I o 

The Meeting of the Advisory Committee on Community Banking 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

November 4, 2011 8:38 - A.M. 

The meeting of the FDIC Advisory Committee on Community 

Banking ("Committee") was called to order by Martin J. Gruenberg, 

Acting Chairman, Federal Deposit Insurance Corporation ("FDIC") 

Board of Directors. 

The members of the Committee present at the meeting were: 

R. Daniel Blanton, President and Chief Executive Officer ("CEO") 

Southeastern Bank Financial Corporation and Georgia Bank & Trust 

Company of Augusta, Augusta, Georgia; Charles G. Brown, III, 

Chairman and CEO, Insignia Bank, Sarasota, Florida; Deborah A. 

Cole, President and CEO, Citizens Savings Bank and Trust Company, 

Nashville, Tennessee; Craig M. Goodlock, Chairman and CEO, Farmers 

State Bank, Munith, Michigan; James H. Gray, Chairman, Beach 

Business Bank, Manhattan Beach, California; Jack B. Hopkins, 

President and CEO, CorTrust Bank, National Association, Sioux 

Falls, South Dakota; Timothy W. Koch, Professor and Chair, Finance 

Department, Moore School of Business, University of South 

Carolina, Columbia, South Carolina; John P. Lewis, President and 

CEO, Southern Arizona Community Bank, Tucson, Arizona; Jan A. 

Miller, President and CEO, Wainwright Bank & Trust Company, 

Boston, Massachusetts; Rebecca Romero Rainey, Chair and CEO, 

Centinel Bank, Taos, New Mexico; Bruce A. Schriefer, President, 

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III 

Bankers’ Bank of Kansas, National Association, Wichita, Kansas; 

Laurie Stewart, President and CEO, Sound Community Bank, 

Seattle, Washington; and Ignacio Urrabazo, Jr., President, 

Commerce Bank, Laredo, Texas. 

Dorothy J. Bridges, President and CEO, City First Bank of 

D.C., Washington, D.C. and Matthew Williams, Chairman and 

President, Gothenburg State Bank & Trust Company, 

Gothenburg, Nebraska, were absent from the meeting. 

Members of the FDIC Board of Directors present at the meeting 

were: Martin J. Gruenberg, Acting Chairman, and Thomas J. Curry, 

Director (Appointive) 

Corporation staff who attended the meeting included: 

Willa M. Allen, Valerie J. Best, Luke H. Brown, Kathleen S. 

Brueqer, Kymberly K. Copa, Christine M. Davis, Patricia B. Devoti, 

Bret D. Edwards, Diane L. Ellis, Keith S. Ernst, Pamela J. Farwig, 

George French, Jeff Kopchik, Michael H. Krimminger, Alan W. Levy, 

Christopher Lucas, Roberta K. McInerney, Jonathan N. Miller, RaeAnn Miller, Arthur J. Murton, Paul M. Nash, Christopher J. 

Newbury, Thomas E. Nixon, Jimmy Nguyen, Sylvia H. Plunkett, 

Carolyn D. Rebmann, Claude A. Rollin, Barbara A. Ryan, John V. 

Thomas, Sandra L. Thompson, Mindy West, James C. Watkins, and 

Katherine G. Wyatt. 

William A. Rowe, III, Deputy to the Chief of Staff and 

Liaison to the FDIC, Office of the Comptroller of the Currency 

("0CC 11 ) , was also present at the meeting. 

Acting Chairman Gruenberg welcomed the Committee and 

observed that it was an extraordinarily effective vehicle for the 

FDIC to gain insight into the role and challenges faced by 

community banks. Noting that the Committee had an interesting 

agenda before it, he introduced Paul Nash, Deputy to the Acting 

Chairman for External Affairs, who moderated the day’s meeting. 

Mr. Nash introduced the first panel, "FDIC Community Bank 

Initiatives" and the panelists: Barbara Ryan, Chief of Staff; 

Arthur Murton, Director, Division of Insurance and Research 

("DIR") ; Sylvia Plunkett, Senior Deputy Director, Division of 

Depositor and Consumer Protection ("DCP") ; and James Watkins, 

Deputy Director, Division of Risk Management and Supervision 

("RMS"). By way of introduction, Mr. Nash said that Acting 

Chairman Gruenberg had requested a study of community banking that 

involved several different projects, including a conference with 

community bankers, regional roundtables, research into community 

November 4, 2011 
112 

banking history and their models, as well as an exploration into 

streamlining the supervisory process. 

Ms. Ryan discussed the community banking conference, which 

would occur at the FDIC’s Arlington, Virginia offices in the first 

quarter of 2012, and the regional roundtables, which would occur 

over the course of the year. She said that the FDIC’s goal was to 

deepen its understanding of community banks and the current 

environment’s challenges and opportunities. Among the topics to 

be addressed, Ms. Ryan said, would be how community banks have 

evolved, including differences in size, geographic footprint and 

business model. There would be discussions of raising capital, 

adapting to change, leveraging technology, dealing with resources 

and succession planning; there would also be input from community 

bank users, including consumers, small businesses, farmers and 

community development organizations. She said that the conference 

would also consider how community banks had weathered crises in 

order to identify lessons about the future of community banks. 

Regarding the six regional roundtables, Ms. Ryan said that 

the Acting Chairman and FDIC senior executives would engage in a 

dialogue to explore more deeply the various issues facing 

community banks. Mr. Murton then generally described the 

community banking study. He said that, in addressing a basic 

question"what is a community bank?"FDIC staff would look at 

trends over the past 20 years, including the experiences of de 

novo banks, urban and rural banks, as well as exploring regional 

differences. The study would rely on Call Report data, the FDIC 

Summary of Deposits, a review of the economic literature, and 

consultation with experts. Some of the research would be 

presented at the spring 2012 conference. The FDIC also plans to 

publish resulting papers. 

Ms. Plunkett described how DCP was reviewing its examination 

process for efficiency and transparency. She said that DCP was 

considering how it conducts examinations, as well as its informal 

and formal procedures to reduce burden. She noted that some 

examinations imposed different standards based on bank size and 

that the FDIC was looking for similar opportunities. Ms. Plunkett 

observed that many laws and regulations had changed recently and 

that, while the FDIC may not be able to change the law’s content 

or deadlines, it could assist with compliance, including 

communicating about upcoming changes, clarifying procedures and 

explaining regulatory expectations. Mr. Watkins discussed similar 

risk management examination reviews and said that RMS was 

considering how it examined institutions of various sizes and 

levels of complexity. He added that the FDIC was considering how 

November 4, 2011 
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to improve its communications with community banks including the 

use of more nationwide conference calls and training sessions. 

Mr. Nash invited the Committee to provide comments about the 

general contours of the FDIC initiative. Members Blanton, Brown 

and Cole addressed the question of defining community banks and 

how they might be measured and described; they observed that 

characteristics of community banks include: the great diversity 

of their charter types; the different population densities of the 

communities where they operate; and, the different business models 

they pursue. Members Cole and Blanton discussed whether there was 

an optimal community bank size, and whether there was a minimum 

size to be able to comply with the regulatory requirements. 

Acting Chairman Gruenberg noted that many banks for which the FDIC 

was the primary federal supervisor were small and were concerned 

about their viability. He said that a key issue was to identify 

issues challenging them and if there were supervisory steps the 

FDIC could take to respond. 

Member Urrabazo observed that community banks serve 

divergent communities, noting that his community was 97 percent 

Hispanic; banks in such communities served different credit needs 

and that understanding the community was to understand the bank. 

He suggested that the FDIC consider holding the conference after 

the roundtables and to use the initiative to promote community 

banking. Member Cole agreed that it was important to consider 

what a bank means to the community that it served and added that 

the FDIC should ensure that community bank concerns were 

communicated to its regional offices. Member Stewart observed 

that community banks were themselves small businesses that faced 

the same challenges as other small businesses and that viewpoint 

might help guide the FDIC’s research. Member Goodlock added that, 

although community banks operated in a regulated environment, they 

remained independent businesses providing a return on investment 

to their investors. He cautioned that the FDIC’s research could 

try to identify successful models, but that it was up to a bank’s 

leadership to make the business decisions. 

Member Gray said that community banks could benefit from the 

research into models that had worked in other situations because a 

banker can become so involved in their own business plan that they 

overlook others. He added that information about models that had 

not worked would also be important. Mr. Murton agreed that the 

FDIC’s intent was to be descriptive, not prescriptive; he inquired 

about what other success measures would be useful to explore. 

Member Brown said that a bank’s ownership characteristics would be 

revealing, for example, whether a bank was family-owned or if a 

November 4, 2011 
114 

majority of its shareholders resided in the community. He 

cautioned the FDIC should avoid prescribing banking models that it 

preferred. 

Member Koch identified additional subjects the FDIC 

researchers might consider, the first being a survey in which 

bankers estimated their costs of regulatory compliance. Mr. 

Murton said that the FDIC had considered conducting a survey, 

either using examiners, or a broader survey. Members Cole and 

Goodlock opined that a survey separate from examinations would be 

better while Member Schriefer indicated that making the survey 

almost a part of an examination could be effective. Members Gray, 

Blanton and Goodlock cautioned against surveying too early because 

many regulations were unfinished and accurately estimating 

compliance costs would be difficult. Member Urrabazo said that 

many regulatory compliance costs are hidden or indirect in that 

they are included in lawyer, consultant or auditor fees. He and 

Member Hopkins indicated that it would be important for FDIC 

researchers to focus on a bank’s lines of business in comparing 

banks because different lines have different business and 

regulatory characteristics. 

Member Lewis expressed a concern about the viability of 

family-owned and other banks that have limited access to capital 

and whose borrowers are running out of liquidity. Member Rainey 

said that she greatly preferred to hear about upcoming regulatory 

and examination trends from the regulators themselves, rather than 

from consultants. In an exchange with Acting Chairman Gruenberg, 

she described a process of dialogue between the FDIC Dallas 

Regional Office outside of the examination cycle in which her bank 

is able to pose questions and hear directly from the regional 

office about its current concerns. Member Rainey said that the 

dialogue was a great resource to her bank and suggested that 

similar dialogues could be done through broader conference calls 

on specific banking subjects. Member Gray agreed that it was 

helpful for regulators to make banks aware of problems that the 

regulator was seeingin advance of an examinationso that banks 

could consider if their internal focus was appropriate to the 

problems; he noted that, historically, banks had been surprised 

about the current "hot button" examination issues. 

The Committee discussed the research aspect of the community 

banking initiative. Member Stewart observed that the FDIC has 

access to broad level data that individual banks do not have, as 

well as time to analyze the data. She said that the community 

banking sector could benefit greatly if the FDIC reviewed the data 

from the recent crisis and identified bank activities that 

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consistently did not work, or, alternately, produced strong 

results. Member Koch agreed that the FDIC’s study could be 

productive because of the FDIC’s data resources and suggested 

other subjects for consideration, including: the relationship 

between the makeup of a bank’s board of directors and the bank’s 

risk management practices; the link between compensation 

practices, incentive compensation and risk taking conduct; and the 

validity of claims that certain practices led to losses and 

troubled banks (such as out-of-market lending and loan 

participations) . Member Urrabazo suggested that another subject 

the FDIC might consider was the relationship between new capital 

requirements and their effect on banks raising capital. Member 

Brown also observed that regulators should focus on return on 

equity ("ROE") because it affects access to capital. Members 

Blanton, Goodlock, and Gray discussed whether community bank 

shareholders, who have close ties to their community, may have 

different return expectations. 

Ms. Ryan invited the Committee’s recommendations about the 

regional roundtable discussions. There was general agreement that 

the regional sessions should be structured to avoid their becoming 

forums for unfocused complaints. Members Blanton and Brown 

suggested that breaking the regional meetings into two parts could 

work well. The first part of the meeting might involve an 

information exchange between regulators and bankers and limited to 

fewer participants, perhaps identified by the state banker’s 

association. The second part of the meeting could be open to all, 

in which information from the first session, and other sources, 

could be communicated to a broader audience. Member Brown said 

that the FDIC’s Atlanta Regional Office had participated in such a 

meeting, which was very productive; about 50 people attended the 

first meeting and about 300 attended the second. Mr. Nash said 

that whether the regional meetings would be open to the media was 

an open question. Members Koch and Brown observed that the 

meetings that they described had not been open to the media. 

Member Urrabazo recommended that all community bankers have 

an opportunity to participate in some manner and suggested 

involving the state banking associations. Member Cole agreed the 

state associations could be important to help identify important 

discussion ideas and in communicating to a larger group. Director 

Curry observed that FDIC already has small-scale regional outreach 

sessions with 20-30 bankers and that the FDIC could explore ways 

to include those meetings’ results into the regional roundtables. 

In determining the size of the meetings, Member Stewart suggested 

that the FDIC be guided by the goals it wanted to achieve in the 

regional meetingswhether it was to elicit specific information 

November 4, 2011 
116 

from bankers, to communicate information out to bankers, or a 

combination. She said that a small group would encourage a 

candid, meaningful dialogue, while a large group would be more 

effective as a "tell and sell" approach. Member Rainey agreed and 

thought that both goals could be accomplished in one meeting. 

In response to Member Schriefer’s inquiry about the FDIC’s 

view of the regional meetings’ purpose, Ms. Ryan said that a goal 

was to elicit banker input, another was the "reporting out" at the 

end of the process. She added that a dialogue between bankers and 

Washington was key. Member Blanton suggested that holding the 

national conference after the FDIC had gathered information in the 

regional meetings might be effective. Ms. Ryan said that the FDIC 

was considering how to share the regional roundtable results; one 

option was a second conference after the roundtables or to present 

the results in conjunction with a Community Banking Advisory 

Committee meeting. Director Curry suggested that the project 

might involve a year of gathering information and a second year ot 

reporting out the findings. He added that the FDIC’s research 

should not overlook mutually-owned institutions, which have a 

distinct corporate organization form, are clearly tied to their 

communities, and whose capital limitations can reduce their risk 

appetite. Director Curry agreed with observations that that the 

result of the FDIC’s research should not be to identify an optimal 

form or corporate organization; as had been done in the past. 

Mr. Nash then introduced the second panel, titled "Community 

Banking by the Numbers," and its panelists, Christopher J. 

Newbury, Associate Director, DIR, Diane Ellis, Deputy Director, 

DIR, and Keith Ernst, Associate Director, DCP, who further 

discussed the specifics of the FDIC research project. Mr. Newbury 

began by reviewing a handout of six charts that provided 

historical trend information about community banking. The first 

subject Mr. Newbury discussed was the decline in the number of 

insured institutions since 1985, especially in the number of 

institutions with assets below $100 million. He observed that, in 

1985, one might have considered a community bank to be one with 

assets of $250 million or less, and that, for various reasons, one 

might now consider a community bank to have assets up to $1 

billion. Turning to a second chart, Mr. Newbury discussed sources 

of the net change in community banks from 1985 to 2010 (defining 

community banks as those with less than $250 million in assets in 

1985 and under $1 billion in 2010) . There were, he said, about 

16,000 community banks in 1985 and about 9,200 fewer in 2010. Of 

the 16,000 in 1985, about one-third of them continued to operate 

independently with assets less than $1 billion today. Mr. Newbury 

addressed why the other two-thirds of 1985 community banks would 

November 4, 2011 
lip; 

not be considered independent community banks in 2010: about 260 

had grown to have assets of more than $1 billion; about 130 had 

closed voluntarily, about 1,900 had failed, about 3,900 had 

engaged in intra-company consolidations (and thus had stopped 

having independent charters); and about 4,800 had been purchased 

by an unrelated bank and merged into it. 

Mr. Newbury then discussed five different time periods, 

noting that intra-company mergers, voluntary mergers, and failures 

had all been more prevalent at the beginning of the period, from 

1986 to 1990, and that the percentage reductions in numbers had 

steadily declined over time. Discussing a fourth chart, Mr. 

Newbury observed that banks with assets under $250 million at 

year-end 1985 had failed with less frequency than larger 

institutions over the succeeding 25 years; he added that the 

highest failure rate had been among banks in the $1 to $10 billion 

asset category. He said that one conclusion that could be drawn 

from the charts was that community banks were not going away 

faster than mid-sized banks, but that the trend was merely more 

visible among community banks because there were more of them in 

absolute numbers at the beginning. 

Ms. Ellis reviewed the questions which would guide the FDIC’s 

research. The first issue to be addressed, she said, was how to 

define a community bank, noting that the FDIC would not limit 

itself to size thresholds, but would also consider factors such as 

funding strategy, lending strategy and ownership structure. 

Another question that would be addressed was how community banks 

had changed over time. A third question would be where community 

banks are located and why, including such issues as rural 

depopulation and how it affects banking. Ms. Ellis said that the 

fourth issue would be the different types of business models used 

by community banks, including comparing them through time and 

comparing business models of small and large institutions. Mr. 

Ernst described the fifth question as an examination of the 

different products and services that community banks offer and how 

they compare to those of larger banks. The sixth question, he 

said, would consider whether community banks tended to serve sets 

of customers that are distinct from those served by larger banks. 

Ms. Ellis continued, indicating that the study would also explore 

how to measure the performance of community banks, noting that the 

FDIC would look beyond the measure of Return on Assets and ROE. 

Another question to be examined, she said, was whether and how 

local communities benefit from having a strong community banking 

presence in their area. Four other issues that would be 

considered included: developing a model that predicts the 

characteristics of successful community banks; looking at the cost 

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118 

and revenue structure of successful community banks compared to 

larger banks; considering the ability of community banks to raise 

and deploy capital; and looking at the "lessons learned" from the 

current economic crisis. Ms. Ellis added that the study would 

also review how technology affected the performance of community 

banks, and, finally, how trends in the economy (in particular, the 

small business economy) affected community banks. Ms. Ellis said 

that the FDIC had data from Call Reports and other internal 

sources, but added that researchers would be looking for 

additional data, possibly including a community bankers’ survey. 

Ms. Ellis invited feedback and additional areas of inquiry. 

Regarding the definition of a community bank, Member Blanton said 

that the primary issue was whether the majority of shareholders 

were from the community and if the important decisions were made 

by people who live and work there. In response to a question from 

Mr. Nash about a relationship between out-of-market lending and 

banks becoming troubled, Member Blanton said that there had been 

some participations and out-of-market lending where community 

banks could not find enough loan demand in their local market; he 

added that the business model of a community bank was less totally 

focused on return so that they were not forced into alternative 

lending methods beyond their expertise. Member Hopkins said that 

he was concerned about the high failure rate of community banks 

between 1985 and 2010 and inquired whether the FDIC’s research 

would identify common factors among the failed banks, for example, 

if they were de novo banks or had ownership changes. 

Member Goodlock said that he would be interested to see how 

the broader economy related to bank failures or whether failures 

were caused more by internal bank issues. Member Koch observed 

that he saw a relationship between de novo banks that failed and 

fast-growing economic markets, which have different attributes 

than other markets; he added that de novos were often started with 

the intent of "flipping" them. Member Koch, who had earlier 

remarked that community banks were "relationship" banks, not 

merely lenders, commented that the FDIC’s research should examine 

employee turnover, indicating that community banks would have 

lower turnover for comparable positions. Member Blanton observed 

that community bank stock had traditionally been viewed as an 

income investment but, in the last 20 years, had been viewed as an 

"equity play," which led to excessive chartering with the purpose 

of "flipping" the investment. He indicated that this led to an 

excess of community banks created for the wrong business purpose; 

he indicated that the industry was again viewing community banking 

stock as an income investment. 

November 4, 2011 
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Regarding whether community banks provided unique products or 

services, Member Brown said that competitors could easily 

duplicate new products so that products are not likely to be 

special for long. Regarding the FDIC’s research into identifying 

successful community banking models, he recommended reviewing 

various banking periodicals which often report on such topics. 

Member Stewart inquired whether the FDIC’s research would support 

the existence of a correlation between extremely strong 

performance for a short time and subsequent failure, indicating 

such banks’ excessive focus on short-term results. Member 

Urrabazo suggested that the research would support a conclusion 

that, when banks faced higher regulatory and other costs and 

simultaneous loss of income sources (such as interchange and 

overdraft fees) , they resorted to riskier lending practices and 

became vulnerable to economic downturns. Member Lewis inquired 

whether the FDIC tracked why community banks migrated from being 

highly rated to becoming troubled. Ms. Ellis reported that the 

FDICas part of modeling losses for the Deposit Insurance Fund 

("D1F")continually reviewed migration trends, failure rates and 

their causes. Mr. Nash and Member Brown noted that the FDIC 

Inspector General published informative Material Loss Reviews that 

examined the causes of bank failures. Director Curry suggested 

that it would be useful to consider how FDIC supervisory personnel 

try to rehabilitate a troubled institution as well as to determine 

the reasons for an ultimate failure. 

The Committee members discussed a variety of community bank 

advantages and disadvantages compared to their competitors, as 

well as the effects of the economic environment. Member Schriefer 

observed that some community bank competitors, such as credit 

unions and the Farm Credit Service, had the advantage of being 

tax-free. He said that community banks were thus encouraged to 

leave those business areas and were left with riskier lending 

opportunities; he suggested that these issues should be part of 

the research agenda. Member Stewart suggested that the research 

consider the consolidation occurring in other industries to help 

provide context and perspective for banking consolidation. Mr. 

Newbury agreed that it would be useful to examine how the small 

business economy and community banking interact. Members Blanton 

and Brown observed that new small businesses were being created as 

others declined and that they presented new lending possibilities. 

Member Gray suggested that community banks may not provide 

services unique from large banks, but that they provide a 

consistently higher service level. Member Blanton observed that a 

community bank’s greater knowledge of its community helped it 

better manage its business, but also said that being limited to a 

November 4, 2011 
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single community increased risk if the community declined. Member 

Koch agreed that service levels brought customers to community 

banks, but cautioned that, if a product can be "credit-scored," 

larger banks would be able to undercut prices. Member Koch asked 

why community banks lost attractive customers and suggested that 

it was often because the needs of a small-business outgrew the 

bank’s capabilities. Member Hopkins suggested that pricing was 

often the reason customers left; larger banks avoided a riskier 

start-up client, but undercut prices after it showed less risk. 

Member Gray posited that a community bank’s personal service and 

the continuity of its relationship with a small-but-growing 

business made it harder for larger banks to take their business. 

Member Stewart cautioned against focusing strictly on a smallbusiness banking model. She suggested that the research also 

consider consumer focused banking models and asking why community 

banks fail to attract or lose consumer clients. 

Members Gray, Blanton and Stewart discussed technology 

issues in response to a question from Mr. Nash, observing that 

community banks often offer new technologies because customers 

demand them and are disinclined to go to a bank branch. Member 

Schriefer said that there was risk that banks invest in new 

technologies but fail to invest in the risk-management needs 

connected to the new technologies. Member Cole observed that her 

bank had recently made a substantial investment in new technology 

because the market required it; she said that the investment had 

increased efficiency but that the bank had to work to minimize the 

risks associated with it. 

Acting Chairman Gruenberg inquired about recruiting capable 

staff to community banks, especially in rural areas, and how that 

interacted with other issues that had been discussed. Member 

Blanton observed that it was difficult to attract qualified 

compliance staff to small communities and that possible responses 

included outsourcing the work, or for banks in an area to share 

compliance staff and expenses. Member Urrabazo observed that 

hiring consultants was expensive and indicated that community 

banks usually trained personnel in-house. Member Gray opined that 

the challenge of recruiting qualified staff was greater in rural 

areas than in more urban ones. 

The Committee stood in recess at 10:32 a.m. and reconvened at 

10:49 a.m. that same day. 

Mr. Nash introduced the next topic, "Mobile Financial 

Services," and Jonathan Miller, Deputy Director, DCP, and Jeff 

Kopchik, Senior Policy Analyst, RMS. Mr. Miller said that mobile 

November 4, 2011 
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financial services could be divided into three groupsmobile 

banking, mobile payments, and mobile commerceand that he would 

focus on the first. He described characteristics of U.S. mobile 

telephone users: about 90 percent of adults owned a mobile 

telephone, and about 35 percent owned a "smartphone;" low-income 

households owned smartphones at the same rate as the national 

average; racial and ethnic minorities are more likely to own 

smartphones than non-minorities (44 percent of African-Americans 

and Hispanics compared to 30 percent of Caucasian Americans) . In 

addition, non-FDIC research has reported that ethnic minorities 

engaged in mobile banking more than Caucasians (46 percent of 

African-Americans, 37 percent of Hispanics, and 24 percent of 

Caucasians) . Concerning under-banked consumers, Mr. Miller said 

that they were much less likely to have a high-speed computer 

connection in their home but were more likely to use mobile 

banking; this supported the hypothesis, he said, that under-banked 

consumers were substituting mobile banking for a home computer 

based form of banking. 

Mr. Miller observed that non-banking businesses, such as 

telecommunications companies, may be attracted to being mobile 

payments intermediaries and inquired how much of a challenge that 

would be to the traditional banking model. He discussed the 

results of a 2011 community bank survey about mobile banking, 

which found that: 47 percent of community banks planned to offer 

mobile payments services before 2013 (up from 14 percent in 2011); 

and 21 percent planned to offer remote deposit capture. Mr. 

Miller said that remote deposit capture may offer a way for banks 

to create traditional bank customers out of people who previously 

used check-cashing businesses. Finally, he noted that mobile 

banking could result in lower costs; for example, citing outsider 

research, a typical branch transaction cost $4, a call center 

transaction cost $3.75, and an ATM transaction cost $.85, while a 

mobile transaction cost $.80. 

Mr. Kopchik addressed risk-management aspects of mobile 

banking; observing that mobile banking and mobile payments had 

different characteristics. Mobile banking, he said, was a more 

mature service that was used to retain customers and reduce 

expenses but was less likely to be a big revenue producer. Mr. 

Kopchik said that, for banks to be involved in mobile banking, 

they had to engage customers in all three channels: text-based 

mobile banking; internet-based mobile banking, which relied on a 

smartphone’s web-browser; and application-based mobile banking 

which required a customer to download an application onto their 

smartphone. Mr. Kopchik observed that each of the mobile banking 

channels presented unique risks, and that RMS had worked to 

November 4, 2011 
identify and categorize those risks and to explore ways to 

mitigate them. One risk in mobile banking is the involvement of 

non-banking businesses (such as telecommunications service 

providers, handset manufacturers, and mobile applications 

developers) with whom banks had not traditionally interacted. Mr. 

Kopchik said that there was a tension between banks quickly 

bringing mobile banking services to the public and engaging in 

appropriate due diligence for risks to banks and consumers. For 

example, he said, a risk in the fast-growing area of applicationbased banking was that consumers would download to their 

smartphone an application that was really "maiware," designed to 

do harm or legitimate applications that do not adequately protect 

sensitive customer information. 

Mobile payments are much less developed, Mr. Kopchik said. 

One type was "proximity mobile payments," in which a smartphone is 

waved over a retailer’s point-of-sale terminal and substitutes for 

a credit card. Another type was "remote mobile payments," in 

which two smartphones interact to allow an exchange of value from 

one account to another. Regarding proximity mobile payments, Mr. 

Kopchik said that there was a lack of infrastructure in place for 

them. Mr. Kopchik said that the current credit card system worked 

reasonably well, and inquired whether proximity based mobile 

payment systems might be a "solution looking for a problem." Mr. 

Kopchik also spoke about the possibility of "disintermediation," 

where mobile payment systems are developed without the inclusion 

of financial services firms at all. He inquired whether the 

banking industry viewed disintermediation as a serious issue and, 

if so, how it might respond. 

Member Blanton observed that U.S. credit card technology had 

not adopted the European chip technology and said that embedding a 

chip into a smartphone was a natural evolution, and consistent 

with the younger generation. He provided an example of a business 

switching its payroll system to prepaid debit cards instead of 

paper checks, and said that this approach would be helpful for the 

needs of that workforce. Members Blanton and Goodlock discussed 

the issue of whether a bank or non-bank held the money balance in 

prepaid debit card accounts. Member Goodlock said that, if the 

balances were held outside of banks, that disintermediation of 

banks from the payment system was already occurring; he added that 

prepaid debit cards were a consumer-driven product more than a 

bank-driven product. Member Stewart said that banks had been 

complacent and thought that they controlled the payment system 

when they may not. She discussed volunteer work she did with lowincome families and observed that, while few had landline 

telephones or bank accounts, most had mobile telephones and used 

November 4, 2011 
I ’) 

prepaid debit cards; she said that, if community banks wanted them 

as customers, then the banks would have to incorporate the use of 

mobile telephones and alternate payment system technologies. 

Member Urrabazo said that his bank had success in providing 

hands-on instruction to underbanked customers who had been 

reluctant to use technologies that his bank offered, such as ATMs 

and debit cards. Once the instruction was given, he said, the 

customers found the technologies easy to use; he added that such 

underbanked customers were a large potential market for community 

banks. Members Schriefer and Miller expressed concern about the 

loss of personal information to non-bank providers, such as 

Google, who used the information for other business purposes. 

After discussing with Member Blanton how some people appeared 

unable to safely handle bank accounts, Member Goodlock inquired 

whether it was good policy for most Americans to have standard 

checking accounts. Member Stewart responded that she thought that 

a banking relationship was different than just a traditional 

banking account, and that community banks would have more to risk 

by failing to adopt new technologies than by adopting them. Mr. 

Kopchik inquired whether some disintermediation of banks occurred 

because banks and other businesses, such as wireless 

telecommunications providers, traditionally had little interface. 

Member Stewart observed that it would be difficult for a community 

bank to get the attention of a telecommunications company. 

Mr. Nash inquired if Members’ banks offered mobile banking. 

Member Brown said that his bank had invested substantial resources 

to offering remote deposit capture for small businesses and 

mitigating the risks involved; he added that mobile banking also 

raised the issue of costs, especially at smaller banks. He added 

that, although mobile banking was increasing, he did not perceive 

that his bank was losing customers because it did not offer it. 

Member Brown noted that younger people may be more attracted to a 

mobile banking application than to using a bank’s branch. Member 

Blanton indicated that bankers who focused on traditional banking 

concerns, for example, obtaining signature cards, may not be able 

to successfully adapt to mobile banking issues. Member Goodlock 

indicated that consumers may not share the risk-focused paradigm 

under which banks and regulators operated. He said that consumers 

may adopt mobile banking systems that have less focus on risk 

mitigation than banks can offer, thus causing banks to lose more 

control over payments systems. 

In response to a question from Mr. Nash, Mr. Kopchik said 

that the FDIC had assembled some information to alert examiners 

about possible mobile banking risk issues. Member Rainey said 

November 4, 2011 
1’) 

that it would be helpful if the FDIC would share such resources so 

that bankers could be alerted to those risks; Acting Chairman 

Gruenberg said that the FDIC would try to compile useful 

information for distribution. Mr. Kopchik said that the FDIC had 

been alarmed at recent reports that there had been a 400 percent 

increase in mobile banking malware in 2011. He said that most of 

the maiware had been obtained in a marketplace for mobile 

applications that appeared to be trustworthy but was not wellregulated; he advised that consumers should download applications 

only from their bank’s website. Member Urrabazo said that, in his 

bank’s experience, most frauds were originating at third parties 

and that relatively few problems had originated on the bank’s 

website or in its mobile banking area. 

Mr. Nash introduced George French, Deputy Director, RMS and 

Mindy West, Acting Associate Director, RMS, to lead the discussion 

of "Supervisory Issues: Capital and Concentration Risk." Mr. 

French began by observing that a fundamental shift was occurring 

in the area of regulatory capital. In the past, he said, the 

largest banks had operated with the lowest capital levels because 

of their size and perceived diversification, and within the last 

ten years, regulations would have allowed the largest banks to 

have lower minimum capital requirements. In the wake of the 

recent crisis, however, he said the largest banks would have to 

meet higher minimum capital requirements and the historical 

capital level gap between large and small banks could be expected 

to dramatically narrow. Among the reasons, Mr. French said, were 

the "Collins Amendment" to the Dodd-Frank Wall Street Reform and 

Consumer Protection Act ("Dodd-Frank Act") which requires that the 

capital requirements applied to community banks act as the floor 

for the capital requirements applicable to bank holding companies 

and large, internationally active banks. A second reason, he 

said, was Section 165 of the Dodd-Frank Act, which requires bankholding companies with assets of $50 billion to maintain higher 

capital. Mr. French said that a third reason was the more 

detailed requirements of "Basel III" which aims to control 

systemic risk by requiring large banks to hold enough capital to 

address the risks they pose to the economy. A fourth reason, he 

said, was the capital surcharge applied to "systemically important 

financial institutions," that would range from 1 to 2.5 percent of 

risk-weighted assets. These reasons, as well as additional Federal 

Reserve requirements concerning stress-testing and capital 

planning, Mr. French said, were creating a fundamental shift in 

favor of community banks. Although the Basel III requirements 

would not be a "non-event" for community banks, he said, the 

FDIC’s analysis, for the most part, indicated that community banks 

were already in compliance with those standards. 

November 4, 2011 
1- ’;_’5 

Ms. West spoke about concentration of risks, noting that if 

they were not properly managed, they could put capital at risk. 

She said that, during the recent crisis, the FDIC saw that many 

banks with concentrated commercial real estate ("CRE") portfolios 

had been at higher risk of failure than less concentrated ones. 

She inquired about the tools that Committee members used for 

managing concentration risks, and in particular whether they used 

some form of stress testing. In response to a question from 

Member Koch, Ms. West and Mr. French discussed the 2006 joint 

agency guidance regarding when CRE concentrations existed and the 

heightened risk management practices banks should take to respond. 

Member Blanton observed that most bankers had a good 

understanding of concentration risk given the recent focus on it, 

but said that memories could lapse when the economy recovered. 

Member Schriefer observed that many banks in agricultural 

communities had a de facto agricultural lending concentration but 

appeared to be managing the risk reasonably well. Ms. West 

indicated that concentrations were not inherently bad; the key was 

how a bank managed its concentration. 

Member Brown expressed concern that regulators would expect 

community banks to engage in stress-testing despite earlier agency 

statements that it would not be required; his impression of 

stress-testing models was that they were flawed and unnecessarily 

negative. Mr. French observed that stress-testing was an 

important subject among regulators because the Dodd-Frank Act 

required it for banks with over $10 billion in assets but that he 

did not think that those requirements would trickle down to 

community banks. However, he said, supervisory expectations were 

expressed in the 2006 CRE guidance (and in a 2001 guidance on 

subprime lending) which indicated that banks with high 

concentrations should stress-test their portfolios to determine 

how the concentrations would behave in bad economic conditions. 

Mr. French observed that community banks may be unclear whether 

they were concentrated or how to conduct a stress-test and 

inquired if additional examples or definitions would be helpful; 

he noted that it was important that a stress-test be relatively 

simple to perform and that it provide value for a concentrated 

bank. Members Brown and Urrabazo indicated that vendor-supplied 

stress tests may not be accurate or useful without expensive 

customization. Mr. French agreed that regulators did not want to 

impose complex, numbers-driven exercises that added no value, but 

said that, if a bank is highly concentrated, it needed to consider 

the effects of a difficult economic environment. 

November 4, 2011 
g 

Members Urrabazo and Brown observed that community banks had 

relatively few areas in which to diversify their lending because 

they could no longer compete on consumer loans, automobile loans 

and because residential real estate lending was handled as passthroughs. Member Brown added that commercial and industrial loans 

were currently experiencing rapid default and loss rates. He 

cautioned against encouraging banks to, in effect, switch from one 

area of concentration (such as CRE) to another. Member Blanton 

observed that his bank did a risk underwriting at annual reviews 

of its customers by business lines; he said that that underwriting 

was, in effect, stress-testing. Members Urrabazo and Gray 

recommended distinguishing between owner-occupied CRE and more 

speculative investor CRE which presented different risk profiles 

if real estate values declined. Member Stewart indicated that 

thrifts faced a similar distinction in their residential real 

estate lending between borrower and non-borrower occupied homes. 

She added that most thrifts managed their residential mortgage 

concentration risks more by managing the underwriting risks than 

through stress testing. Ms. West agreed that lenders who live in 

the communities where they lend engage in ongoing stress testing 

by knowing and being in their communities. 

Mr. Nash said that the FDIC often heard that the Basel III or 

Dodd-Frank Act requirements would have an adverse effect on 

community banks and invited members to share concerns in that 

area. Member Hopkins said that he was troubled about the Easel 

III limitations on mortgage servicing rights as a percentage of 

capital. He said that a smaller bank had to achieve a certain 

volume of mortgage servicing in order for it to be viable but 

that, if the bank had limited access to capital, it might be 

forced out of mortgage servicing, thus leaving the business to big 

servicers who did not perform the work as well. Members Stewart 

and Brown agreed that the capital limitations could be a factor 

for community banks or thrifts in determining whether to engage in 

mortgage servicing. Members Hopkins and Stewart added that the 

new mortgage servicing requirements would impose a standardization 

that could also discourage community banks from engaging in that 

business. Member Stewart observed that, if community banks did 

not service mortgages that they originated, they would lose 

another connection with a potential client for other business. 

She recommended that regulators reconsider both the mortgage 

servicing capital limitations and the mortgage servicing standards 

for their impact on community banks. Member Schriefer expressed a 

concern that regulators were developing an expectation that a bank 

would have a senior "risk officer" rather than allowing the bank 

to handle risk functions based on the bank’s circumstances. Ms. 

West said that there was no requirement for a separate risk 

November 4, 2011 
t’ 

officer; regulators recognized that there was an issue of 

proportionality involved so that a smaller institution could 

manage risk in a way appropriate to it. 

Mr. Nash and Deputy General Counsel Roberta McInerney then 

moderated a panel titled "Legislative and Regulatory Update." Mr. 

Nash said that there would likely be light legislative action in 

Congress in 2012; Congress would continue to oversee the agencies 

implementation of the Dodd-Frank Act but that the election year 

may result in fewer proposals being enacted. Ms. McInerney 

provided an overview of the FDIC regulation drafting process with 

a focus on Dodd-Frank Act initiatives. She noted that many 

regulations are required by statute. For example, three important 

FDIC regulations were required by the Dodd-Frank Act: the 

"Volcker" rule; the credit risk retention rule; and the incentive 

based compensation rule. Rules can also be prompted by industry 

clarification requests or because the FDIC identifies a need. Ms. 

McInerney emphasized that FDIC leadership and staff are attuned to 

the effect of regulations on banks, especially community banks, 

and try to minimize burdens; she also emphasized the importance of 

public and industry involvement in rule development. 

Ms. McInerney said that the FDIC often uses interdivisional 

teams to draft rules, with one division being given the lead for a 

rule and receiving support from others. The teams gather 

information through various types of research, including 

conducting studies and meeting with experts in the affected 

fields; for example, in preparing for the incentive based 

compensation rule, FDIC staff met with compensation specialists 

from around the country. While drafting proposals, the 

interdivisional or interagency teams meet as often as necessary, 

typically once a week, but occasionally every day, and share their 

work product with other divisions, FDIC leadership, and other 

agencies where appropriate. For some regulations, such as the 

Volcker rule, the Financial Stability Oversight Council ("FSOC") 

has a consultative role; Ms. McInerney noted that the FSOC, which 

includes three non-voting state banking and insurance regulators 

as well as a variety of federal financial regulators, provided a 

helpful perspective that was not always formally included in the 

past. She said that the drafting process involves considerable 

give and take, including research into costs and benefits and a 

search for alternative ways to achieve goals more efficiently. 

The members of the FDIC Board of Directors are briefed on and 

provide input into a rule’s contents, and the Board formally votes 

on the proposed rule before it is published for public comment. 

Ms. McInerney said that public comment was very importantshe 

noted that the risk retention rule received about 11,000 comments. 

November 4, 2011 
I ’) 

I’ 

Staff analyzes comments and considers how the regulation could be 

redrafted or reframed to respond to them; staff then briefs the 

FDIC leadership, who may consult with other agency leaders. 

In response to a question from Member Urrabazo, Ms. McInerney 

and Acting Chairman Gruenberg discussed the progress that the FDIC 

had made on the 44 regulations that it was involved in drafting 

pursuant to the Dodd-Frank Act. Acting Chairman Gruenberg said 

that all 18 of the rules for which FDIC had sole responsibility 

were essentially complete and being implemented, these included: 

increasing deposit insurance coverage to $250,000; changing the 

deposit insurance assessment base from a deposit focus to an asset 

focus; and the rules which apply to systemically important 

financial institutions. Regarding the change to an asset based 

assessment for deposit insurance, he noted that many community 

banks would experience a 30 percent reduction in their premiums as 

a result of the rule. Ms. McInerney noted that the agencies were 

making good progress on joint agency rules and that essentially 

all the statutory deadlines had been met. In response to a 

question from Member Stewart, she noted that there were limited 

statutory penalties for missing a deadline but that agency staffs 

nonetheless took the deadlines very seriously. Acting Chairman 

Gruenberg added that his periodic testimony before Congress (and 

those of other agency leaders) tended to act as an enforcement 

mechanism for agencies to meet their deadlines. 

Member Urrabazo observed that it was difficult for community 

banks to digest long and complex rules to determine whether the 

rule, such as the Volcker rule, applied to them. He added that a 

further problem was that, although a rule appeared not to apply to 

a community bank when it was written, later interpretations tended 

to impose requirements on community banks. Member Urrabazo said 

that bankers often relied on the American Bankers Association or 

state industry groups to assist in interpreting the regulations; 

he encouraged the FDIC to provide clear guidance on a rule’s 

applicability to community banks. Ms. McInerney noted that the 

FDIC had begun providing such guidance on Financial Institution 

Letters ("FIL") that distributed new rules to banks and also 

indicated that FDIC staff was available to answer bank questions 

about rules. Ms. McInerney also said that the FDIC tried to 

provide "bright line" guidance about when a rule would or would 

not apply to a bank. In response to a question from Member Koch, 

Ms. McInerney and Acting Chairman Gruenberg discussed the 

application of section 23A of the Federal Reserve Act regarding 

limitations on the transfer of assets from an affiliate to an 

insured institution. They noted that, if the transfer exceeded a 

ten percent of capital limit, the Federal Reserve’s practice had 

November 4, 2011 
I )i1 

I’

’

. i 

been to consult with the FDIC; pursuant to the Dodd-Frank Act, 

such consultations would be required beginning July 21, 2012. 

The Committee stood in recess at 12:23 p.m. and reconvened at 

1:53 p.m. that same day. 

Mr. Nash reintroduced Sylvia Plunkett and James Watkins who 

lead the discussion regarding "Gaining Efficiencies in the 

Examination Process." Ms. Plunkett noted that the FDIC used a 

"scoping" process to differentiate community banks from larger, 

more complex banks and that examiners were required to perform a 

risk profile of each bank to identify what its risks were. Ms. 

Plunkett said that a bank’s examination should respond to the 

products and services that the bank offered. She also said that 

the FDIC would try to improve its communications to banks about 

what would be expected in future examinations. Mr. Watkins said 

that RMS had recently asked its examiners and supervisors to try 

to identify areas that could be streamlined. 

Mr. Watkins agreed with earlier comments that the FDIC could: 

provide better communications about its initial risk assessments; 

clarify some of its guidance, especially in technical or 

accounting areas; and provide the industry with quicker feedback 

on developing examination issues. Mr. Watkins discussed FDIC 

practices regarding banks facing difficulties; he noted that 

relatively minor problems could be addressed by an examiner asking 

a bank’s board of directors to review an issue and provide a 

written response about it; in more serious cases, the FDIC might 

enter into an informal agreement with the bank; and, if there were 

quite pronounced problems, the FDIC might pursue a formal action 

such as a consent order. He noted that, in most cases, a bank’s 

problems are successfully resolved. Mr. Watkins said that the 

FDIC aimed to be as responsive to a bank’s improvements as to its 

problems; thus, if a bank was recapitalized or improved its 

financial standing, the FDIC would try to provide timely and 

appropriate upgrades and release the institution from constraints 

that might have been imposed. 

Member Lewis said that his bank had recently experienced a 

relatively complex merger and that an examiner had become familiar 

with the bank’s circumstances during the FDIC’s review. He said 

that it would be time-saving if the same examiner who was familiar 

with his bank was assigned to the next examination. Mr. Watkins 

agreed and noted that, because the FDIC has 86 field offices, many 

examiners are already familiar with the economic circumstances of 

a bank’s community. Member Brown made two observations about a 

bank’s pre-examination submission of information to the FDIC. 

November 4, 2011 
LO 

First, he said that it recently appeared that examiners had not 

fully reviewed the information off-site before arriving at the 

bank; he said that since the bank had limited space to accommodate 

examiners, more offsite review would increase an examination’s 

efficiency. Second, he noted that an FDIC request for information 

can occur as long as 90 days before the examination; he said that, 

with such a long lead time, it was possible that policies or 

procedures would be stale by the time the onsite examination 

began. Member Brown added that he thought that the of f site review 

of bank information was generally a good process. 

Member Blanton said that the contact between examiners and 

the bank to clarify the pre-examination information helped create 

a rapport between the parties before the onsite examination began. 

He contrasted such a situation with one in which the examiners had 

not made contact with the bank before coming onsite; in that case, 

he said, the examiners had experienced a technical difficulty 

obtaining information that could have been addressed by the bank 

in the pre-onsite period. Member Urrabazo added that examiners do 

not always acknowledge the receipt of the information that they 

requested or if the information provided fulfilled their needs. 

He also inquired about FDIC time guidelines for the FDIC to 

respond to information that it had received and for completing 

examination reports. Mr. Watkins said that there were statutory 

deadlines for acting on various applications but not on completing 

an examination. He and Ms. Plunkett agreed that it was a good 

practice for examiners to acknowledge receipt of information and 

its adequacy. 

Ms. Plunkett had earlier inquired about the effectiveness of 

the FDIC’s communications to banks about new and important 

subjects, in particular, whether FILs were useful. Member Rainey 

complimented the use of the Frequently Asked Questions ("FAQ") 

format in describing supervisory expectations about overdraft 

payment programs, which she found very helpful because it provided 

sufficient detail and was in an accessible presentation. She and 

Ms. Plunkett noted that the FAQ5 followed a nationwide call-in 

between the FDIC and bankers which helped identify the areas that 

would benefit from further clarification. Member Rainey also 

suggested that, when new areas of supervisory concern developsuch 

as the mobile banking issues raised earlier in the meetingthat 

the FDIC share its observations with bankers, as well as 

examiners, so that banks are not surprised in examinations. 

The Committee also discussed the timeliness of examination 

reports. Member Blanton observed that in Georgia, where the 

presence of more troubled banks results in more frequent 

November 4, 2011 
examinations, a bank may face a new exam before it has received 

the previous report. Member Urrabazo noted that a bank may not 

know what direction it needs to pursue if a problem was identified 

but the report has not been issued. Member Hopkins, whose bank is 

supervised by the 0CC, questioned whether the FDIC and 0CC 

operated under different philosophies. He said that 0CC findings 

are reviewed and virtually agreed upon before their examiners 

leave the bank; he likened that relationship to what his bank had 

with its auditorsproblems, resolutions, and the bank’s commitment 

to fix the problems all occurred at one time. Member Hopkins said 

that his bank generally received its examination report within 

three weeks and that his bank had quarterly communications with 

its examiner-in-charge which helped identify and resolve problems 

quickly. 

Mr. Nash and Mr. Watkins said that the timeliness of 

examination reports was an issue that was being addressed. Mr. 

Watkins observed that untimely reports were less helpful than 

timely ones; he said that many regions issue their reports within 

60 to 90 days, but that there were exceptions. He noted that FDIC 

field offices could issue reports for banks with a certain risk 

level and that larger banks, or those with higher risk levels, 

were also reviewed at regional offices. Mr. Watkins noted that 

the examination process usually involved a closeout meeting in 

which the examiner would meet with the executives of the bank and 

provide preliminary findings and ratings. Member Brown observed 

that his bank had experienced long delays a couple years before 

but that its most recent examination report was promptly received. 

About exit interviews, he added that examiners often provided 

complimentary remarks about the bank’s progress on various issues 

but said that those positive remarks "never" made it into the 

written reports; he said that his board of directors had commented 

on the written reports’ more negative tone. 

Member Brown and Mr. Watkins also discussed the need for the 

FDIC to provide clarification about the proper accounting 

treatment for troubled debt restructuring ("TDR") . Member Brown 

said that TDRs had become a matter of focus lately and that the 

uncertainty of supervisory treatment resulted in banks being 

reluctant to work with borrowers. Mr. Watkins said that the FDIC 

had received a number of inquiries about TDR5 and that it was 

arranging a nationwide call-in between the FDIC’s Chief Accountant 

and banks’ chief financial officers. He added that the FDIC’s 

basic message to its examiners was to be balanced and reasonable. 

Mr. Nash told the Committee that the FDIC often heard from 

Members of Congress or other public officials that "regulators" 

November 4, 2011 
132 

were not letting banks lend money and asked members to provide 

examples of how regulators might be thought to discourage lending. 

Members Goodlock and Urrabazo provided examples of changes to 

flood zone maps by the Federal Emergency Management Agency 

("FEMA") which caused the bank to respond in a way that made its 

security interest less secure. Member Goodlock provided a second 

example involving making an unsecured loan on real estate rather 

than requiring the borrower to comply with mortgage regulatory 

requirements. He added that, occasionally, a banker might use 

regulatory difficulty as a convenient excuse for not making a loan 

that the banker did not want to make. Member Blanton said that 

his bank was mindful about concentration risk issues, but 

indicated that it would still make loans if they were good 

credits. Member Brown said that examiners’ aggressive comments 

about CRE concentration risk in an exit interview had negatively 

affected the willingness of his board of directors to make CRE 

loans. In the subsequent examination, the examiners’ statements 

were more temperedencouraging the bank to mitigate its 

concentration risk, but not to pass up good loansand had a 

positive effect on the bank board’s willingness to make CRE loans. 

Member Brown recommended that regulators recognize that their 

statements, whether in examinations or in speeches, can have a 

tremendous impact on lending and adjust their statements 

accordingly. 

Members Cole, Urrabazo and Blanton noted that fair lending 

compliance concerns could restrain lending in certain situations. 

They noted, for example, that if a borrower’s credit score does 

not meet the lending criteria, the bank may be reluctant to act on 

its knowledge of the borrower’s good credit history because of 

concerns that its decision would be difficult to explain in a fair 

lending review. Member Goodlock also indicated that new appraisal 

requirements, even in a refinance without new money, can create a 

reluctance to lend. Member Stewart added that uncertainty about 

capital level requirements could discourage lending; she said that 

a bank now had to consider each possible loan against its limited 

capital supply, a situation not present a couple years ago. 

In response to Member Schriefer’s inquiry about the status of 

unlimited deposit insurance for non-interest bearing accounts, Mr. 

Nash said that, pursuant to the Dodd-Frank Act, the insurance 

would cease at the end of 2012, and that he was not aware of any 

current industry efforts to continue it. Ms. Ellis noted that 

there was some interaction between the extension of that insurance 

coverage and when the DIF would meet its 1.15 percent reserve 

ratio requirement. The FDIC currently projected that the DIF 

would achieve the 1.15 reserve ratio in 2018 and that the 

November 4, 2011 
133 

insurance assessment rates could be lowered somewhat then; 

however, if the unlimited coverage of non-interest bearing 

accounts was extended, that exposure might delay the projected 

2018 date for lowering the assessment rates. 

In the "Roundtable Discussion," Mr. Nash invited Committee 

members to provide information about their local economies and 

banking conditions. Member Schriefer described the conditions in 

Kansas as muddling along; agriculture was relatively strong, as 

was energy development, but the Wichita aviation industry was 

flat. Member Goodlock observed that Michigan has a diverse 

economy, so that while the Detroit area was on the cusp of 

failure, western Michigan had fair growth. Regarding housing, he 

noted that in many cases it made economic sense to tear down 

foreclosed housing rather than rehabilitate it. Member Hopkins 

reported that South Dakota was doing well, that agriculture was 

doing well although commercial sectors were not; although loan 

demand was soft, there was some growth. Member Cole said that the 

Tennessee economy was varied, unemployment was in the single 

digits statewide but higher in some areas; she said that consumer 

confidence was a primary problem. Member Brown said that the 

Florida economy was stabilizing, but not yet stabilized. He noted 

that property appraisals were improving in some areas but 

declining in others; that there had been some positive absorption 

on CRE; and that a selection of area banks had recently gone from 

losing money to a profit. Member Lewis said that in the Tucson, 

Arizona area, unemployment was down to about seven percent and 

that an increasing number of economic positive signs were 

occurring. Member Urrabazo said that some areas of Texas were 

improving while pockets of urban areas still struggled; his area 

of south Texas had seen a significant increase in oil and gas 

exploration. He said that real estate continued to struggle; many 

people could not qualify for loans and that prices would likely 

drop. He said that unemployment rates remained steady and that he 

believed that Texas had seen the economic bottom. 

Member Blanton said that the South Carolina economy would 

likely stay difficult for awhile but that it had probably bottomed 

out; he said that he expected elevated banking losses for a couple 

years and that it was becoming apparent which banks would and 

would not survive. Member Rainey reported that New Mexico 

continued to struggle economically, and that the northern part of 

the state was not diversified so as to be able to lead a recovery. 

In real estate, she said that there were very few transactions and 

that appraisals were occasionally half of what construction costs 

were. Member Gray said that California was in poor condition and 

getting worse, the unemployment rate was about 12 percent and 

November 4, 2011 
134 

there was significant excess housing. He noted, however, that the 

state was diverse and that some areas were improving while others 

continued to decline. Member Gray said that there had been little 

loan growth in the first part of the year but that the third 

quarter showed an eight percent growth over the previous year. 

Member Stewart said that Washington State was diversified 

economically and was near the bottom of the trough if not already 

there; she said that while the statewide unemployment rate was 

about 9.6 percent, it was lower in the Seattle area. Concerning 

community banks, she said that she was encouraged that some that 

had come close to failure had attracted outside capital. Member 

Koch said that the South Carolina economy was bouncing along the 

bottom but noted that he was more optimistic due to several large 

employers moving into the area. He said that double-digit 

unemployment remained and that there were concerns about a doubledip in coastal housing values. Member Koch added that most banks 

were merely muddling through the situation but some were doing 

quite well. 

Acting Chairman Gruenberg thanked the Committee for an 

extremely helpful meeting. Director Curry added particular thanks 

to the departing members of the Committee for their advice and 

counsel. 

There being no further business, the meeting was adjourned at 

2:59 p.m. 

Robert E. Feldman 

Executive Secretary 

Federal Deposit Insurance Corporation 

And Committee Management Officer 

FDIC Advisory Committee on Community 

Banking 

November 4, 2011 
Minutes 

of 

The Meeting of the FDIC Advisory Committee on Community Banking 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

November 4, 2011 - 8:38 A.M. 

I hereby certify that, to the best of my knowledge, the attached 

minutes are accurate and complete. 

Acting Chairman 

Martin J. Gru(nbe 

Board of Directors 

Federal Deposit Insurance Corporation 

Dated: February 2, 2012