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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

July 23,2014 - 9:00 AM.

The meeting of the FDIC Advisory Committee on Community Banking ("Committee")

was called to order by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation

("FDIC") Board of Directors.

The members of the Committee present at the meeting were: Robert F. Baronner, Jr.,

President and Chief Executive Officer ("CEO"), Bank of Charles Town, Charles Town, West

Virginia; Cynthia L. Blankenship, Vice Chairman and Chief Operating Officer, Bank of the

West, Grapevine, Texas; Pedro A Bryant, President and CEO, Metro Bank, Louisville,

Kentucky; Leonel Castillo, President and CEO, American Bank of Commerce, Provo, Utah;

Carolyn "Betsy" Flynn, President and CEO, Community Financial Services Bank, Benton,

Kentucky; Jane Haskin, President and CEO, First Bethany Bank & Trust, Bethany, Oklahoma;

James Lundy, Chief Executive Officer, Western Alliance Bank, Phoenix, Arizona; Kim D.

Saunders, President, CEO and Director, M & F Bancorp, Durham, North Carolina; Dorothy A

Savarese, President and CEO, Cape Cod Five Cents Savings Bank, Orleans, Massachusetts;

David Seleski, President, CEO and Director, Stonegate Bank, Fort Lauderdale, Florida; Mark

Stevenson, President and CEO, Capital Pacific Bank, Portland, Oregon; Alan Thian, President

and CEO, Royal Business Bank, Los Angeles, California; and Derek Williams, President and

CEO, First Peoples Bank, Pine Mountain, Georgia.

Mark Hesser, President, Pinnacle Bank, Lincoln, Nebraska and Joseph G. Pierce,

President and CEO, Farmers State Bank, Lagrange, Indiana were absent from the meeting.

Members ofthe FDIC Board of Directors present at the meeting were: Martin J.

Gruenberg, Chairman, Thomas M. Hoenig, Vice Chairman and Jeremiah O. Norton, Director

(Appointive). Corporation staff who attended the meeting included: Willa M. Allen, Steven O.

App, Stephen Beard, Luke H. Brown, Richard A Brown, Patricia A Colohan, Kymberly K.

Copa, Alice Chang, Lynn B. Dallin, Christine M. Davis, Patricia B. Devoti, Doreen R. Eberley,

Bret D. Edwards, Diane Ellis, George E. French, Suzy S. Gardner, Shannon N. Greco, Michele

A Heller, Chuck Hunter, Jessica A Kaemingk, Arleas Upton Kea, Alice J. Leslie, Alan W.

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Levy, Christopher Lucas, Roberta K. McInerney, Jonathan N. Miller, Rae-Ann Miller, Kathy L.

Moe, Robert W. Mooney, Mark S. Moylan, Christopher J. Newbury, Thomas E. Nixon,

Elizabeth Ortiz, Richard J. Osterman, Jr., Mark E. Pearce, Sylvia H. Plunkett, Claude A. Rollin,

Barbara A. Ryan, Robert Storch, James C. Watkins, and Cottrell L. Webster.

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

Comptroller of the Currency ("OCC") was also present at the meeting.

Chairman Gruenberg welcomed the Committee and provided an overview ofthe day's

agenda. The topics that would be discussed, he said, included an update on the FDIC's

community banking initiatives; a discussion of minority depository institutions and facilitating

partnerships between them and community banks; a panel focused on recently issued supervisory

guidance; a presentation on a review of FDIC regulations pursuant to the Economic Growth and

Regulatory Paperwork Reduction Act of 1996; and a discussion of guidance about commercial

real estate ("CRE") concentrations. Chairman Gruenberg welcomed Pedro Bryant as a new

member of the Committee.

Chairman Gruenberg then introduced Chief of Staff Barbara Ryan, who moderated the

day's proceedings. Ms. Ryan in tum introduced Doreen Eberley, Director, Division of Risk

Management Supervision ("RMS"), Mark Pearce, Director, Division of Depositor and Consumer

Protection ("DCP"), and Diane Ellis, Director, Division of Insurance and Research ("DIR") who

led the panel titled, "Update on Community Bank Initiatives." Ms. Eberley highlighted four

community banking actions that RMS had taken since the last meeting. First, she said that RMS

had mailed the information packages that were previously discussed to all state non-member

financial institutions and had received positive feedback regarding them. Second, Ms. Eberley

said that RMS was considering two tracks for obtaining feedback about the technical assistance

videos. In the shorter term, RMS was considering mailing a survey to each financial institution;

in the longer term, RMS was considering using an instant feedback mechanism on the YouTube

channel after a person had watched an FDIC technical assistance video. She said that RMS was

working on a vendor management video and planned another video on any changes that may

occur on the allowance for loan and lease losses ("ALLL").

The third item Ms. Eberley discussed was a "myth-busting" section to the Directors'

Resource Center of the FDIC webpage. The myth-busting would respond to and clarify common

concerns that bankers raise to the FDIC at outreach events concerning the FDIC's supervisory

expectations. She said that, for example, there may be requirements applicable to larger

institutions (such as stress testing) that consultants imply will eventually become required for

smaller institutions when that is not the FDIC's expectation. Ms. Eberley said that the mythbusting section of the webpage would help clarify the FDIC's expectations; she noted that the

FDIC's risk management expectations for community institutions are described in Part 364 of

the FDIC's regulations and that the FDIC did not want banks to spend money to comply with

nonexistent requirements. The fourth item Ms. Eberley highlighted was the Supervisory Insights

Journal ("SI.1") which is intended to provide helpful explanations or interpretations of the

FDIC's views. She said that a recent SIJ included some myth-busting concerning the need to

engage consultants and how banks can use technical assistance videos to train their staffs to be

able to conduct internally some of the independent reviews required by interagency guidance.

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Another major article reviewed matters that require the attention of bank boards and trends that

the FDIC sees in that regard.

Mr. Pearce said DCP was working on technical assistance videos concerning compliance

with the new mortgage lending rules based in part on DCP's early experience examining banks

under the new rules. He said that the mortgage videos would start with the subjects of ability to

repay ("ATR") and qualified mortgages ("QM") and would try to ensure that community bankers

were aware of the exemptions and special considerations that may apply to them. Other

mortgage videos will include the mortgage servicing rules and loan originator compensation, he

said.

Mr. Pearce said that DCP will also make contributions to the myth-busting section ofthe

webpage, addressing such topics as character-based lending and fair lending enforcement.

Concerning FDIC fair lending enforcement and referrals to the Department of Justice ("DOJ"),

Mr. Pearce said that the FDIC had not changed its guidance recently and that most institutions

were managing their compliance effectively. Contrary to what DCP representatives heard at

banker outreach events concerning a rumored FDIC intent to "ramp up" enforcement and DOJ

referrals, there was actually a downward trend of referrals in recent years reflecting banks'

effective compliance management.

Ms. Ellis said that, while DIR continued its work on community bank research projects,

(including subjects such as branching trends and de novo banks), she wanted to highlight the

addition of a community bank section to the FDIC's "Quarterly Banking Profile" ("QBP")

publication. She explained that in order to better understand community banks, community bank

data needed to be separated from the aggregate banking data which is greatly affected by the

largest banks' data. Ms. Ellis said that the QBP community bank section used the same

definition of community banks that DIR had been using in its recent research (which is not

strictly based on asset-size, but also considers if banks are relationship-based lenders, rely upon

core deposits and are not geographically dispersed). Under that definition, she said that there

were 6,234 community banks, which make up 93 percent of all insured institutions and hold

about 14 percent of industry assets. Ms. Ellis said that community banks reported $4.4 billion in

net income in the first quarter of2014, down 1.5 percent from the previous year, but far less a

decline than the 7.6 percent decline for the industry as a whole. She noted that community bank

net interest income increased at a faster pace than the aggregate industry and that community

bank loan growth was nearly one percent higher than the industry as a whole. Ms. Ellis said that

the QBP made special note of community bank small business lending; community banks hold

about 45 percent of small loans to business. She said that DIR intended to continue the separate

community bank section in future QBPs and welcomed feedback about it.

In response to a question from Member Stevenson, Ms. Ellis clarified that the FDIC's

data allows it to identify small loans to businesses, but not loans to small businesses. She said

that the FDIC defined small loans to businesses as loans to commercial borrowers up to $1

million and farm loans up to one-half million dollars. Member Saunders indicated support for

the myth-busters addition to the FDIC webpage and inquired if it would be required reading for

examiners. Ms. Eberley said that RMS had its examiners view everything that was produced as

technical assistance; for example, examiners watched and discussed technical assistance videos

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in groups so that they would be able to answer banker questions about the contents. Similarly,

she said, examiners reviewed the information packets that were sent to all banks (before they

were sent) so that they would be able to discuss them with bankers.

Member Savarese observed that there continued to be divergent interpretations of issues

among examiners --especially on the compliance side, and among regions. She said that

inconsistent interpretations can lead to tense moments during examinations, times in which

bankers try to maintain a constructive relationship with examiners and not engage in unnecessary

disputes. She said that the myth-busters section of the webpage would be a useful source of

information that bankers (and examiners) could point to when such interpretive issues arose

during an examination. Member Savarese encouraged the FDIC to expand its myth-busting

approach to topics on which there continue to be divergent interpretations of regulatory

requirements. Member Williams agreed that there could be significant divergence of

interpretations on key examination issues. Member Lundy provided an example in which he

thought that his bank was unfairly criticized during a compliance/Community Reinvestment Act

("CRA") examination. Mr. Pearce said that examiners try to evaluate an institution within its

performance context, based on the bank's strategy and what its peers are doing. He said that

DCP encourages examiners to communicate to banks where they have opportunities to improve,

rather than criticize them. Mr. Pearce acknowledged that how an examiner communicates to a

banker can impact the banker's perception of what they hear and said that DCP uses its resources

to encourage examiners to use open communications. Regarding the points raised by Members

Savarese and Williams, Mr. Pearce observed that it is a challenge to achieve and maintain a

common understanding of supervisory interpretations within a large examination workforce and

agreed that more transparency in the FDIC's communications about its examination policies will

promote examination consistency. He added that DCP continually updates the compliance

examination manual and that it can be a cornerstone reference if a bank perceives it is receiving

different policy interpretations. Mr. Pearce also encouraged bankers to contact FDIC regional

office staff or the Ombudsman's office if they have questions or issues. Member Savarese said

that she felt that community bankers and the FDIC shared the same goals. She suggested that the

FDIC consider providing additional methods for bankers to communicate issues to the FDIC;

methods that presented a low-hurdle to bankers, perhaps even anonymized communications.

Member Savarese observed that the FDIC's community bank initiative had made really

significant achievements but expressed concern that too many community bankers were unaware

of those achievements. She suggested that the FDIC be willing to communicate its goals and

successes multiple times and through various channels to ensure that community bankers

received the message. Member Baronner suggested that the QBP section on community banking

report on two metrics that would help indicate the health of the community banking sector: the

percentage of small business loans made by community banks and the percentage of deposits

held by community banks.

Ms. Ryan introduced the speakers for the panel titled "Minority Depository Institutions

and Community Development Financial Institutions" ("MDI" and "CDFI"): Richard Brown,

Chief Economist, DIR; Robert Mooney, National Director for MDIs and Community

Development Banking, RMS; and Elizabeth Ortiz, Deputy Director, DCP. Mr. Brown provided

the Committee with an overview of a study published by the FDIC entitled, "Minority

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Depository Institutions: Structure, Performance, and Social Impact." He noted that MDIs were

a time-honored institutional form with the specific purpose of serving minority and under-served

populations and had also been recognized by a number of legislative, executive and agency

actions, including the Financial Institutions Reform Recovery and Enforcement Act of 1989

("FIRREA"), the Riegle Community Development and Regulatory Improvement Act of 1994,

and a 2002 FDIC policy statement. Mr. Brown said that the FDIC's study was a collaboration of

DIR and DCP staff, which began in 2013, relied on data from as early as 2001, and sought to

apply some of the same metrics and frameworks the FDIC had applied to community banks. He

noted that the study placed MDIs in the context ofCDFIs, most of which are not insured

institutions.

Mr. Brown reviewed various characteristics ofMDIs and CDFIs. He noted that there

were 174 MDIs at the end of2013 (all of them FDIC insured) and 88 percent of them met the

FDIC's definition of community bank (by comparison, there were over 800 CDFIs, of which 78

are FDIC insured). Mr. Brown said that MDIs make up 2.6 percent of insured institution

charters, have about 1.2 percent of total industry assets in the aggregate, and are relatively small

in size, with a median asset size of$198 million. He said that the funding structure ofMDIs is

built around core deposits (like most community banks), MDIs have a relatively high loan-toassets ratio, and tend to specialize in CRE lending. Mr. Brown said that most MDIs are

organized to serve the needs of a specific under-served population; about half serve the AsianAmerican community; 22 percent serve the Hispanic community; 16 percent serve the AfricanAmerican community; and 10 percent serve the Native American community. He noted that 87

percent ofMDIs are headquartered inmetro areas and that over half ofMDIs are located in four

states (California, Texas, Florida, and New York). Nationally, MDIs hold just 1.5 percent of

metro area deposits, but hold much larger percentages in certain areas such as Los Angeles

County, California, and Miami-Dade County, Florida.

Mr. Brown observed that MDIs experienced significant structural changes in the study

period; their numbers peaked at 212 just before the financial crisis and declined to 174 at the end

of2013. He said that 32 MDIs failed in the crisis, for a failure rate that was about three times the

industry average, and said this reflected the vulnerability (to unemployment, for example) of the

populations that the MDIs served. Mr. Brown said that almost no new MDI chartering was

occurring, but noted that there was a replenishment ofMDI charters inasmuch as 81 institutions

were newly designated as MDIs in the study period while only 20 were designated away from

MDI status. Mr. Brown said that, when MDIs consolidated (through mergers, failures, or

acquisitions), just under half of the MDI charters were acquired by other MDIs, but significantly

higher percentages ofMDI assets stayed with MDI acquirers. He noted that these results were

consistent with the FIRREA legislative goals of maintaining the number of MDIs and preserving

their minority character in mergers and acquisitions.

Mr. Brown discussed the financial performance ofMDIs. He noted that MDIs tend to be

less profitable than either community banks or non-community banks, in part because of their

relatively small size, the fact that often they do business in high-cost metropolitan areas, and tend

to be younger institutions (the median MDI age is 28 years compared to 98 years for community

banks). He said that MDIs' net interest income was about the same as community banks over

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time, they tended to be lenders, their loan-loss provisions exceeded other bank types, and they

tended to have relatively high non-interest expenses.

Mr. Brown said that it was important to consider the social impact ofMDIs since their

mission is to promote the economic viability of minority and under-served populations. In this

regard, he said that MDIs successfully reached low-and-moderate-income ("LMI") households;

46 percent of the service area populations served by MDIs were in LMI income census tracts

compared to 17 percent for community banks and 27 percent for non-community banks. In

addition, Mr. Brown said that MDIs provide mortgages in lower income neighborhoods; 25

percent ofMDI's reportable mortgages (under the Home Mortgage Disclosure Act, "HMDA")

were made to residents of LMI census, tracts compared to 9 percent for all other types of

institutions. Mr. Brown said that MDIs also successfully reached their target populations in a

way that other institutions did not. For example, the median African-American MDI in 2011

made 67 percent of its mortgage loans to African-Americans. Similarly, the median Asian MDI

made 57 percent of its mortgages to Asian-Americans and the median Hispanic MDI made 65

percent of its mortgages to Hispanic borrowers. In contrast, non-MDI institutions' lending

percentages to those borrowers was two percent or less. In summary, Mr. Brown said that the

results indicated that MDIs shared some of the economic difficulties of the populations that they

served during the recent crisis, but that MDIs were successful in reaching and serving those

communities.

Mr. Mooney then provided an overview of the FDIC's MDI program, discussing

legislative mandates to preserve the number ofMDIs, to preserve their minority character in

cases involving mergers and acquisitions, to provide technical assistance to MDIs to prevent

insolvency, to encourage the creation of new MDIs, and to provide ongoing training and

technical assistance to them. He observed that MDIs tend to be located in communities with a

higher share of minority residents and LMI areas which might be underserved absent an MDI.

Mr. Mooney said that MDIs made many mortgages in LMI areas and to minority borrowers and

had acted as a bulwark against predatory mortgage lenders that had targeted these communities

before the financial crisis. Mr. Mooney observed that MDIs make small business loans that help

create jobs in locales that often still have very high unemployment. He noted that MDIs recently

had about $12 billion in small business loans, or about 2.5 percent ofthe industry total of small

business loans, although MDIs have only about 1.2 percent of industry assets.

Mr. Mooney said that the MDI program's organizational structure included a dedicated

permanent executive in Washington (himself) and regional coordinators in each of the FDIC's

six regional offices. The FDIC's MDI staff work with other FDIC staff and MDI trade

associations, and other Federal agencies, to coordinate training efforts and explore ways to

preserve and promote MDIs. Mr. Mooney said that the FDIC and other banking agencies

sponsor a biannual national conference for MDIs and CDFI banks. The 2013 conference

included 120 MDI and CDFI bankers, top leaders of the agencies, he said, and provided for

presentations from the agencies, MDIs, and CDFIs, as well as roundtable discussions, training

sessions for MDI staff, and an early presentation of the DIR study Mr. Brown had just discussed.

Mr. Mooney said that MDI/CDFI leaders viewed the study as the first of its kind and supported

its continuation; in particular, they thought that the study would help interest potential investors,

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attract Board Members, attract qualified management, and better inform future legislative and

regulatory initiatives.

Mr. Mooney discussed routine contacts that FDIC MDI staff have with individual MDls.

As described in the FDIC MDI policy statement, after an examination, FDIC staff offer to make

return visits to assist the bank in understanding and implementing exam recommendations. He

noted that MDIs can also initiate requests for technical assistance on proposed bank policies on

operational areas such as lending, investment or funds management. Mr. Mooney said that FDIC

examiners provided 109 instances of technical assistance to MDIs in 2013. For example, he said

that one bank first received assistance on information technology risk assessment and vendor

management. The first technical assistance went so well that the bank then asked for assistance

on ALLL methodology and policy, and subsequently, on a bank-wide audit program and Call

Report accuracy. Mr. Mooney said that, in a subsequent examination, the bank received overall

higher ratings, a welcomed outcome. Mr. Mooney said that he was pleased to recently receive a

"thank-you" letter from Committee Member Thian for technical assistance on CRA issues. Mr.

Thian complimented the FDIC staff for its helpful CRA technical assistance to his MDI bank and

said that he had also requested help concerning understanding the new mortgage rules applicable

to his bank's newly formed mortgage division. Mr. Mooney said that technical assistance that

the FDIC was able to provide to another MDI led to the MDI inviting various FDIC staff - along

with OCC and large bank representatives-- to its city for a roundtable discussion ofMDI/CDFI

partnership opportunities.

Mr. Mooney noted that, while MDI's performance continues to improve compared to the

crisis years, many MDIs continue to face economic challenges and described ways that FDIC

MDI staff advise them so that they may survive and serve their communities. He also described

how the FDIC works to preserve a MDI's minority character when an MDI fails, consistent with

statutory goals. Mr. Mooney said that these steps include contacting all MDIs nationwide that

qualify to bid on a failing institution, providing technical assistance in completing bid forms, and

providing information about the types of assets the FDIC has for sale, the methods the FDIC uses

to sell them, and how to become pre-qualified as a potential asset purchaser. He said that the

FDIC has been successful, noting that 87 percent of assets of failed MDI institutions were sold to

MDI acquirers.

Finally, Mr. Mooney said that his view was that community banks were well-positioned

to help MDI and CDFI banks because they often do not compete against one another although

they operate near them. He described ways in which community banks can work with MDIs and

also earn valuable CRA incentives.

Ms. Ortiz spoke about the FDIC's recently published "Strategies/or Community Banks to

Develop Partnerships with Community Development Financial Institutions" ("CDFI Resource

Guide"). She noted that before she worked for the FDIC, she was a leader at the Nonprofit

Finance Fund ("NFF"), a national CDFI that focused on providing loans and financial advisory

services to small and medium-sized non-profits which could not obtain financing from

mainstream financial institutions. Ms. Ortiz described how the NFF operated and observed that

it was only one of among 800 certified CDFIs across the country that are organized in a variety

of ways to achieve their individualized goals. She said that the distinguishing feature of CDFIs

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is having the primary mission of providing capital and services to benefit LMI persons in

distressed communities (she noted that CDFIs must be able to demonstrate that 60 percent of

their financing and service activities are targeted to the geographies and communities that they

have defined as their target markets).

Ms. Ortiz first addressed how CDFIs can be effective partners for community banks. She

noted that most community banks have strong records in serving the credit needs of LMI

communities in their CRA assessment areas but that, in some communities, the credit and

investment needs of the LMI borrowers cannot be fully met by traditional banks. Ms. Ortiz said

that CDFIs can fill such a gap because they are intentionally niche players and specialists who

are familiar with local markets and skilled in using a variety of risk mitigation programs. She

said that CDFIs offer products with flexible underwriting standards and take steps to ensure that

borrowers are able to use capital effectively and repay their loans. Partnering with a CDFI can

benefit a community bank, she said, by allowing the bank to expand into new areas and reach

more clients, to leverage the CDFI's market knowledge and specialized products that help the

bank meet the capital and credit needs of LMI communities within their CRA assessment areas.

Ms. Ortiz noted that the Interagency Questions and Answers concerning CRA explicitly

recognized that loans to and investments in CDFIs can receive CRA consideration in a bank's

performance evaluation.

Ms. Ortiz said that a bank-CDFI partnership can occur in many ways, depending on the

bank's business strategy and market need. A basis relationship, she said, can be a referral

program in which the bank refers to the CDFI credit-worthy borrowers who do not meet the

bank's underwriting requirements. Alternately, a CDFI can refer borrowers who are ready for

conventional financing to the bank. Ms. Ortiz said that a bank may: make investments to

support a CDFI's lending, its operations or its technical assistance programs; make equivalent

investments in non-profit CDFI loan funds; or make deposits in CDFI depositories. She said that

community banks and CDFIs may collaborate on loans together, including loan participations

and participating with other banks in a loan pool. Community banks can also provide various

forms of technical assistance to CDFIs, Ms. Ortiz said, for example, by allowing the volunteer

service of a bank officer as a CDFI Board Director, a member of a CDFI Advisory Committee,

or credit review committee.

Ms. Ortiz also described how the FDIC's community affairs staff help connect banks and

CDFIs. The methods include organizing and participating in community development forums in

various locations, and developing a webinar series to raise awareness and share successful

community development strategies. Ms. Ortiz said that the FDIC developed the CDFI Resource

Guide specifically to meet the informational needs of smaller banks and was both comprehensive

and practical in focus. She said that the Guide discusses a variety of strategies to mitigate risks,

and provides information about intermediary organizations that allow banks to invest in CDFIs

indirectly. The Guide also describes resources that help leverage a bank's own resources, she

said, including Federal funding programs and how CDFI investments and loans can meet CRA

criteria. Finally, Ms. Ortiz said that the Guide provides several case studies that show how bankCDFI partnerships have been created and operated, how they fit into banks' community

development strategies, how risks were mitigated, and how banks and communities benefitted.

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Member Bryant spoke about his MDI bank, which has 26 shareholders, seven of which

are Fortune 500 companies. Although his bank is not minority-owned, it serves a minority

community and has a Board majority composed of minorities. He said that the day's discussion

was important because, while larger financial institutions were aware of the benefits of working

with MDIs and CDFIs, fewer community banks were aware and involved. Member Bryant said

that the challenges that community banks face were even greater if the bank was working in a

community experiencing very high unemployment and economic distress. He said that the

various partnerships and collaborations discussed earlier help strengthen both communities and

financial institutions. Member Haskin said that her bank has a capital investment in a CDFI that

was formed in Oklahoma by a majority of banks. She said that the CDFI was very successful

and could invest in companies that the banks cannot and provided mezzanine financing that

allowed member banks to make subsequent loans. Member Haskin said that several loans her

bank had made qualified for New Market Tax Credits and that the tax credits' benefits flowed

down to benefit the individual shareholders of her S-corporation bank. She said that the tax

credits allowed her bank to make loans at a better rate and be more competitive. Member Haskin

said that MDI-CDFI opportunities deserved more discussion among community banks because

they are an extremely good business development vehicle and allow banks to be part of projects

that they would not otherwise be able take the risk in doing. Member Blankenship said that

CDFI collaboration was a great opportunity for community banks; she said that it fits

complementarily with the Small Business Administration ("SBA") financing that her bank does

and also provides tax credit benefits.

Member Blankenship referred to the statistic reported previously that MDIs made 25

percent of their HMDA-reportable mortgage lending in LMI census tracts compared with 9

percent ofnon-MDIs. For future reporting, she suggested that the FDIC distinguish between

community and non-community banks regarding the non-MDI lending percentage so that trends

between them could be tracked and to help ensure that the new mortgage rules do not negatively

affect community banks lending in LMI areas.

In response to a question from Member Castillo, Mr. Mooney said that there had not been

much new chartering activity among MDI or community banks, and that the present period was

more of a consolidation and growth period within existing MDIs. He said that there had been

some discussion with non-profit organizations partnering with existing community banks, and a

conversation in which a current community bank owner was considering retiring and wanted to

leave the bank in good hands by partnering with a good CDFI fund.

Member Castillo inquired whether the technical assistance available to MDIs was

different in approach -such as being more detailed and specific-- than assistance available to all

community banks. He said that, in his experience, questions to the field office requesting help

with a particular area usually resulted in a direction to the applicable regulatory guidance rather

than an individualized response that the bank was seeking. Mr. Mooney said that the FDIC was

interested in improving a bank's performance as well as evaluating it. Ms. Eberley said that

Chairman Gruenberg had raised a similar question with RMS in the past; she said that the

technical assistance the FDIC provides under the MDI program was statutorily based, but that

the FDIC still does not tell an MDI how to run its business. Ms. Eberley said that examiners will

discuss the regulatory landscape with MDIs, but do not help them do their work or write policies.

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She said that the community bank initiative represented a big change in the FDIC's approach to

providing technical assistance more aggressively to all community banks on topics of interest to

them. Ms. Eberley said that, although the FDIC cannot pre-approve a bank's procedures or

policies, she encouraged any bank with questions about guidance or a new activity to contact

their case manager and discuss whether the banker's understanding of the guidance is accurate.

Member Lundy said that the training the FDIC provided to banks about troubled debt

restructuring ("TDR") was an example of high quality technical assistance that involved several

related regulatory issues and how they interacted with specific factual issues that banks faced.

Member Lundy said the TDR training was also an example of the FDIC embracing the fact that

it needed to increase consistency among its examiners, as well as communicating about a

complex issue with the banking industry. Ms. Eberley said that the TDR and ALLL technical

assistance videos were both examples of the FDIC's new approach of taking a product developed

in one region and making it available to all institutions, on demand, and including sufficient

examples to promote a thorough understanding. Member Thian said that the Chinese MDIs have

a trade association that sponsors seminars each year and that they had invited FDIC MDI

coordinators to assist in presenting an educational program on the new mortgage rules and other

hot topics. He said that he would appreciate more such educational opportunities. Mr. Mooney

said that, in addition to technical assistance, the FDIC also held 50 roundtables and training

sessions on a variety of topics primarily for MDI and CDFI banks. Ms. Eberley noted that the

FDIC has a robust outreach program with all community institutions by partnering with local

trade associations and state banking departments.

Member Saunders said that she thought the MDI study was essential and was very happy

that the FDIC had dedicated the time and resources to produce it. She said that it would help

organizations such as hers, which is both an MDI and a CDFI, to support their legislative efforts,

to talk to potential investors, and raise the general understanding of the important economic role

that MDIs and CDFIs play. Member Saunders noted that the study recognized that MDIs had

distinct business models and financial profiles. She said that, even ifMDIs did not require an

examining team that specialized in MDIs, that it was important that examiners recognize that

MDIs have a different risk profile (for example, with regard to CRE lending). Member Saunders

suggested that the FDIC study how MDI portfolios have performed over time. She said that

there is often a perception that there is undue risk in serving a particular population, but she

questioned whether it actually translated into a higher risk profile. Member Saunders also

complimented the FDIC technical assistance programs which helped dispel myths her bank had

heard concerning fair lending, CRA and the examination process. In response to a question from

Member Thian, Mr. Mooney and Ms. Eberley noted that, pursuant to statute, MDIs may request

a post-examination visit intended to help the MDI understand and implement the examination's

recommendations. Ms. Eberley said that, under the FDIC's "interim contact program," the FDIC

also reaches out to all institutions between regularly scheduled exams.

In response to Member Stevenson's inquiry whether CDFI banks are considered

differently during an examination, Ms. Eberley said that, pursuant to the Uniform Financial

Institution Rating System, each institution is rated on its individual risk profile and strategic plan.

Thus, if an MDI was strategically planning to serve an LMI community, and expecting to take

some additional risk in its portfolio because they are serving a somewhat more vulnerable

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population, the earnings component of the CAMELS rating would be given in that context, she

said. This would be different from an institution that took on more risk because it was targeting

high risk loans to grow more rapidly. Member Bryant said that he makes an annual visit to the

FDIC's regional office to discuss and review his bank's business plan with them, and also calls

his case manager two days before sending his bank's Call Report to give the case manager some

insight about the facts behind the numbers about to be sent. Member Bryant said that these

contacts help avoid examination surprises and supported a two-way communication about issues

the bank is facing. Member Saunders said that her bank took similar steps with its regional

office to inform them about the institution's individualized risk profile because newly assigned

examiners may not be familiar with the institution. Member Lundy suggested that a useful

research topic would be to review MDIs' experiences recovering from the financial crisis to

determine if any trends became apparent that might provide useful guidance for the future. Ms.

Ryan thanked the Committee and panelists for a tremendously valuable discussion.

The Committee stood in recess at 10:52 a.m. and reconvened at 11:11 a.m. that same day.

Ms. Ryan introduced the speakers for the third panel, "Recent Supervisory Guidance"

Doreen Eberley; George French, Deputy Director, RMS; Robert Storch, Chief Accountant,

RMS; Rae-Ann Miller, Associate Director, RMS; Luke Brown, Associate Director, DCP; and

Mark Moylan, Deputy Regional Director, RMS, Kansas City.

Mr. French spoke about Financial Institution Letter ("FIL") 40-2014, which describes

how the FDIC intends to consider requests from S-corporation banks to pay dividends when

those dividends would otherwise not be permitted under the capital conservation buffer

requirements of the Basel III capital rule. He explained that the capital conservation rule would

limit certain banks in the payment of dividends iftheir capital ratios were less than 2.5

percentage points above their minimum. The purpose of the rule, Mr. French said, was to

encourage banks to remain well capitalized. He noted, however, that concern had been raised

that S-corporation banks, in which the bank's income is attributed to its shareholders, would

generate income on which their shareholders would owe income taxes, but the banks would be

limited in the payment of dividends to cover the shareholders' taxes. Such a situation could

make it harder for those banks to attract investors. Although the limitation would not be fully

effective until 2019 and the FDIC did not expect it to be applicable very often, Mr. French said

that the FDIC used the FIL to explain the rule's operation and how the FDIC intended to handle

the matter if and when it occurred. He said that the Basel III rule allows the primary Federal

regulator to consider a request for an exception to the capital conservation limitation. The FIL

explained that, absent significant safety and soundness concerns about the requesting bank, the

FDIC generally would expect to approve exception requests by well-rated S-corporation banks.

Mr. French added that the FIL described an expedited process for the described situations and

did not limit the case-by-case consideration of other requests by banks that did not meet the

FIL's criteria.

Mr. Storch discussed proposed changes to the Call Report that would conform it to

changes made a year ago in the regulatory capital rules (which revised and strengthened the

regulatory capital definitions and incorporated the "standardized" approach to the calculation of

risk-weighted assets). In response to the regulatory capital changes, the Federal Financial

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Institutions Examination Council ("FFIEC") and the banking agencies proposed in June 2014

changes to the reporting of risk-weighted assets in Schedule RC-R of the Call Report, to be

effective March 31, 2015. Mr. Storch said that institutions had been notified of the proposed

Call Report changes by FILs and through an interagency teleconference in which over 700 banks

participated. He said that drafts ofthe proposed Schedule RC-R risk-weighted asset reporting

form and instructions were available on the FDIC and FFIEC websites and public comments

were welcome.

Ms. Miller and Mr. Luke Brown discussed interagency guidance concerning Home

Equity Lines of Credit ("HELOC") nearing their "end-of-draw" period. Ms. Miller said that

HELOC's commonly have a ten year draw period so that loans that were made in the run-up to

the financial crisis are starting to come due. She said that some HELOC portfolios would be

difficult to manage because they were made with low underwriting criteria, and some banks

purchased HELOC portfolios that contained differing risk profiles, product features and

standards. She indicated that there was some regulatory concern about banks and consumers

being prepared for the end-of-draw period when borrowers may have difficulty meeting higher

payments resulting from principal amortization or an interest rate reset, or may have difficulty

refinancing due to changes in their financial circumstances, declines in property values, or

lending criteria changes.

Ms. Miller said that an institution's HELOC response should be commensurate with its

exposures; those with large or higher-risk HELOC portfolios would need comprehensive plans

while community banks with a small or low-risk HELOC exposure may be able to rely on their

existing processes. She said that the HELOC guidance does not create many new requirements

and refers to existing guidance in many cases; the guidance does emphasize the need for banks to

monitor and work with their borrowers early in the process, before the loans reset. Ms. Miller

said that the guidance discusses prudent underwriting for renewals and extensions and what

should be in HELOC policies and procedures for dealing with the end-of-draw period. She said

that banks need to: have a clear picture of their end-of-draw exposures; understand their

contractual provisions; and evaluate their near-term risks. The guidance discusses refinancing

and modification of HELOCs and prudent workouts that may be in the best interest of both the

bank and borrower. Ms. Miller said that a bank should have clear internal guidelines for the endof-draw period and ensure that account representatives are properly trained to be able to provide

that information to borrowers. Regarding reporting, she said that banks should be able to track

their actions and that, when modifications are made, the bank should be able to follow up on the

performance, including properly documenting the ALLL.

Mr. Brown said that, while the HELOC guidance was primarily safety and soundness

driven, it also addressed important consumer protection issues. He said that the guidance

encouraged banks to identify and work with end-of-draw borro\vers who faced financial

difficulties so that unnecessary defaults could be avoided. This would include, he said,

implementing an outreach program to borrowers well before the scheduled end-of-draw period

that responded effectively to issues as they arise. Mr. Brown noted that renewals, workouts and

modifications should include an analysis of the borrower's ability to repay the loan and that the

payment terms should be sustainable.

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Mr. Moylan spoke about FIL-39-2014, "Prudent Management of Agricultural Credits

Through Economic Cycles." He said that the FDIC recommended a prudent approach to

agricultural lending that focused on cash flow, without undue reliance on collateral values,

particularly land. Mr. Moylan said that it was important for banks to manage any concentration

risk they have in agricultural lending. He said that commodities had long traded in a tight price

channel, but have been more volatile recently. For example, he said that the price of com traded

,between $1.50-2.50 per bushel between 1980 and 2006, then broke out of the channel in about

2008, peaking at $8 per bushel, and has since declined to a current $3.62 per bushel. He noted

that there had been a run-up in land prices which might be subject to declines in light of the

lower commodity prices. Mr. Moylan said that, with such changing price dynamics, cash flow

analysis was vitally important and that banks should identify borrowers who were weak and need

assistance to strengthen the credit and mitigate loss.

[Editor's note: For the reader's convenience, the Committee members' comments on the

four supervisory topics just discussed are grouped by subject matter.] Member Haskin

commended the recent guidance concerning the capital buffer and S-corporation banks. She said

that, after consulting with FDIC staff, she recently made a presentation to the board of her Scorporation bank; she said that the guidance provided the bank's shareholders with a tremendous

amount of relief and made them feel better about that aspect of the Basel III rule. In response to

a question from Member Williams, Mr. French clarified that S-corporation banks that had issues

that arose from matters not within the scope of the recent FIL guidance would still have their

issues resolved on a case-by-case basis.

Concerning changes to the Call Report, Member Haskin suggested that agency-led

training would be helpful and cost effective. She noted that the Call Report had expanded

reporting requirements in various ways over recent years and that it was difficult to get trained

and qualified people to prepare the Call Report so that banks had to use service providers.

Member Blankenship noted that a survey about Call Report burden had identified Schedule RCR as the most burdensome schedule and that it required a lot of manual work to classify

information properly, even after relying on output from the bank's data processing system. She

added that hiring outside expertise to derive the information was expensive. Member Williams

suggested that it might be helpful and prudent to reduce the information required in the Call

Report, or to require it less often than quarterly, especially for well-capitalized community banks

with a low-risk profile. Member Blankenship agreed that such a change would help

tremendously, and would make sense for banks whose balance sheets did not change much from

period to period.

Mr. Storch indicated that banking agencies could consider providing Call Report training;

he noted that they had done it in previous decades, but that the training had migrated to trade

groups over time. He also said that the recent teleconference on the proposed Call Report

changes had been intended, in part, to help bankers identify areas where banks would need to

make manual adjustments when reporting risk-weighted assets. Mr. Storch said that the FFIEC

was always interested in whether there were more automated, less burdensome, ways to obtain

the information the banking agencies needed. Mr. Storch also said that the banking agencies

could consider Member Blankenship's point about reducing the amount of detail required (or the

frequency of requiring it) from banks whose balance sheets did not change significantly. He

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noted that the agencies have tried for several years to gear reporting requirements to institutions

of certain asset size levels, or to institutions meeting minimum activity thresholds. Mr. Storch

noted that the new Call Report items on international remittances, for example, are required only

semi-annually because the agencies felt that receiving information at that frequency would be

sufficient.

In response to a question from Member Castillo concerning the HELOC guidance, Ms.

Miller confirmed that borrowers who met the current underwriting criteria, have sufficient

property values and have been good customers could have their HELOCs renewed.

Concerning agricultural lending, Member Savarese asked if the FDIC had concerns or

best practices concerning fracking. Mr. Moylan said that in North Dakota, where a lot of

fracking activity is occurring, land sales were currently separating the land's mineral rights from

the rest of the land transaction and that buyers and lenders needed to be aware of what was.(,md

what was not) being sold. Mr. Moylan later observed that North Dakota was experiencing a high

employment period due to fracking, but there were other dynamics that regulators were

monitoring such as infrastructure investment and how long-term the oil boom would be.

Mr. Moylan also discussed the assessment of agricultural land values. He noted that land

is an income producing property and that its rental value will fluctuate generally with commodity

prices; thus, a decrease in commodity prices will negatively affect rental values and land sale

values. Mr. Moylan said that agricultural land also had an intrinsic premium value to nearby

landowners because of the ease of incorporating nearby land into current operations. He noted

that although land prices had risen in recent years, buyers had used a lot of cash for their

purchases and there was not substantial leverage involved. Mr. Moylan said that cash-flow was

very important for agricultural lending and that farmers could experience a build-up of carryover

debt if they have several years of not making a profit.

Members Savarese and Flynn inquired about competition posed by the Farm Credit

network of lenders and its effect of squeezing loan pricing and margins, and unrealistic terms and

conditions. Member Flynn said that her bank regularly loses business to Farm Credit because of

the low rates they can charge, in part because they are government subsidized. In response to a

question from Mr. Moylan, Member Flynn said that Farm Credit was lending mostly on

operating lines of credit and equipment as farmers expanded their operations. Mr. Moylan said

that he was aware of banker complaints about Farm Credit and noted that banks also experience

competition from lending done by seed companies and farm equipment manufacturers. Mr.

Moylan said that bankers in the Kansas City region reported low loan demand, in part because

farmers' profitability allowed them to be self-financing. He said that there may be a rebalancing

of agricultural loan portfolios as farmers need more loans for their operations (as lower

commodity prices lower farmer profits) and that banks should be careful not to take on excessive

risk where a farmer's cash flow is tight or inadequate. Mr. Moylan noted that John Deere and

some banks are requiring loan payments at an intermediate date in June whereas they had

traditionally required payments the following January after the farmer's profits were in. He said

that concentrations are an inherent concern in agricultural banking, and suggested that banks

bifurcate their portfolio (as banks do with CRE) and understand that there are different risk

profiles among an operating line, a land loan, and intermediate debt. Mr. Moylan said that it was

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important to not look exclusively at current worth and current collateral values because land and

equipment values can drop if farm income drops.

During this panel discussion, committee members also suggested possible future topics

for discussion. Members Savarese and Baronner suggested there was a concern about whether

the use of the ChexSystems database (or others) for account opening purposes would be viewed

as creating a fair lending compliance issue because of the disparate impact the use of the

databases may create. Member Lundy noted that many banks use such databases in complying

with their Bank Secrecy Act ("BSA") -related "know your customer" obligations. Member

Blankenship suggested that a discussion of digital currencies and alternative forms of payments

and the extent to which they are (or are not) insured would be a good topic for discussion.

Member Savarese thought that other topics could include the CRA implications of online

depository account opening, online lending, and fully automated ATMs. Member Castillo also

thought that it would be helpful to hear the FDIC's forward thinking about risk management of

emerging technologies for delivering financial products and services. Member Lundy said that

the "EB-5" immigrant investor visa category program would be a good topic for discussion

because the program might offer a significant deposit opportunity for community banks as well

as potential for community development, but also might raise BSA or other unidentified risks.

Member Castillo inquired about Operation Choke Point and the types of businesses that

banks may serve. Ms. Eberley discussed the DOJ Choke Point operation, noting that it was

focused on banks that were knowingly not complying with their BSA obligations when servicing

third-party payment processors. She said that there was an increase in demand for third-party

payment processors due to the increase in internet commerce and that there was evidence that

some institutions were not meeting their legal obligations. In some cases, she said that some

high risk third-party processors had targeted small, troubled institutions to service them. Ms.

Eberley said the FDIC had amended and updated earlier guidance on servicing third-party

processors. Referring to the guidance, she reviewed some of the risks that banks face (credit

risk, BSA risk, reputation risk) and provided an overview of their compliance obligations.

The Committee stood in recess at 12:10 p.m. and reconvened at 2:10 p.m. that same day.

Ms. Ryan introduced the panelists for "Guidance on Commercial Real Estate

Concentrations," James Watkins, Senior Deputy Director, RMS, George French, Deputy

Director, RMS, Kathy Moe, Deputy Regional Director, RMS, San Francisco, and Richard

Brown. Mr. Watkins said the panel would share some "lessons leamed" during the recent

financial crisis about CRE lending and the importance of good risk management practices and

communications; he noted that the FDIC was not changing or expanding its existing guidance on

CRE lending. Mr. Watkins said that there were currently good trends in banking conditions and

performance, with growth in lending that was improving bank profitability. Referring to a

packet of slides titled "Commercial Real Estate," he discussed a 2012 FDIC Inspector General

("IG") study that found many banks with a concentration in real estate loans had successfully

managed their portfolios' risks. Mr. Watkins said that the IG found that successful risk

management of such a concentration included: implementing more conservative growth

strategies; relying on core deposits and limiting dependence on volatile funding sources;

implementing prudent risk management practices (and limiting speculative lending, loan

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participations, and out-of-area lending); maintaining stable capital levels; and being responsive

to supervisory recommendations, actions and guidance.

Mr. Watkins observed that not all institutions fared well during the crisis and said that

those that failed often shared certain characteristics: they experienced rapid loan growth; they

did not recognize the growing risk exposure from their real estate concentration; they did not

develop sufficient risk assessments that included an analysis of economic conditions and stress

testing; and they did not develop sufficient contingency plans. He said that a 2013 IG study

reached similar conclusions concerning failures. Mr. Watkins reviewed statistics relating to

aggressive growth and failure rates. Of the institutions whose growth rate was over 20 percent in

the 3 years preceding the crisis, 37 percent remained satisfactorily rated as of year-end 2011 and

16 percent failed. In contrast, he said, of the institutions whose growth rate was between zero

and 10 percent in the same period, 69 percent remained satisfactorily rated and 2 percent failed.

Mr. Richard Brown said that CRE concentrations were associated with a higher failure

rate during the crisis. Overall, he said, CRE specialists were more than twice as likely to fail in

the 2006-2010 period, and those with construction and development loans concentrations of

more than ten percent of assets were three times as likely to fail. Mr. Brown also observed that

community banks that switched their lending strategies in the early 2000s fared worse than banks

that did not change from their "baseline" lending strategies (such as mortgages, agriculture or

diversified lending). Mr. Brown said that the FDIC also compared past due rates and charge-off

rates of non-owner occupied CRE properties and owner-occupied ones. Past due and charge-off

rates rose for both loan types during the crisis, he said. While owner-occupied properties more

often had a higher past due rate, non-owner occupied properties had higher charge-off rates. In

summary, he said that both types ofloans were subject to credit risk in this business cycle. Mr.

Watkins observed that the number of banks that have construction and development and CRE _

concentrations have declined during and after the crisis.

Ms. Moe discussed some current trends in CRE lending. She noted that national trends

for CRE prices were generally upward in the retail, office, industrial and apartment categories

although there were some regional differences (such as higher prices in the northeast U.S. and

west coast). Ms. Moe said that it was important that bank management continue to monitor their

local economic trends, respond to market condition changes, and ensure that loans are

appropriately priced for risk. She said that, in the first quarter of 20 14, 70 percent of all banks

reported positive year-over-year loan growth, the highest since 2009. Ms. Moe said that many

states with the highest number of banks with concentrations in acquisition, development, and

construction loans and CRE loans are on the coasts and that those banks tended to experience

problems earlier in the crisis and tend to be recovering faster. She said that, whileloan growth

was a healthy sign, concentrations of credit of any type required heightened risk management,

monitoring and oversight. Specifically, she said that a bank's board of directors should establish

an overall CRE strategy that is consistent with the bank's growth objectives and capital planning;

further, banks should have strong policies and controls in place, have appropriate staff to support

their strategies and conduct regular reviews of their risk limits to respond to changes in markets.

Ms. Moe said that most banks are implementing sound practices for managing their CRE risks.

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Mr. French discussed three sources of written guidance applicable to CRE: 2006

interagency guidance on CRE; the FDIC's Standards for Safety and Soundness (12 C.F.R. Part

364); and the FDIC's Real Estate Lending Standards (Part 365). He said that the three formed

the basis for FDIC's examination programs involving CRE and that all concerned risk

management but did not set lending limits. Mr. French noted that institutions that follow good

risk management practices were more likely to survive periods of economic downturn.

Mr. French described the reasons the agencies issued the 2006 guidance and noted that it

focused on ADC and non-owner-occupied CRE concentrations. He said that the 2006 guidance

identified thresholds the agencies said they would use to identify banks that were potentially

exposed to significant CRE concentration risk and thus would be examined closely to ensure that

they had appropriate risk management practices in place. Mr. French observed that owneroccupied CRE was excluded from the scope of the 2006 guidance but was covered by Part 364,

the safety and soundness regulation. He said that Part 364 includes operational and managerial

standards for a number of key bank functions. The standards most relevant to CRE, he said,

include: adequate information systems to assess risk; loan documentation to identify repayment

sources; prudent underwriting; policies to take into account concentration risk and the timely

identification of problem assets. Mr. French also discussed the FDIC's real estate lending

standards and observed that it states that real estate lending that is conducted in a prudent manner

will not be subject to examiner criticism. He said that Part 365 requires every institution to have

a written real estate lending policy and describes what such a policy needs to address. Mr.

French said that the FDIC believes that it had a sound body of existing regulation on CRE and

ADC lending and was not looking to change it. He added that the return of bank lending

previously mentioned was a good thing and that the challenge going forward was to ensure that

prudent loan growth will be sustainable.

In response to a question from Member Stevenson about recent loss rates on commercial

and industrial ("C&I") loans compared to CRE loans, Mr. Brown said that unsecured C&I loans

would have a higher loss rate on average than secured CRE loans in periods of economic

distress. Member Stevenson said that was consistent with his perception; he said that in making

a C&I loan he evaluates the business' ability to generate cash flow but that his experience is that

real estate as collateral is more reliable than receivables.

Member Saunders said that many MDIs, such as hers, do substantial lending to faithbased communities and were concerned whether they were limited in lending to them when they

reached the 300 percent of capital threshold and inquired ifthe fact that those loans were owneroccupied-CRE affected the issue. She noted that her bank's risk management practices would

continue to be very robust. Mr. French clarified that the FDIC does not impose lending limits of

300 percent of total capital for any type of real estate; rather, the guidance used 300 percent as a

threshold for helping examiners identify situations that require heightened risk management

practices. Mr. Watkins agreed and discussed risk mitigation strategies where a substantial

concentration existed; he said that, as an institution builds its concentration, it needs to have

control systems that adequately compensate for the added risk. Member Seleski said that he

believed that many Florida banks had CRE concentrations that exceeded 300 percent of capital

and complimented regulators on emphasizing the need for robust risk management rather than

imposing a hard and fast rule against the concentrations. Mr. Watkins said that, nationwide,

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many banks exceeded the 300 percent threshold; he added that the IG report supported the

conclusion that substantial concentrations could be successfully managed during an economic

downturn. Ms. Moe cautioned that it was risky for a bank to set a concentration limit and then

merely raise the percentage when they reached their previous goal without sufficient

consideration of the new decision; she said that a bank's CRE concentration risk appetite needed

to be coordinated with their growth and capital planning. Member Williams said that he was

aware of banks that raised their concentration targets without sufficient consideration; he said

that he also appreciated the regulators approach of allowing concentrations to be managed.

Member Stevenson said that his bank had received an FDIC letter noting its higher

growth rate and CRE concentration; he said that he was happy to understand that the letter was

meant to encourage prudent risk management and communication between a bank's

management, its board and its regulators. Mr. Watkins said that the FDIC tries to reach out to

institutions when the FDIC's review of Call Report data identifies increases in certain lines of

business. He said that the FDIC encourages banks to share their strategies and business plans

concerning those areas. Member Saunders suggested that C&I lending was experiencing a

growth trend that may warrant additional regulatory attention.

Ms. Ryan then introduced Deputy General Counsel Roberta McInerney who discussed

the "Review of FDIC Regulations under the Economic Growth and Regulatory Paperwork

Reduction Act" ("EGRPRA"). Ms. McInerney said that the FFIEC and the banking regulatory

agencies (the FDIC, the acc and the Board of Governors of the Federal Reserve Board) were

conducting a review of regulations to identify those that were outdated, unnecessary or unduly

burdensome, and invited bankers' participation in the important process. She provided an

overview of the review process required by EGRPRA. First, the agencies must categorize their

regulations by type (for example, safety and soundness regulations) and publish the categorized

regulations at regular intervals requesting public comment on how their regulatory burden could

be reduced. After all the categorized regulations have been published, she said, the agencies will

publish a summary of the public comments and identify the significant issues raised. The

agencies will also consider the regulations on their own and take administrative action to reduce

burden where they can, she said. Finally, the agencies will publish a report to Congress that

discusses the issues raised, their merits, and whether burden reduction can be accomplished

administratively or would require legislative changes (since many regulations are required by

statute).

Ms. McInerney said that the EGRPRA review must be done every ten years; and since

the first review was completed in 2006, the current one would be completed by the end of2016.

She said that the agencies were cooperating closely on the review effort and recently published a

Federal Register notice that: 1) described the process that would be followed; 2) identified the

twelve categories of regulations that would be published for public comment over the next two

years; and, 3) requested comment on the first three categories of regulations to be reviewed. Ms.

McInerney said that the twelve categories of regulations will be: 1) applications and reporting;

2) banking operations; 3) capital; 4) CRA; 5) consumer protection; 6) directors, officers and

employees; 7) international operations; 8) money laundering; 9) powers and activities; 10) rules

of procedure; 11) safety and soundness; and 12) securities. Ms. McInerney noted that the first

three categories open for comment were: applications and reporting; powers and activities; and

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international operations, and encouraged community bankers to provide comments. She said

specific comments that focused on parts of regulations that may not be working properly would

be particularly helpful, as would be suggestions for any legislative changes that may be

necessary. Ms. McInerney drew the members' attention to charts in the Federal Register notice

that listed all the regulations that were currently open for comment and those that would be

published later.

Member Castillo inquired about the impact ofthe previous EGRPRA review. Ms.

McInerney and Claude Rollin, Counsel, Legal Division, said that the previous review led to

legislation being passed that eliminated some outdated regulatory requirements. They noted,

however, that many regulatory requirements are required by statute, thus limiting how much the

agencies can do administratively, and that the need for legislative changes was included in the

first EGRPRA report to Congress. In response to a question from Member Williams, Ms.

McInerney agreed that the agencies would have to continue to implement legislative mandates

for certain regulations, but said the agencies were always looking for ways that regulations could

be streamlined, overlaps eliminated, or requirements clarified.

Member Savarese observed that many regulations had been passed pursuant to the DoddFrank Wall Street Reform and Consumer Protection Act and inquired how those would be

reviewed for the burden they imposed. Ms. McInerney said that the FDIC was sensitive to the

burdens that it imposed on all banks, particularly smaller ones. She said that the burden of each

regulation is evaluated as it is being developed under: the Regulatory Flexibility Act (which

focuses on small entities); the Paperwork Reduction Act; and the FDIC's recently updated

regulatory policy statement, which emphasizes the need to impose the least amount of burden

possible. Regulations currently being developed are reviewed under those laws and policies, she

said, while the EGRPRA review is focused on regulations already in place. Ms. McInerney

noted that the Consumer Financial Protection Bureau ("CFPB"), which is responsible for many

regulations applicable to banking, is not part of the EGRPRA review; however, she said that the

CFPB is required to review its significant rules every five years. In response to a question from

Member Baronner, Ms. McInerney provided further details about how the FDIC considers

regulatory burden, including costs and benefits, when that information is available.

Member Baronner suggested that the Committee could provide helpful feedback on

regulatory burden, for example, the burden and benefit of CRA reporting. Ms. McInerney said

that such a comment would be helpful to the EGRPRA review. Ms. Ryan said that the FDIC

would consider how it could incorporate the Committee's input into the EGRPRA review, which

is in its early stages. In response to a comment by Member Lundy, Ms. McInerney described the

relationship between the EGRPRA review and National Credit Union Administration. Member

Savarese observed that the regulatory reviews tended to be undertaken from the perspective of

the regulation, or the regulatory authority that issued it, but are not undertaken from an enterprise

perspective. She indicated that a review that looked at the totality of regulatory burden on a

community bank would be more useful.

Chairman Gruenberg said that the Committee members' input was remarkably valuable

to the FDIC and thanked them for their participation.

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There being no further business, the meeting was adjoumedat 3:03 p.m.

Robert

~L

E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

And Committee Management Officer

FDIC Advisory Committee on Community Banking

July 23,2014
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

July 23, 2014 — 9:00 A.M..

I hereby certify that, to the best of my knowledge, the attached minutes are accurate and

complete.

_.,

~~

Martin J. Gruenber p

Chairman

Board of Directors

Federal Deposit Insurance Corporation