Eleventh District Banking Conference

President Logan discussed economic conditions, banking, risk management and policy issues in conversation with Gabe Guerra, a South Texas community banker and member of the Dallas Fed’s San Antonio Branch board of directors.

This session, along with the opening remarks preceding it, was the only segment of the conference to be recorded. Watch the video below.

• Lorie Logan, Federal Reserve Bank of Dallas
• Gabe Guerra, Kleberg Bank

AI adoption and workforce: In the Dallas Fed’s May 2025 Texas Manufacturing Outlook Survey, 40 percent of firms reported they are currently using artificial intelligence (AI), with half of those using generative AI. Another 20 percent plan to adopt AI within a year. AI is being applied in data analytics, fraud detection and customer service operations, with 72 percent of respondents reporting minimal employment impact, though higher-skill jobs may see changes.

Eleventh District economy: The district’s diversified economy—energy in Houston, technology in Austin and finance in Dallas—attracts businesses, but the region faces challenges relating to workforce development, power generation and water supply.

FedNOW: The Federal Reserve’s instant-payment platform, FedNOW, is a priority for modernizing payment systems, and there is a push for adoption across banks of all sizes.

Discount window readiness: The Federal Reserve emphasizes discount window readiness for banks to address liquidity risks (such as those seen during the Silicon Valley Bank crisis) and aims to reduce stigma associated with using the discount window.

Current risks: Cyber risk, interconnected with liquidity risk, is a top concern due to its unpredictability and multiple attack vectors. Geopolitical risks are monitored for their potential impact on inflation and the Fed’s dual mandate of promoting price stability and maximum employment.

Texas bankers shared their views on economic, operational and technological considerations impacting conditions in the banking industry.

• David Osborn, WestStar
• Casey Barrett, Texas State Bank
• Cindy Blankenship, Bank of the West
• Jared Whitson, Texas Department of Banking

Inflation trends: Bankers are monitoring inflation trends in order to adjust their interest rate forecasts as rate expectations change.

Employee turnover: Bankers are faced with challenges of high employee turnover due to unclear paths for career growth. Solutions may include capitalizing on the state’s large network of banking schools and programs to attract talent, as well as investing in employees to retain talent.

Cyber risk: Risks related to cyber threats are a top concern. This highlights the need to invest in talent, expand IT support and stay on top of the most current mitigation tools and strategies.

Economic considerations:

• Economic, trade and regulatory uncertainty all are high, while economic conditions in Texas remain strong.
• Bank customers are concerned about tariffs, especially in border communities and the construction industry.

Operational considerations:

• Competition for deposits is high from other segments of the banking industry.
• Check fraud is a massive and costly problem. Mitigation requires cooperation among banks of all sizes, their customers, regulators and law enforcement.

Technological considerations:

• Adoption of artificial intelligence (AI) has been slow but will eventually benefit the banking industry. Banks generally lean on large software providers for adoption. The impact on employment and staffing is uncertain.
• Cryptocurrency and stablecoin adoption is being discussed by state and federal governments. Banks are advocating for a fair playing field among the various players.

Federal Reserve leaders with expertise in payments systems and bank examinations provided information on the current fraud environment.

• Mike Timoney, Federal Reserve Bank of Boston
• William Bliss, Federal Reserve Bank of Dallas

Defining fraud: While all scams constitute fraud, not all fraudulent activities qualify as scams.

Fraud by the numbers:

• 2023 losses:
• Total U.S. fraud losses: $138 billion
• Check fraud: $21 billion
• Synthetic identity fraud: $30 billion
• 2024 losses:
• Scams: $12.5 billion
• Account takeover fraud: $16 billion

Common types: Mail theft, synthetic identity fraud and account takeovers are among the most common types of fraud.

Trends in fraud activity show a significant rise in mail theft. Bad actors are increasingly employing minors for illicit activities, including mail theft. Check fraud, account takeover and synthetic identity fraud, where personally identifiable information (PII) is aggregated from multiple sources, remain in high occurrence.

Understanding trends: Analyzing fraud to understand trends and themes is important. Using scam and fraud classifiers can help.

Advances in fraud classifier models and generative AI-powered deep fake detection offer enhanced understanding of fraudulent activities.

Mitigation strategies: Fraud can be weakened through the use of education, technology and information sharing across banks.

Effective information sharing among financial institutions, while currently challenging, holds significant potential for fraud prevention when supported by well-defined and collaborative engagement models.

Other potential solutions to combat fraud include enhanced fraud education and strengthened privacy safeguards for PII.

Robust security parameters for mobile deposits, along with fraud classifiers designed to analyze and categorize fraud patterns, are vital. In addition to technological tools, continued public education on security measures to protect PII remains crucial.

Federal and state supervisors joined a Dallas Fed business economist to discuss the status of commercial real estate (CRE) in the Eleventh District.

• Laila Assanie, Federal Reserve Bank of Dallas
• Tom Susany, Texas Department of Banking
• Lorenzo Garza, Federal Reserve Bank of Dallas
• Jamie Garcia, Federal Reserve Bank of Dallas

District CRE trends: Generally, CRE has been doing well, benefiting from diversification and a business-friendly environment. Loan delinquencies are low, but refinancing is on the rise.

Supply and demand across the district are largely out of balance, with larger supply and lagging demand post pandemic. Conditions vary by market, with Dallas–Fort Worth, San Antonio and Houston better positioned than the overbuilt Austin market.

Across markets, several trends are influencing supply and demand:

• The hybrid/remote trend is slowing office-space recovery.
• High vacancy rates are seen in older buildings, and high rents in newer buildings.
• Markets are exploring office-to-apartment conversions.

Growth in CRE continues despite external pressures such as inflation, higher interest rates, CECL adoption and economic uncertainty.

Headwinds for CRE include:

• Slower economic and population growth.
• Uncertainty over trade and trade policies.
• Elevated cost of construction.
• No reversal on rents. (Rent concessions are still in play for 2025–26.)
• Data centers (a big driver of growth but also resource-intensive).
• Lack of affordable housing.
• General uncertainty and rising input costs.

Supervision insights: While CRE lending is generally looked upon favorably from the supervisory perspective, banks should work with the borrower and keep credit risk management in mind when refinancing deals.

• Using SR 23-5: In view of higher rates in 2025 and 2026, bankers should justify CRE refinancing risks with analysis. Refer to the guidance provided in SR 23-5, Prudent Commercial Real Estate Loan Accommodations and Workouts.
• “Special mention” classification: For ongoing monitoring, bankers should embrace the “special mention” category for credits. Effective use of this classification reflects prudent credit risk management practices. Special mention does not indicate a bad credit, but rather a good one with risks to monitor.

Federal and state supervisors discussed implementation of the current expected credit losses (CECL) accounting standard and fielded concerns from bankers.

• Will Trujillo, Federal Reserve Bank of Dallas
• Tim Anderson, Texas Department of Banking

Uneven CECL outcomes: CECL implementation diverged from expectations. Contrary to predictions, CECL allowances did not uniformly increase across banks, particularly for community banks.

Larger banks experienced increases in allowance for credit losses (ACL) levels. In contrast, community banks often maintained lower allowances, due partly to lower nonaccrual and past-due loans, but also due to the use of models that did not directly account for reasonable and supportable forecasts (R&SF). Regional banks showed higher nonaccrual and past-due loans but lower allowances.

Model and policy deficiencies: Larger banks employ sophisticated models, while smaller banks rely on simpler models that often lack sound qualitative-factor adjustments or R&SF.

For smaller banks, inadequate model risk management and insufficient validations are common issues. Model validations, critical for accuracy, are infrequent. Assumptions often rely on outdated or default settings. Peer data is commonly used but requires adjustments for relevance.

CRE and unfunded commitments: Risk-focused loan portfolio segmentation is important, especially for CRE concentrations. Examiners focus heavily on CRE concentrations, requiring proper loan segmentation and fair value assessments for nonaccrual loans.

It’s also important to establish ACLs for unfunded loan commitments and held-to-maturity (HTM) securities with non-zero loss history.

Industry concerns: Many bankers express frustration with CECL, citing confusing standards, inconsistent examiner applications and challenges for strong banks with minimal loss history. Some view it as a burdensome peer-matching exercise more than a tailored reserve requirement.

State and federal supervisors shared perspectives on selecting and working with fintech providers.

• Ruth Norris, Texas Department of Banking
• Meeoak Cho, Federal Reserve Bank of Dallas
• Kristin LaPorte, Federal Reserve Bank of Chicago

Business benefits: Working with fintech providers can offer benefits for community banks, creating opportunities for enhanced services, cost reductions, operational efficiencies and rapid deployment of innovation.

Getting started: Banks are encouraged to start slowly, prioritizing their needs and looking at several fintech firms prior to committing to a business relationship.

Due diligence: It’s important to perform due diligence up front to understand the fintech company, its processes and the risks it may pose to a partner institution. Banks should not be hesitant to let a fintech know that it may not be a good match.

Managing risk: Banks should leverage their existing third-party risk management processes. Relevant employees and managers may need additional training to maximize the benefits and mitigate any identified risks of partnering with a fintech.

Ending the relationship: Be ready to end the relationship if needed. Management should review the contract to understand how to terminate the relationship in case things don’t go according to expectations.