delegate the bank's daily managerial duties 00:23:33.152 --> 00:23:37.302 to others; however, the board is ultimately responsible for providing 00:23:37.302 --> 00:23:40.892 the appropriate oversight to ensure that the bank operates in a safe and 00:23:40.892 --> 00:23:44.882 sound manner and in compliance with applicable laws and regulations. 00:23:45.552 --> 00:23:48.932 This includes consideration of whether new activities are consistent 00:23:48.962 --> 00:23:52.492 with the bank's strategic goals and risk appetite and comply with 00:23:52.492 --> 00:23:54.392 applicable laws and regulations. 00:23:54.922 --> 00:23:58.462 The board is also responsible for ensuring management implements an 00:23:58.462 --> 00:24:02.872 effective risk management system that identifies, measures, monitors, and 00:24:02.872 --> 00:24:05.342 controls risks related to new activities. 00:24:05.802 --> 00:24:09.282 This includes management informing the board and the board understanding 00:24:09.312 --> 00:24:12.632 any material risks that may impact earnings and capital. 00:24:13.393 --> 00:24:16.663 Regarding fraud risk management, the report notes that fraud 00:24:16.663 --> 00:24:20.313 affects numerous stakeholders, including banks and their customers. 00:24:20.843 --> 00:24:24.083 The interconnected payments ecosystem highlights the importance of 00:24:24.083 --> 00:24:26.153 information sharing and collaboration. 00:24:26.683 --> 00:24:30.143 Banks can support their customers by providing information about fraud 00:24:30.143 --> 00:24:32.263 trends and ways to protect themselves. 00:24:32.853 --> 00:24:37.253 Customer education can help consumers be aware of fraud schemes and trends. 00:24:37.593 --> 00:24:41.863 Ongoing training can help bank staff to identify red flags and respond to 00:24:41.863 --> 00:24:46.573 customers seeking to conduct transactions outside their usual transaction patterns. 00:24:47.113 --> 00:24:50.443 Bank trade groups may be able to facilitate sharing of information 00:24:50.503 --> 00:24:54.223 at a level that could help reduce or mitigate risks in the banking system. 00:24:55.058 --> 00:24:58.148 Criminals continue to exploit traditional payment methods. 00:24:58.678 --> 00:25:02.788 Fraud schemes commonly target checks, wire transfers, peer-to-peer 00:25:02.788 --> 00:25:04.828 payment platforms, and insiders. 00:25:05.358 --> 00:25:09.368 While fraud schemes are constantly evolving, social engineering, phishing, 00:25:09.438 --> 00:25:13.558 account takeover, business email compromise, impersonation of business 00:25:13.558 --> 00:25:18.168 executives, government officials, third parties, or tech support, romance 00:25:18.208 --> 00:25:21.978 and investment scams, and identity theft schemes remain lucrative. 00:25:22.827 --> 00:25:27.017 First-party fraud or friendly fraud occurs when an external party, including 00:25:27.017 --> 00:25:31.187 a bank customer, uses their own identity to commit fraud against the bank. 00:25:31.717 --> 00:25:35.427 Card holders may attempt to take advantage of chargeback rules to dispute 00:25:35.427 --> 00:25:37.087 a legitimate charge on their card. 00:25:37.647 --> 00:25:42.227 Foundational controls, such as customer authentication and continuous monitoring 00:25:42.227 --> 00:25:46.217 of account transaction activity using historical data and technology 00:25:46.217 --> 00:25:50.717 tools, may help banks to identify higher-risk accounts and prevent fraud. 00:25:51.491 --> 00:25:54.981 Insider abuse can expose banks to excessive risk and cause a 00:25:54.981 --> 00:25:56.661 loss of customer confidence. 00:25:57.311 --> 00:26:00.341 The digital environment presents opportunities for employees to 00:26:00.341 --> 00:26:04.281 manipulate information to misappropriate assets, commit financial statement 00:26:04.281 --> 00:26:08.631 fraud, steal information to resell, or conduct other illicit activity. 00:26:09.241 --> 00:26:12.871 Mobile phones and other electronic devices facilitate the capture 00:26:12.871 --> 00:26:16.801 and theft of sensitive customer information, especially when permitted 00:26:16.801 --> 00:26:18.561 in sensitive areas of the bank. 00:26:19.071 --> 00:26:23.211 Required step-aways, such as mandatory vacation and job rotation, 00:26:23.511 --> 00:26:27.061 can limit a single employee's control over a specific task. 00:26:27.782 --> 00:26:31.762 Moving to compliance risk, the report discusses Bank Secrecy Act 00:26:31.802 --> 00:26:35.562 anti-money laundering and Office of Foreign Assets Control issues. 00:26:36.052 --> 00:26:39.962 Elevated levels of fraud, including traditional fraud schemes and use of 00:26:39.992 --> 00:26:44.402 innovative technology to perpetrate fraud, may result in increased volumes 00:26:44.402 --> 00:26:49.062 of suspicious activity alerts and increased S A R filing obligations. 00:26:49.472 --> 00:26:54.292 In some cases, banks are leveraging B S A staff to help manage related risks in 00:26:54.332 --> 00:26:58.232 other areas of the bank, for example, fraud investigations, which could 00:26:58.232 --> 00:27:00.852 affect continuity of B S A operations. 00:27:01.551 --> 00:27:05.121 As banks continue to implement innovative technologies, including 00:27:05.121 --> 00:27:09.281 partnering with fintechs to deliver new or expanded products and services, 00:27:09.581 --> 00:27:12.881 the fintechs may not always have appropriate experience, technical 00:27:12.881 --> 00:27:15.061 expertise, and resources in place. 00:27:15.631 --> 00:27:19.171 This could undermine their ability to effectively manage these associated 00:27:19.171 --> 00:27:24.571 risks, particularly regarding a bank's B S A A M L or sanctions risk profile, 00:27:24.901 --> 00:27:28.661 which may be altered by changing business models or global events. 00:27:29.270 --> 00:27:33.370 The Treasury Department in March 2025 issued an interim final rule 00:27:33.370 --> 00:27:37.490 that removes the requirement for U S companies and U S persons to report 00:27:37.490 --> 00:27:41.500 beneficial ownership information to the Financial Crimes Enforcement Network 00:27:41.540 --> 00:27:43.370 under the Corporate Transparency Act. 00:27:43.800 --> 00:27:48.510 O C C supervised banks must continue to comply with the existing F I N C 00:27:48.540 --> 00:27:53.810 E N 2016 Customer Due Diligence rule and other existing B S A requirements. 00:27:54.160 --> 00:27:57.580 There are currently no specific requirements for banks to incorporate 00:27:57.580 --> 00:28:02.580 the National Priorities issued by F I N C E N into their risk based B S A 00:28:02.580 --> 00:28:06.840 compliance programs until the effective date of final revised regulations. 00:28:07.563 --> 00:28:12.293 For consumer compliance, the report notes that compliance risk increases when banks 00:28:12.293 --> 00:28:16.603 do not promptly investigate, resolve, and, as appropriate, credit funds in 00:28:16.603 --> 00:28:20.893 accordance with applicable laws, such as the Electronic Fund Transfer Act, 00:28:21.073 --> 00:28:25.173 the Expedited Funds Availability Act, and the Federal Trade Commission Act. 00:28:25.853 --> 00:28:29.523 As discussed above, increased levels and sophistication of fraud 00:28:29.523 --> 00:28:33.473 may necessitate reasonable delays as allowed by law or regulation. 00:28:33.923 --> 00:28:38.263 However, this may also exacerbate compliance risk when banks take prolonged 00:28:38.293 --> 00:28:42.233 timeframes to complete investigations or implement broad account access 00:28:42.233 --> 00:28:46.293 limitations, preventing customers, including those who are not victims 00:28:46.293 --> 00:28:48.453 of fraud, from accessing their funds. 00:28:49.195 --> 00:28:53.295 As interest rates fluctuate, banks may offer new or updated deposit 00:28:53.295 --> 00:28:56.755 products, such as high-yield savings accounts or a greater 00:28:56.755 --> 00:28:58.815 variety of certificates of deposit. 00:28:59.435 --> 00:29:03.045 Compliance risk may increase when communications on C D rollover 00:29:03.045 --> 00:29:07.345 processes or maturity options lack clarity or cause confusion, for 00:29:07.345 --> 00:29:11.665 example, when rates paid on rolled-over C D s are far below the original 00:29:11.665 --> 00:29:13.695 promotional rates offered by a bank. 00:29:14.265 --> 00:29:17.595 Compliance risk may rise as insurance premiums rise. 00:29:18.155 --> 00:29:21.995 For example, failure to maintain adequate flood insurance coverage 00:29:21.995 --> 00:29:25.305 can lead to violations of the Flood Disaster Protection Act 00:29:25.555 --> 00:29:27.325 and its implementing regulations. 00:29:28.044 --> 00:29:31.474 Finally, let's look at Part Three, which covers bank performance. 00:29:32.114 --> 00:29:35.954 The report states that profitability in the federal banking system was stable 00:29:35.954 --> 00:29:39.664 in 2024, with return on equity at 11.7 00:29:39.664 --> 00:29:42.104 percent, compared with 11.5 00:29:42.104 --> 00:29:43.354 percent a year prior. 00:29:43.954 --> 00:29:47.194 For banks with less than 10 billion dollars in total assets, 00:29:47.304 --> 00:29:51.304 profitability declined slightly from a year ago, from 10.7 00:29:51.304 --> 00:29:52.634 percent to 10.4 00:29:52.634 --> 00:29:56.924 percent, but remained at a solid level compared with historical averages. 00:29:57.384 --> 00:30:00.874 Though the Federal Reserve started to ease monetary policy in the latter 00:30:00.874 --> 00:30:05.294 half of 2024, interest rates remained relatively high throughout the year, 00:30:05.634 --> 00:30:09.184 leading to subdued loan growth and compression of net interest margin. 00:30:09.734 --> 00:30:13.564 For 2025, the earnings outlook will depend on how banks navigate 00:30:13.564 --> 00:30:17.464 an uncertain economic climate and the future path of interest rates. 00:30:18.074 --> 00:30:21.524 The federal banking system remains resilient and well-positioned to 00:30:21.524 --> 00:30:26.414 absorb stress, with capital ratios and liquidity high by historical standards. 00:30:26.834 --> 00:30:30.304 The federal banking system's ratio of liquid assets to total 00:30:30.334 --> 00:30:35.874 assets was at 31 percent in 2024, compared with 16 percent in 2008. 00:30:36.648 --> 00:30:40.948 Net interest income growth, a key driver of bank profitability, slowed 00:30:40.948 --> 00:30:45.278 in 2024, in part due to higher funding costs and lower loan growth. 00:30:45.988 --> 00:30:51.018 For the federal banking system, N I I was largely unchanged, with a slight 0.3 00:30:51.018 --> 00:30:56.588 percent decline, while banks with assets less than 10 billion dollars saw a 2.7 00:30:56.588 --> 00:30:57.288 percent growth. 00:30:57.778 --> 00:31:01.538 For both the federal banking system and banks with assets less than 10 00:31:01.538 --> 00:31:05.388 billion dollars, higher noninterest income offset some of the weakness 00:31:05.388 --> 00:31:09.718 in N I I and supported revenue, while growth in expenses was modest. 00:31:10.288 --> 00:31:13.698 In addition, the federal banking system benefited from gains in the 00:31:13.698 --> 00:31:18.368 equity securities portfolio in 2024, which also supported profitability. 00:31:18.908 --> 00:31:22.628 Overall, this led to an improvement in net income for the federal banking 00:31:22.628 --> 00:31:27.908 system and banks with assets less than 10 billion dollars, increasing 5.7 00:31:27.908 --> 00:31:29.418 percent and 6.4 00:31:29.418 --> 00:31:30.828 percent, respectively. 00:31:31.632 --> 00:31:35.872 Bank funding costs increased in 2024, as interest rates remained 00:31:35.902 --> 00:31:39.882 elevated and depositors continued to switch into higher-yielding accounts. 00:31:40.392 --> 00:31:44.312 While the increase in funding costs was more pronounced among banks with assets 00:31:44.392 --> 00:31:48.922 less than 10 billion dollars, those banks also realized greater gains on asset 00:31:48.922 --> 00:31:53.712 yields compared with the overall system, resulting in smaller N I M compression. 00:31:54.062 --> 00:31:58.372 Banks with assets less than 10 billion dollars were slower to reprice deposits 00:31:58.372 --> 00:32:02.122 in response to the cuts in the federal funds rate that began in September, 00:32:02.232 --> 00:32:03.912 compared with the overall system. 00:32:04.432 --> 00:32:08.402 Both the federal banking system and banks with assets less than 10 billion 00:32:08.402 --> 00:32:12.112 dollars, however, have repriced deposits faster than in the last 00:32:12.112 --> 00:32:14.532 interest rate cutting cycle in 2019. 00:32:15.300 --> 00:32:19.110 Recent changes in banks' balance sheets have positioned banks to potentially 00:32:19.110 --> 00:32:23.240 benefit more from a decline in interest rates relative to prior periods when 00:32:23.240 --> 00:32:24.990 the Federal Reserve lowered rates. 00:32:25.550 --> 00:32:29.630 For example, a higher proportion of banks carry more short-term liabilities 00:32:29.630 --> 00:32:34.190 relative to short-term assets compared with the beginning of 2019, the start 00:32:34.190 --> 00:32:36.120 of the previous rate-lowering cycle. 00:32:36.460 --> 00:32:40.530 Though a number of factors can affect how changes in interest rates impact N I 00:32:40.530 --> 00:32:45.000 M, this suggests that a greater share of banks could benefit from lower deposit 00:32:45.000 --> 00:32:47.020 rates compared with prior periods. 00:32:47.707 --> 00:32:51.167 Loan growth remained weak in 2024, at 1.6 00:32:51.217 --> 00:32:51.727 percent. 00:32:52.247 --> 00:32:56.507 Weak growth was primarily driven by a decline in commercial and industrial and 00:32:56.507 --> 00:32:58.967 nonfarm nonresidential real estate loans. 00:32:59.457 --> 00:33:03.677 Loan growth was supported by increases in credit card balances and loans to 00:33:03.677 --> 00:33:06.067 nondepository financial institutions. 00:33:06.557 --> 00:33:10.117 Real estate loans drove a 4 percent increase in loan balances 00:33:10.117 --> 00:33:14.217 at banks with assets less than 10 billion dollars in total assets. 00:33:14.557 --> 00:33:18.537 Residential real estate, nonfarm nonresidential, and multifamily 00:33:18.537 --> 00:33:22.097 lending account for more than 60 percent of community bank lending. 00:33:22.839 --> 00:33:27.319 Federal banking system deposits grew at the same pace as loans, 1.6 00:33:27.429 --> 00:33:31.699 percent, following deposit outflows in 2022 and 2023. 00:33:32.289 --> 00:33:37.109 The loan-to-deposit ratio, one measure of liquidity, remained below the pre-pandemic 00:33:37.109 --> 00:33:39.029 level for the federal banking system. 00:33:39.549 --> 00:33:43.689 For banks with assets less than 10 billion dollars, with slightly faster 00:33:43.689 --> 00:33:48.609 loan growth, loan-to-deposit ratios have nearly returned to pre-pandemic levels. 00:33:49.279 --> 00:33:52.299 Net charge-off rates slightly increased from the prior year 00:33:52.549 --> 00:33:54.169 but remained historically strong. 00:33:54.829 --> 00:33:57.759 For the federal banking system, the net charge-off rate for 00:33:57.759 --> 00:33:59.959 total loans increased to 0.8 00:33:59.959 --> 00:34:02.399 percent, compared with 0.6 00:34:02.459 --> 00:34:03.489 percent a year ago. 00:34:04.199 --> 00:34:08.129 Nonfarm, nonresidential real estate loans were the only outlier as the 00:34:08.129 --> 00:34:12.889 net charge-off rate rose slightly above the 1991 to 2019 average rate. 00:34:13.469 --> 00:34:17.399 However, net charge-off rates for all other loan categories remained 00:34:17.399 --> 00:34:19.189 below their historical averages. 00:34:19.519 --> 00:34:23.949 For banks with assets less than 10 billion dollars, net charge-off rates 00:34:23.949 --> 00:34:27.939 were little changed from the historically low levels of a year ago and remained 00:34:27.939 --> 00:34:30.019 low across all loan categories. 00:34:30.745 --> 00:34:32.145 This concludes our summary. 00:34:32.847 --> 00:34:37.107 If your credit union could use assistance with your exam, reach out to Mark Treichel 00:34:37.107 --> 00:34:39.747 on LinkedIn, or at mark Treichel dot com. 00:34:40.317 --> 00:34:42.927 This is Samantha Shares and we thank you for listening.