12

Minutes

of

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

January 28, 2 a 1 a - 8: 3 a A. M .

The meeting of the FDIC Advisory Committee on Community

Banking ("Committee") was called to order by FDIC Chairman,

Sheila C. Bair.

The members of the Committee present at the meeting were:

R. Daniel Blanton, President and CEO, Southeastern Bank

Financial Corporation and Georgia Bank & Trust Company of

Augusta, Augusta, Georgia; Dorothy J. Bridges, President & CEO,

City First Bank of D.C., Washington, D.C.; 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 of Munith, Munith, Michigan;

James H. Gray, Chairman, Beach Business Bank, Manhattan

Beach, California; Jack E. 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; Bruce A. Schriefer, President, Bankers'

Bank of Kansas, National Association, Wichita, Kansas; Laurie

Stewart, President and CEO, Sound Community Bank,

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

Bank, Laredo, Texas; and Matthew Williams, Chairman and
13

President, Gothenburg State Bank & Trust Company,

Gothenburg, Nebraska. Committee Member Rebecca Romero Rainey,

Chair and CEO, Centinel Bank, Taos, New Mexico, was absent from

the meet ing .

Members of the Federal Deposit Insurance Corporation

("Corporation" or "FDIC") Board of Directors present at the

meeting were Sheila C. Bair, Chairman, Martin J. Gruenberg, Vice

Chairman, and Thomas J. Curry, Director (Appointive).

Corporation staff who attended the meeting included

Valerie J. Best, Richard A. Brown, Jason C. Cave, Kymerly K.

Copa, Christine M. Davis, Patricia B. Devoti, Diane L. Ellis,

Robert E. Feldman, George E. French, Steven D. Fritts,

Tiffany K. Froman, Mitchell L. Glassman, Alice C. Goodman,

Leneta G. Gregorie, Tray Halverson, William F. Harral,

Michele A. Hel ler, Christopher L. Hencke, Greg Hernandez,

Ellen W. Lazar, Alan W. Levy, Skip Miller, Tariq A. Mirza,

Roberta K. McInerney, Kathy L. Moe, Arthur J. Murton,

Christopher J. Newbury, Richard J. Osterman, Jr., Sally A.

Rinaldi, Claude A. Rollin, Lisa K. Roy, Barbara A. Ryan, Jon T.

Rymer, Christopher J. Spoth, John V. Thomas, Sandra L. Thompson,

Jesse o. Villareal, Kelly N. Walsh, Cottrell L. Webster,

James R. Wigand, and Katherine Wyatt.

william A. Rowe, III, Deputy Chief of Staff, Office of the

Comptroller of the Currency; and Charlotte M. Bahin, Senior

Counsel for Special Proj ects, Office of Thrift Supervision, were

also present at the meeting.

Chairman Bair opened and presided at the meeting. After

welcoming Committee members, she acknowledged the issues

confronting community banks and underscored the Corporation's

commitment to a thriving community banking sector and its

support of important community banking functions, particularly

in the area of small business lending. She then provided a

brief overview of the meeting agenda and introduced Roberta K.

McInerney, Deputy General Counsel, Consumer and Legislation

Branch, FDIC Legal Division, as the overall meeting moderator,

and Sandra L. Thompson, Director, FDIC Division of Supervision

and Consumer Protection ("DSC"), and Steven D. Fritts, Associate

Director, Risk Management Policy Branch, Policy, DSC, as

moderators of the first panel discussion on "Community Banks as

Growth Engines: Raising Capital and Increasing Lending in the

Current Environment."

January 28, 2010
14

At Ms. McInerney's request, Committee members introduced

themselves and briefly discussed the history and characteristics

of their respective institutions and, in some cases, the

communities in which they operate.

Initiating the panel discussion, Ms. Thompson noted that

regulators had recently been encouraging banks to raise their

capital levels and expressed an interest in hearing Committee

members' comments on any challenges they face in that regard.

First, however, she requested that Mr. Fritts offer his general

observations on the issue from a regulatory point of view.

Mr. Fritts noted that, at the Committee's meeting on

October 15, 2009, there had been a great deal of discussion on

bank capital levels and supervisory examinations; that the

discussion had been helpful in development of the Policy

Statement on Prudent Commercial Real Estate Loan Workouts issued

by the banking agencies on October 30, 2009; and that,

subsequent to issuance of the policy statement, Corporation

staff had hosted separate conference calls with bankers and

examiners to explain and answer questions on the guidance. He

then acknowledged the somewhat circular dynamics underlying the

need for banks to work through existing credit problems, extend

new credit, raise profitability, and increase capital, but noted

that Chairman Bair and FDIC staff have engaged in discussions

with officials of the U. S. Department of the Treasury regarding

the impact of such issues on community banks and, more

specifically, regarding the importance of having easily

understandable and attainable qualifications and requirements

for any Troubled Asset Relief Program ("TARP") assistance to

help community banks lend to small businesses.

Then, in response to a question by Ms. Thompson as to how

the program to help community banks lend to small businesses

could best be designed to encourage participation, Committee

Members Cole, Blanton, Urrabazo, and Grey suggested renaming the

program to avoid the negative public perception associated with

TARP; Committee Members Miller and Urrabazo suggested attractive

pricing, with Mr. Urrabazo elaborating on the possibilities of a

tiered pricing structure or pricing discounts based on the

percentage of increase in loans to small businesses; and

Committee Member Bridges suggested more flexible qualifications

cri teria to expand program access to community development

financial institutions and community bank involvement in the

establishment of program parameters. In addition, Committee

Members Blanton, Goodlock, and Miller suggested not tying the

program to loan growth or volume because they believe that doing

January 28, 2010
15

so would incent the wrong behavior in the current economy, with

Mr. Miller noting that there is a natural decline in loan demand

during a recession; Mr. Grey suggested allowing TARP I

participants to convert to the new program; and Committee Member

Schriefer suggested that the program not be limited to CAMELS

"1" - and "2" -rated banks, but include lower-rated institutions

that simply need a credit cushion to survive until the economy

recovers. Committee Member Brown noted that it was the larger

banks and not community banks that had cut back on lending and

that, in recognition of that fact, any program tied to an

increase in lending should not just look at any increase going

forward, but should also look back one year. Finally, Ms. Cole

introduced her idea for a simple capital investment program that

would include availability of funds for a set period of time,

perhaps five years, with an opt ion for renewal; and a tiered

interest rate structure, with the rate for individual banks

dependent upon their examination ratings and their ability to

raise additional funds.

Chairman Bair, noting that there had been some industry

obj ection to a recent proposal for reallocation of a portion of

unused TARP funds to create a small business loan fund with a

loss-sharing feature, then asked whether the effort to provide

support for new lending should take the form of a capital

investment program. Mr. Brown responded that an inj ection of

funds directly into a bank's loan loss reserves would be much

more attractive than a loan guarantee because the former

approach would have a positive effect on earnings, whereas in

the latter approach, there exists the possibility that the

guarantee may not be honored if certain conditions are

determined not to have been met. Agreeing that an infusion of

capi tal into loan loss reserves is a good concept, Mr. Blanton

nevertheless observed that the attractiveness of the idea would

depend on how the program is structured. Mr. Goodlock also

agreed, noting that an inj ection of capital into loan loss

reserves was consistent with the need to shore up balance

sheets. Although acknowledging a need for growth in small

business lending, Ms. Bridges indicated that such growth should

be the secondary goal for reallocation of unused TARP funds and

that bringing bank balance sheets back to a healthy condition

should be the primary goal. Mr. Brown suggested that any

program aimed at community banks should provide the option to

shore up capital or increase loans to small businesses,

depending upon the needs of the individual bank.

Indicating that TARP was originally designed to generate

real economic act i vi ty through extension of credit, Chairman

January 28, 2010
16

Bair expressed support for tapping unused TARP funds to spur new

lending.

There followed a brief discussion of the December 6, 2006,

interagency Guidance on Concentrations in Commercial Real Estate

Lending ("CRE Guidance") and the manner in which it was being

applied during supervisory examinations. Mr. Brown indicated

that there seemed to be confusion among examiners as to whether

the concentration criteria set forth in the CRE Guidance should

be viewed as guidelines or applied as a fixed ceiling. He

noted, in particular, the anomaly that occurs when banks attempt

to diversify out of CRE concentrations by getting rid of their

"2"- and "3"-rated loans, leaving them with a higher ratio of

lower-rated credits yet able to pass the CRE concentration test.

In response, Ms. Thompson advised that although common

characteristics among banks that failed in 2009 included rapid

growth, a high concentration of CRE loans, and volatile funding

structures, examiners are nevertheless encouraged to adopt a

balanced approach and use sound judgment when evaluating banks'

lending portfolios, with the aim of facilitating good lending

rather than restricting it. Mr. Fritts reiterated that

examiners review the underlying credit characteristics of a

bank's loan portfolio, focusing more on credit quality rather

than credit concentration

Returning to Ms. Thompson's original question on challenges

faced by community banks in raising capital, Committee members

offered a number of observations. Mr. Brown observed that not

only are banks experiencing problems with raising capital, but

also with the erosion of capital resulting from troubled debt

restructuring. Messrs. Urrabazo and Miller observed that

regulatory compliance costs represent a huge drain on capital

and earnings, with Mr. Urrabazo noting that the current lack of

loan demand compounds the problem. Mr. Miller further pointed

out that the increase in deposit insurance assessments was also

taking capital out of the banking system. Committee Member

Hopkins made two observations: first, that banks are being

forced to shrink their balance sheets which, in some cases, can

only be accomplished by getting rid of performing loans, a

process that lowers the capital of banks acquiring the loans;

and second, that existing shareholders are reluctant to invest

more capital for fear that their investments will only lessen

the loss to the Bank Insurance Fund in the event of the bank's

failure. Offering additional thoughts, Ms. Cole suggested that,

al though private investment funds are available, there may be

reluctance on the part of some to accept funds that will result

in a dilution of ownership and control; Mr. Brown suggested

January 28, 2010
17

that, while there may be investment funds available, it may not

be on favorable economic terms; and Mr. Goodlock suggested that

bank regulators give some thought to revisiting the makeup of

Tier 1 and Tier 2 capital.

The discussion then turned to the public relations impact

of bank failures, with Ms. Cole and Committee Member Williams

suggesting that many bankers believe the intent of the FDIC is

to decrease the number of banks. Chairman Bair refuted those

statements, indicating that she was at a loss regarding the

source of the belief and noting that, to the contrary, the

Corporation has been a strong advocate for the role of community

banks in the U. S. banking system. Further emphasizing her

support of the community banking sector, she expressed concern

that bailout polices will have the effect of increasing

consolidation because, thus far, the policies had been skewed in

favor of larger institutions. Vice Chairman Gruenberg echoed

Chairman Bair's comments, stating that in his opinion there have

been no more vigorous advocates for community banks than the

FDIC or Chairman Bair. He noted, however, that it would be in

no one's best interest for the Corporation not to carry out its

statutory responsibilities with regard to the resolution of

failed banks.

In closing, Chairman Bair advised that guidance on small

business lending would soon be issued and, it is hoped, would

include a prescription for banks, particularly larger

institutions, to abandon mathematical formulas and historical

loss rates in favor of returning to standard banking practices

of getting to know their customers and employing basic loan

underwriting criteria.

Mr. Urrabazo then briefly commented on pending legislation

regarding overdraft fees and the negative repercussions it could

have on profitability. Chairman Bair suggested that the topic

be revisited during the open discussion later in the day.

Ms. McInerney then called then for a short recess.

Accordingly, at 10: 02 a. m., the meeting stood in recess.

* * * * * * *

The meeting reconvened at 10:20 a.m. that same day,

whereupon Christopher J. Spoth, Senior Deputy Director,

Supervisory Examinations, DSC, and Kathy L. Moe, Field Office

Supervisor, San Francisco Region, DSC, opened the second panel

discussion on "hot button" examination issues including interest

January 28, 2010
18

rate risk, broke red deposits, and CRE Guidance. Mr. Spoth, in

his introductory remarks, noted that supervisory interests

closely align with the interests of bankers with respect to

encouraging safe and sound banking practices and avoiding the

market disruptions that result from unduly risky behavior. He

reported on several of the strategies employed by DSC to keep

the lines of communication open between DSC management and

examiners in the field, including National Field Supervisors'

Conferences, the next one of which would occur in February 2010,

to present the opportunity for dialogue between DSC management,

field supervisors, bankers, and trade association

representatives, and periodic meetings between the Field

Supervisors' Council and DSC management for purposes of keeping

abreast of issues arising in the field. Then, in her

introductory remarks, Ms. Moe noted that she and her field staff

have been dealing with many of the issues raised by Committee

members at the December 15, 2009, meeting, including the

challenges of raising capital; the classification of assets,

particularly those related to real estate; and the

appropriateness of allowance for loan and lease losses ("ALLL")

methodologies and documentation.

Mr. Brown then indicated that, based on his own experiences

and those shared by other bankers in his area, an issue had

arisen regarding the reasonableness test for validating ALLL

methodology. He reported that he and other bankers had been

required by examiners to increase their reserves and expressed

concern that, without bank access to the models being used by

examiners, the same problem would arise in future supervisory

examinations. In response, Ms. Moe advised that rather than

using a standard model or a bright line test, examiners rely on

the model used by the bank, the model's underlying assumptions,

the extent to which the bank has validated the reasonableness of

its ALLL methodology, and, in some cases, their own judgment.

In addition, both Ms. Moe and Mr. Fritts stated that, although

it is not directly related to the reasonableness test, examiners

are asked to look more closely at situations in which an

institution's reserves are not keeping pace with its level of

non-performing loans, particularly when the institution is close

to capital thresholds. Mr. Brown suggested nevertheless that it

would be helpful if the Corporation would issue a white paper,

wi th examples, for bankers to use as a guide, and Mr. Hopkins,

seemingly in agreement, observed that bankers were becoming

fearful of making loans because of a lack of understanding of

the factors on which examiners base their judgments. Mr.

Blanton, however, disagreed on the need for a white paper,

expressing a preference for examiner latitude to make judgments

January 28, 2010
19

on the effectiveness of a bank's methodology. Mr. Fritts stated

that he would take the suggestion for a white paper under

advisement.

Mr. Brown then turned the discussion to Financial

Accounting Standards Board ("FASB") Statement No. 114,

Accounting by Credi tors for Impairment of a Loan, reporting some

confusion among bankers as to when an impaired loan is subj ect

to specific reserve and when it is subject to write-down. He

then suggested that it would be helpful if the Corporation could

offer more guidance in that regard. Mr. Blanton then inquired

about the FDIC's position on excess reserves, in response to

which Chairman Bair advised that examiners are required to

follow FASB's generally accepted accounting principles in that

regard, but noted that all of the bank regulators have urged

FASB to provide more flexibility for banks because of the procyclical impact of existing rules.

The discussion then turned to funding sources, possible

extension of the Transaction Account Guarantee ("TAG") Program,

interest rate risk, reclassification of troubled debt

restructuring ("TDR"), and business plans. With respect to

funding sources, Ms. Bridges and Mr. Blanton observed that

reciprocal Certificate of Deposit Account Registry Service

("CDARS") deposits in many instances are core deposits and,

therefore, should be distinguished from traditional brokered

deposi ts . In response, Ms. Moe and Mr. Spoth indicated that

examiners are under instructions to look at the underlying

relationships and franchise value of reciprocal CDARS deposits

to determine whether they are, in fact, core deposits. However,

Mr. Brown suggested that, because some reciprocal CDARS are not

core deposits, it might be appropriate for the bank regulators

to consider amending the Consolidated Report of Condition and

Income Report definition of brokered deposits to reflect the

distinction. Chairman Bair and several Committee Members then

discussed the effect of brokered deposits on deposit insurance

premiums and liquidity, with both Mr. Blanton and Mr. Goodlock

making the point that, for purposes of calculating dependency

ratios, raising the reporting threshold for broke red deposits

and Federal Home Loan Bank advances to the current deposit

insurance limit of $250,000 would significantly reduce the

ratio, particularly if the calculation also recognizes the

extent to which the deposits are core deposits. Finally, Mr.

Schriefer observed that, currently, thrifts can use Federal Home

Loan Banks to issue letters of credit to secure deposits whereas

banks cannot and inquired whether any consideration was being

given to changing the rule to provide additional funding

January 28, 2010
~o

opportuni ties for banks. Mr. Spoth answered that the issue had

been raised at the staff level but has yet to be developed into

a proposal for consideration by the Board of Directors.

With respect to TAG Program, Committee members were in

general agreement that the program has had a positive impact on

the stability of deposit accounts and suggested that the

Corporation give consideration to extending the program beyond

the June 30, 2010, termination date. Chairman Bair replied that

staff was continuing to analyze market conditions and the

volatility of deposits and expressed an interest in hearing the

perspectives of Committee members, perhaps at the next Committee

meeting, on the potential ramifications of allowing the program

to terminate as scheduled.

On the issue of interest rate risk, Mr. Miller observed

that while broke red deposits and Federal Home Loan Bank advances

can be effectively used to minimize interest rate risk, they

resul t in a deposit insurance assessment penalty and are subj ect

to being viewed by examiners as an inappropriate funding source.

In addition, Professor Koch, while complimentary of the January

6, 2010, Advisory On Interest Rate Risk Management jointly

issued by the FDIC and other financial institution regulators,

expressed concern that, although many of the models used by

community bankers can effectively capture interest rate, they do

not adequately capture the credit risk that accompanies a rising

rate environment. He also asked, after noting the expectation

of rising interest rates and the difficulty of changing balance

sheets to adjust for interest rate risk in the short term, for

staff's reaction to interest rate swaps and the purchase of

interest rate caps. In response, Chairman Bair and Mr. Spoth

expressed general support of community banks taking advantage of

hedging opportunities; however, Ms. Moe advised that the level

of internal bank expertise required to take advantage of hedging

opportunities should be commensurate with the size of the

institution and the complexity of its balance sheet and hedging

products, even when out sourced . She further advised that use of

hedging strategies should be supported by appropriate policies,

controls, validation and back-testing. Committee Members

Stewart and Hopkins then requested that staff address the issues

facing less than well capitalized institutions that are

constrained in establishing interest rates by the need to

consider rates in the competitive environment, including the

rates of institutions considered "too big to fail."

Specifically, they indicated that the rates offered by branches

of larger institutions, which can be quite numerous in some

markets, must be factored in separately rather than counting as

January 28, 2010
21

one institution, which Mr. Blanton noted arbi trarily drives down

the interest rate. George E. French, Deputy Director, Policy,

DSC, acknowledged the need to factor all branches in the

competitive market into the equation, but indicated that the

impact is only about 10 basis points.

Moving to the topic of reclassification of troubled debt

restructurings, Mr. Goodlock requested clarification on the

appropriate timing for troubled debts restructurings that

returns to performing status. Ms. Moe, in answer, noted that

the general rule of thumb is that reclassification is

appropriate when there are six months of performance and

financial analysis proj ects continued performance beyond the six

month period. Mr. Miller pointed out that he believes the CRE

Guidance is unclear because it states the TDR needs to be shown

on four consecutive call reports and suggested that further

clarification may be needed. Chairman Bair, agreeing that the

question is raised frequently, stated that the issue should in

fact be clarified.

Regarding business plans, Mr. Brown noted that there is

developing folklore that the business plans of many de novo

institutions are being disapproved because of high levels of CRE

concentration. He underscored the difficulty of making reliable

proj ections in the current environment and expressed concern

that institutions would be penalized for failing to meet

proj ected targets and that business plans may be used as

leverage to revisit an institution's capital ratios and

portfolio diversification. Mr. Spoth explained that there are a

number of reasons a business plan may require changes, including

growth in the balance sheet beyond expectations or within

certain categories of loans and failure to meet proj ections;

that the FDIC expects that there will be some variability

between proj ections and actual performance, particularly with

respect to proj ections beyond one year; and that business plan

changes basically amount to a resetting of proj ections to

reflect the economics of the area, with the FDIC ultimately

wanting to determine whether an institution is taking more risk

and whether that risk make sense. Ms. Moe added that the

business plan needs to make sense and the bank must be

performing in accordance with the plan.

Next, Ms. McInerney introduced Alice C. Goodman, Deputy

Director, FDIC Office of Legislative Affairs, who provided the

Committee with an update on legislative activity related to

financial regulatory reform legislation, including the bill

recently passed by the u.s. House of Representatives, H.R. 4173,

January 28, 2010
22

wall Street Reform and Consumer Protection Act of 2009 ("House

Bill"). Summarizing some of the highlights of the House Bill,

she reported that, in many ways, it acknowledges the value of

community banks; that it makes an effort at putting an end to

the concept of "too big to fail" by establishing a resolution

process for large, failing institutions that present a systemic

risk; that it establishes a new, independent Consumer Financial

Protection Agency ("CFPA"), with provisions for a community bank

advocate within the agency; that the focus of the CFPA would be

supervision and enforcement activities for non-bank financial

service providers not currently subj ect to oversight, with

primary federal regulators retaining supervision and enforcement

authority for insured financial institutions with under $10

billion in assets; and that it would require the FDIC to base

deposit insurance assessments on assets. In comparison, she

reported that, currently, the Senate is divided on establishment

of an independent consumer protection agency, with some Senators

favoring a bureau under the proposed new regulator for

federally-chartered institutions, some Senators favoring an

autonomous agency with its own budget and rulemaking authority,

and still other Senators favoring creation of a consumer

protection bureau within the Department of Treasury or the Board

of Governors of the Federal Reserve System. She then advised

that the FDIC has continued to work with Congress on development

of financial regulatory reform legislation and that its

priorities in that regard are ensuring that the Financial

Services Oversight Council that will identify and regulate large

firms that represent a system risk to the financial system have

sufficient independence and that the FDIC, as deposit insurer,

plays a major role on the council, and that the systemic

resolution authority is credible, timely, and be funded in

advance.

In the discussion that followed, Committee members and

staff touched on the merits of various aspects of financial

regulatory reform legislation, including its impact on the issue

of preemption, preferences and concerns regarding a new consumer

protection agency, the use of assets as the base for calculating

deposi t insurance assessments, and funding for the systemic

resolution authority. In response to a question from Committee

Member Gray as to whether preemption had been addressed in the

House Bill, Ms. McInerney advised that it would allow the

regulator for federally-chartered institutions to preempt state

law only on a case-by-case basis and only if it makes a

determination that the law would prevent, significantly

interfere with, or materially impair the ability of a national

bank to engage in the business of banking, which she noted sets

January 28, 2010
23

a higher bar than the current standard that allows preemption by

regulation if state law would obstruct, impair, or condition the

ability of a national bank to engage in an activity. She

advised, moreover, that the House Bill would change the standard

for court review of preemption actions, no longer giving

deference to the regulator and requiring courts to more

carefully assess the validity and thoroughness of such actions.

On the issue of the new consumer protection agency,

Chairman Bair expressed concern with having the consumer

protection agency placed within an entity that regulates only

national banks and lacks a broader perspective. Mr. Williams,

on the other hand, expressed concerns that the establishment of

a consumer protection agency, regardless of where it is placed,

would be detrimental to community banks because it would result

in increased regulatory compliance costs. Mr. Hopkins's

concerns were related to exclusions in the House Bill for the

farm credit system and automobile dealers and the possibility

that even more financial service providers would be excluded,

leading to banks continuing to bear the onus of consumer

protection regulations and uneven enforcement. Chairman Bair

acknowledged the danger of political pushback during the

legislative process by entities not currently subject to

regulation and further erosion of coverage.

with respect to an asset-based approach to deposit

insurance assessments, Mr. Williams opined that it would

potentially shift the deposit insurance premium burden to

community banks because larger banks have more flexibility to

restructure their balance sheets. Chairman Bair, indicating

that the FDIC was neutral on the issue, stated nonetheless that

analysis conducted by the Corporation suggests that using assets

as the basis for deposit insurance assessments would

significantly reduce the premiums for smaller banks.

Finally, regarding funding for the systemic resolution

authori ty, Chairman Bair emphasized that while the House Bill

included a working capital fund that would be pre-funded through

a tax on large bank, it was uncertain whether any bill

ultimately approved by the Senate would provide for a prefunding mechanism. She further emphasized that the working

capital fund in the House Bill would not be used to guarantee

any liabilities; it would merely provide the funds to establish

a short-term bridge entity to facilitate the wind-down of large

financial intermediaries and would not be comingled with the

Deposi t Insurance Fund.

January 28, 2010
24

Chairman Bair then called for a recess. Accordingly, at

12:00 p.m., the meeting stood in recess.

* * * * * * *

The meeting reconvened at 1:30 p.m. that same day,

whereupon Chairman Bair introduced Mitchell L. Glassman,

Director, FDIC Division of Resolutions and Receiverships

("DRR"), and James R. Wigand, Deputy Director, Franchise and

Asset Marketing Branch, DRR, who led the final discussion panel

of the day on Clarifying the Bank Resolution Process. In his

introductory remarks, Mr. Glassman noted that the FDIC has more

than 75 years of experience in its dual roles as deposit insurer

and receiver of failed institutions, but indicated that its

recei vership process has changed due changing statutory

requirements and market conditions. He added that, from a

global perspective, the FDIC is unique in controlling not only

the assets, but also the liabilities of an institution at the

time of failure, and emphasized that the FDIC does its best,

through marketing and customer service, to ensure a successful

reopening for each failed bank.

Mr. Wigand then outlined the typical resolution process,

which he stated begins with revocation of the charter by the

chartering authority, followed by the appointment of the FDIC as

receiver and simultaneous coverage of insured deposits, either

through conveyance of insured or all deposits, if its determined

to be the least costly transaction, to an acquiring institution

or through the process of a payout. He then advised that the

FDIC, as receiver, will sell the whole bank, sell deposits and

branches, liquidate assets, or sell asset pools.

Mr. Wigand next discussed in detail the various transaction

structures utilized by the FDIC, identifying those structures as

purchase and assumption transactions, which he advised could

take the form of a clean bank transaction, a transaction

involving put or call options, a transaction involving optional

loan pools, a whole bank transaction or modified whole bank

transaction, or a loss-share transaction or modified whole bank

transaction with loss - share; insured deposit transfers; straight

deposit payoffs; bridge banks; and open bank assistance

transactions. He explained the basic features of each type of

transaction, the circumstances in which they are likely to be

utilized, and, in some instances, their respective pros and cons

Reporting on 2009 bank resolutions, Mr. Wigand advised that

86 percent of bank resolutions in 2009 were all deposit whole

January 28, 2010
25

bank transactions with a loss-share agreement, six percent were

all deposit clean purchase and assumption-type transactions,

four percent were some form of payout, and one percent were al i

deposit whole bank transactions. He further advised that the

weighted average cost to the FDIC for the 2009 transactions was

21 percent of failed bank assets, as compared to a weighted

average cost for the last cycle (1980-1994) of 21.4 percent. Mr.

Wigand noted that media reports that recent costs compare

unfavorably with bank resolution costs during the last cycle do

not take into account that the FDIC is now resolving thrifts,

not just banks, and thrift resolution is more expensive.

Mr. Wigand then discussed what he termed "works in

progress," noting that, in 2010, the FDIC is working with

regulators to cluster failing banks so that they resolve

concurrently , giving bidders the option to bid on any

combination of the failing banks, with the hope of bringing more

bidders into the process; working with chartering authorities to

allow more time to market failing institutions from 45 days to

60 days, with the aim of providing more time-e.g., a minimum of

10 days-for potential acquirers to perform due diligence; and

working to incorporate equity appreciation instruments and lossshare options into the resolution process. He explained that

equi ty appreciation instruments, commonly referred to as

warrants by the media, would allow the Corporation capture for

publicly traded institutions some of the short-term gain in

value associated with a transaction that is not quantifiable in

advance or reflected in the bid because of uncertainty as to how

the market will view the transaction. He further explained that

loss-share options would provide the flexibility for bidders to

elect loss-share protection on some loan pools and to decline it

for others as well as identify different loss-share ratios for

different pools.

Concl uding his presentation, Mr. Wigand provided an

overview on the creation of a limited liability company ("LLC"),

explaining that the FDIC creates an LLC to which assets are

transferred from the receivership; the receivership then has the

equi ty and an IOU note, guaranteed by the FDIC in its corporate

capacity; the equity is sold through competitive auction,

resulting in the receivership having the note, cash, and equity

certificate for LLC; and the guaranteed note is sold in private

market, subsequent to which the receivership estate can

distribute cash to creditors.

In the discussion that followed, Committee members asked a

number of questions. Mr. Lewis inquired as to the amount of

January 28, 2010
26

time allowed a publicly traded holding company under an order to

raise additional capital, in response to which Ms. Thompson

indicated that, by law, institutions subj ect to a prompt

corrective action directive have 90 days to address their

capital issues and Mr. Wigand responded that it really is

dependent upon the circumstances of each case and that, in the

absence of any statutory mandate, more leeway may be accorded to

an institution that has good management, adequate operating

income, and no significant operating losses.

Ms. Bridges questioned the treatment of securities owned by

a failing institution and Mr. Wigand responded that, if the

security is liquid, then it usually passes to the assuming

institution, but that distressed assets are generally aggregated

sold in a structured transaction.

Mr. Brown questioned the connection between the filing of

professional liability lawsuits and the existence of directors

and officers' liability insurance. Richard J. Osterman, Jr.,

Deputy General Counsel, Litigation and Resolutions Branch, FDIC

Legal Division, provided an overview of claims against directors

and officers and stated that amount sought is determined by

damages theory in litigation. Mr. Osterman noted that Board

approval is required and the business judgment rule is

considered in the determination. Mr. Grey noted that it is

increasingly difficult to get insurance because several

insurance companies are leaving the market, and there is also

fear that personal estates will get attacked. Mr. Glassman

suggested a speaker series in Florida and Georgia to deal with

certain misconceptions.

Mr. McInerney then opened the roundtable discussion. In

response to a number of questions from Committee members, staff

discussed, among other things, the DIF balance and the

availabil i ty on the FDIC web site of FDIC Chief Financial

Officer Reports for those wanting more in-depth information, the

problem bank list, the appropriate accounting treatment for

prepaid deposit insurance assessments, and the advance notice of

proposed rulemaking ("ANPR") on Incorporating Employee

Compensation Cri teria Into the Risk Assessment System, issued by

the FDIC on January 19, 2010. Mr. Williams expressed concern

about a recent IRS ruling disallowing the deductibility of the

2010 prepayment of deposit insurance assessment, noting that it

would be detrimental to some institutions. He also questioned

whether there is pressure on field examiners to downgrade banks

in an effort to increase the level of funds to the DIF.

Chairman Bair responded that examiners follow a standardized

January 28, 2010
27

exam process, guided by statutory requirements, and suggested it

might be beneficial for the FDIC Office of Public Affairs an

education campaign for members of the media to explain the

supervisory process.

Mr. Lewis inquired whether the committee is serving the

purpose that Chairman Bair envisioned. Chairman Bair affirmed

that she feels the committee is serving its intended purpose and

identified the TAG program and overdraft protection issues as

possible topics for Committee's next meeting. Mr. Urrabazo and

Mr. Miller also suggested consumer compliance issues and

regulations as a possible topic for the next meeting.

Chairman Bair thanked the bankers for attending and

suggested April 21, 2010, as a possible date for the next

meeting.

There being no further business, the meeting was adj ourned.

Robert E. Feldm~

~

Executive Secretary

Federal Deposit Insurance Corporation

And Committee Management Officer

FDIC Advisory Committee on Community

Banking

January 28, 2010
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

January 28, 2010 - 8: 30 A. M.

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

minutes are accurate and complete.

.~ c &.

Sheila C. Bair

Chairman

Board of Directors

Federal Deposit Insurance Corporation

and

Presiding Officer

January 28, 2010, Meeting of the

FDIC Advisory Committee on Community Banking

Dated: April 23, 2010