01

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

October 15, 2009 - 8:36 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; 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,

Mi tchell, South Dakota; Timothy W. Koch, Professor of Finance,

Moore School of Business, University of South Carolina, Columbia,

South Carolina; John P. Lewis, President and CEO, Southern

Arizona Community Bank, Tucson, Arizona; Jan A. Miller, President

and CEO, Wainwright Bank & Trust Company, Boston, Massachusetts;

Rebecca Romero Rainey, Chair and CEO, Centinel Bank of Taos,

Taos, New Mexico; 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 President, Gothenburg State

Bank & Trust Company, Gothenburg, Nebraska. Committee Member

Dorothy J. Bridges, President & CEO, City First Bank of D. C. ,

Washington, D. C., was absent from the meeting.
02

Members of the Federal Deposit Insurance Corporation's

("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.

Corporation staff who attended the meeting included Steven

o. App, Robert Basinger, Valerie J. Best, Erica F. Bovenzi,

Michael Bradfield, Richard A. Brown, Jason C. Cave, Christine M.

Davis, Diane Ellis, Robert Feldman, Jason K. Fincke, George

French, Steven D. Fritts, Tiffany K. Froman, Mitchell Glassman,

Tray Halverson, William F. Harral, Sally Kearney, Michael H.

Krimminger, Ellen W. Lazar, Alan W. Levy, Roberta K. McInerney,

Carol L. Middlebrook, Tariq A. Mirza, Arthur J. Murton, Paul

Nash, Christopher J. Newbury, Richard Osterman, Silvia L.

Ramirez, Claude A. Rollin, Lisa K. Roy, Jon T. Rymer, Walter C.

Siedentopf, Christopher J. Spoth, Sandra L. Thompson, Jesse o.

Villareal, Cottrel L. Webster, and James Wigand.

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

Comptroller of the Currency; was also present at the meeting.

Chairman Bair opened and presided at the meeting. She began

by highlighting the importance of obtaining frequent input from

communi ty banks and giving a brief summary of the national

economic situation. She then elaborated on the insight and

information that the FDIC Board and staff hoped to gain from the

meeting: 1) What improvements can be made to examination and

supervision procedures that would help communi ty banks survive

and prosper through the current crisis; 2) What do community

bankers think of the current financial legislation pending before

Congress; and (3) What is the community bank reaction to the

FDIC's prepaid assessment proposal and what suggestions do

community bankers have for keeping the Deposit Insurance Fund

("DIF") industry funded.

Vice Chairman Gruenberg and Director Curry commented on the

importance of community banks in leading the country out of the

current economic crisis and the value of establishing a committee

to foster communication with the community banking industry.

Paul Nash, Deputy to the Chairman for External Affairs and

Designated Federal Officer for the Committee, and Christopher J.

Spoth, Senior Deputy Director , Division of Supervision and

Consumer Protection ("DSC"), opened the first discussion session

on bank examination and supervision with an expression of

appreciation for the role of community banks in solving the

current crisis and of desire to hear about possible improvements

to the examination process.

October 15, 2009
03

In the discussion that followed, regulatory flexibility was

a central theme touched on by almost all Committee members. Most

of the members cautioned against using "one-size-fits-all"

regulation and asked for a case-by-case approach to examining and

ensuring the safety of institutions. Committee Member Gray

advised more flexibility in compliance timelines when rule

changes are implemented, and Committee Member Schriefer suggested

a more tailored approach to the requirements placed on banks by

cease and desist orders. Committee Member Urrabazo pointed out

that many examiners push banks to sell foreclosed property when

it might be more beneficial to the bank and to the community for

the bank to hold the property until market conditions improve.

Committee Member Blanton cautioned that many times it is better

to dispose of foreclosed assets early, but he also stated that

examiners focus too heavily on improvement in quarterly earnings

when a long term plan for improvement might be more prudent.

Committee Member Brown pointed out the importance of capital

standards to the industry. Committee members Brown and Schriefer

explained how increased capital requirements can affect the

lending ability of a community bank, and Mr. Brown stated that

meeting vigorous standards for Allowance for Loan and Lease

Losses ("ALLL") while complying with increasing capital

requirements is particularly difficult for community banks and

undermines the prior planning of bank management. Mr. Brown and

Committee Member Hopkins recounted how capital requirements in

cease and desist orders are forcing many banks to sell off all of

their best performing assets in order to come into compliance,

and Mr. Blanton and Mr. Brown explained that the deadlines for

meeting capital plan requirements are often unreasonable or

impractical.

Many of the Committee members were also concerned about the

treatment of specific types of assets under the current capital

rules. Mr. Blanton and Mr. Urrabazo were concerned with the

downgrading of performing securities and commercial real estate

("CRE") loans, especially during a time when there is an illiquid

market for such assets; they suggested more flexibility in

allowing markets to recover. Committee members Blanton and Cole

expressed frustration with being required to write-down modified

loans as troubled debt restructure when trying to proactively

work with borrowers on loan modifications. Committee members

Urrabazo and Rainey expressed concern over criticism of CRE

lending and write-down of CRE loans by bank examiners, especially

in communities where CRE represents a large proportion of

potential business and the best opportunity for profitable loans.

October 15, 2009
JJ 04

Mr. Brown, Mr. Blanton, and Mr. Hopkins suggested that

regulators could help institutions meet rising capital

requirements by increasing the portion of an institution's ALLL

that counts toward total capital.

Committee members Schriefer, Blanton, and Lewis all

commented on the reclassification of performing loans based on a

deterioration of value in the underlying collateral. They

pointed out that many loans had been made based on cash flow and

the underlying ability of the borrower to repay, separate from

the value of the collateral, and that these loans have somehow

been reclassified as "collateral loans" despite current payments

by the borrower. Committee Member Miller explained that many

appraisers are over-careful due to a fear of being criticized for

failing to correctly value property that may later fall in value,

leading to many reclassifications. Mr. Gray suggested creating a

new examination category for loans that are performing but have

underlying collateral values that have deteriorated.

Mr. Gray and Mr. Brown suggested that examiners review

overall earnings, which can be dragged down by loan loss

provisions, and operational earnings, which can give a better

indication of how well a bank is performing structurally,

separately.

There were also comments by Committee members Koch,

Williams, and Gray regarding pressure placed on bank examiners

and a disconnect between feedback given by examiners in the field

and exam reports that come back from the FDIC regional offices.

Mr. Urrabazo commented on the difficulty that banks will

have if congress limits fees associated with consumer bank

accounts.

Mr. Urrabazo and Mr. Hopkins expressed frustration with

being forced to reduce their institutions' reserve levels during

better economic times, and Ms. Cole and Steven D. Fritts,

Associate Director, DSC, pointed out that reserve drawdowns are

required by the accounting standards set by the Financial

Accounting Standards Board, not the FDIC.

Ms. Cole suggested that an extension of funds from the

Troubled Asset Relief Program ("TARP") to community banks would

help increase community lending. Mr. Schriefer expressed his

frustration that the initial TARP program was reserved only for

large banks, and he pointed out that the issuance of unused TARP

funds could help to unfreeze capital markets and prevent costly

failures in the future. Mr. Brown and Ms. Cole suggested that

TARP funds be used as bridge loans for community banks in good

October 15, 2009
J 05

financial condition, but Mr. Miller and Mr. Urrabazo cautioned

that the public associates a stigma of "bailout" with

institutions that receive TARP funds.

Committee Member Goodlock expressed frustration with the

treatment, by examiners, of borrowing from the Federal Home Loan

Banks ("FHLB"). Mr. Brown, Mr. Urrabazo, and Mr. Hopkins

recounted that many banks have simply stopped borrowing from the

FHLBs because of penalties and criticism from exam reports, and

Mr. Miller pointed out that penal ties associated with FHLB

borrowing could drive up the cost of lending for community

development proj ects.

Mr. Blanton expressed frustration with certificates of

deposit ("CDs") over $100,000 not being treated as core funding;

he suggested that this limit should be moved up to at least

$250,000 to match the current deposit insurance coverage. Ms.

Cole and Mr. Urrabazo pointed out that examiners would consider

large CDs as core funding if the bank provides documentation

proving that the deposits are stable.

Mr. Miller and Mr. Blanton expressed frustration over the

negative treatment, by examiners, of brokered deposits,

explaining that the real issue is what loans are being made

rather than the funding. Mr. Williams pointed out that using

brokered deposits and FHLB borrowing sometimes makes the best

business sense.

Members of the FDIC staff, Richard A. Brown, Associate

Director, Regional Operations , Division of Insurance and Research

("DIR") and Christopher J. Spoth, commented on the discussion,

recounting what they saw as the maj or takeaways, and Steven D.

Fritts assured the Committee members that the FDIC understands

the difficulty of the current economic crisis and is actively

considering ways to alleviate many of the mentioned issues. Mr.

Fritts also explained that the FDIC would soon be issuing new

guidance that should help in validating a bank's valuation and

grading of its own loans.

vice Chairman Gruenberg thanked the Committee members for

their openness and commented that there were many takeaways from

the meeting. He also commented that there were potential

opportunities for an expansion of TARP lending to community

banks.

Vice Chairman Gruenberg then called for a recess.

Accordingly, at 10:21 a.m., the meeting stood in recess.

* * * * * * *

October 15, 2009
06

The meeting reconvened at 10:38 a.m. that same day,

whereupon Mr. Nash opened the second discussion session on

financial reform legislation by asking for the Committee member's

opinions on the proposed Consumer Financial Protection Agency

("CFPA") .

Mr. Gray and Mr. Urrabazo stated that the new agency is not

needed, that the FDIC already sufficiently regulates consumer

issues for community banks, that it will impose an extra,

unnecessary cost on community banks, and that community banks did

not participate in the activities that the agency is intended to

regulate. Mr. Blanton, Ms. Cole, and Professor Koch suggested

that the new agency should regulate only the industry that has

created the problem financial products. Finally, Mr. Gray, Mr.

Hopkins, and Mr. Miller thanked the FDIC for i ts activism on this

subj ect and asked how community banks can help.

Mr. Nash then explained that a recent change in the proposal

would leave the CFPA as the unified rule maker for consumer

protection but would leave regulation of smaller banks with the

current regulator. Mr. Brown, Mr. Gray, and Mr. Goodlock

commented that having a sole rule maker removes checks and

balances and diminishes experience in the rulemaking process.

Mr. Urrabazo expressed concerns over how a new rule maker would

affect the Community Reinvestment Act.

Mr. Nash then asked if it would be easier to have the CFPA

and the primary federal regulator examine at the same time.

Almost all of the Committee members commented that this would be

a drain on an institutions resources and time, and they

characteri zed the j oint exam with a single rule maker as a onesize-fits-all policy that does not address the real problem, the

issuance of abusive and risky financial products.

Finally, Mr. Nash asked for comments on the proposal to do

away with preemption of consumer protection laws, and the

Committee members commented that this does not have a large

impact on state chartered banks.

Next, Mr. Nash moved to the topic of a systemic risk

regulator. Mr. Urrabazo suggested that the FDIC is sufficient to

handle systemic risk. Mr. Goodlock and Mr. Hopkins stated that

there needs to be an authority to handle systemic firms and that

some of these firms should be deal t with under anti -trust laws.

Mr. Williams pointed out that many systemic firms are not banks,

and he expressed concern over having the FDIC involved in

October 15, 2009
07

resolving non-bank firms. Chairman Bair interj ected that

even if the FDIC assisted in resolving non-bank firms, it would

not guarantee liabilities of non-banks.

Mr. Nash next asked about the viability of the dual -banking

system. Mr. Blanton pointed out that a state chartered bank has

two distinct examiners, which is an advantage. Mr. Gray and Mr.

Miller recounted some of the banking innovations that have come

from state chartered banks, and Ms. Cole pointed out the growth

in the community banking sector, even during a financial crisis.

Mr. Williams, Mr. Blanton, Ms. Stewart, and Mr. Urrabazo pointed

out that charter choice creates a more competitive environment.

Mr. Hopkins and Mr. Goodlock expressed concerns over a single

regulator losing sight of small banks, and they pointed out the

inability of troubled institutions to switch charters.

Chairman Bair asked for opinions on requiring institutions

to hold a new charter for a set time period before being allowed

to change, and Mr. Hopkins expressed his support for the idea.

Mr. Gray and Chairman Bair commented on the inconsistency in

simultaneously removing federal preemption and eliminating the

state charter.

Mr. Nash asked for opinions on the proposed elimination of

the Office of Thrift Supervision and the thrift charter. Ms.

Stewart acknowledged that there may be justification for

consolidation of the OTS but did not believe that could be

considered without a commitment to preserve the mutual charter.

Mr. Nash then asked whether something should be done to

reduce the size of large banks. Mr. Hopkins suggested that more

should be done to enforce state and federal deposit concentration

caps, and Mr. Goodlock suggested separating the insured business

lines of large institutions. Mr. Schriefer, Mr. Goodlock, Mr.

Urrabazo, and Chairman Bair commented on the effect of financial

sector deregulation and the possibility of un-winding the GrammLeach-Bliley Act, and Mr. Schriefer expressed frustration with

allowing the creation of large bank holding companies. Professor

Koch and Chairman Bair discussed evidence that economies of scale

do not exist in large financial institutions. Professor Koch,

Mr. Hopkins, Ms. Cole, Mr. Brown, Mr. Williams, Chairman Bair,

and Vice Chairman Gruenberg discussed the possibility of charging

an extra risk-based assessment for complex activity and providing

for the resolution of complex firms in order to mitigate risk,

ensure solvency, and facilitate orderly growth. Finally, Mr.

Urrabazo commented that he feels capable of competing with big

banks but that he does not like the idea of paying for their

failure when they act irresponsibly.

October 15, 2009
08

Mr. Goodlock commented that the Securities and Exchange

Commission's five hundred shareholder threshold limits the

ability of community banks to merge.

Mr. Nash and Sandra L. Thompson, Director, DSC, asked

Commi ttee members for suggestions on using TARP funds to help

community banks and for comments on the proposed dollar-fordollar match of capital raised in the private market. Mr. Brown,

Mr. Blanton, and Ms. Cole pointed out that matching would not

work because the capital markets are broken. Mr. Hopkins pointed

out that it would be difficult for family owned banks to

participate in a match. Mr. Blanton suggested allowing bank

holding companies to borrow and stream money to their subsidiary

banks. Professor Koch voiced his support for the matching

program, but he and Mr. Miller pointed out that provisions would

need to be made for mutuals and S corporations.

Mr. Schriefer, Mr. Blanton, Ms. Cole, and Ms. Thompson

discussed allowing banks with a CAMELS rating of 1, 2, or 3 to be

automatically included in TARP eligibility and allowing the

inclusion of banks rated 4 or 5 on a case-by-case basis. Mr.

Schriefer, Mr. Blanton, Mr. Hopkins, and Mr. Nash discussed

allowing all institutions to file applications for TARP funds,

and they discussed which regulator would approve such

applications. Mr. Miller and Mr. Urrabazo suggested that any

program should be structured so as not to be identified with

TARP, and Mr. Urrabazo requested that previous TARP borrowers be

allowed to move into any new program.

Mr. williams pointed out that the sale of failed banks is

making it difficult to raise private capital, and he requested

help from the FDIC on fighting overdraft protection proposals.

Vice Chairman Gruenberg then called for a recess.

Accordingly, at 12:07 p.m., the meeting stood in recess.

* * * * * * *

The meeting reconvened at 1:38 p.m. that same day,

whereupon Paul Nash introduced Arthur J. Murton, Director, DIR,

to open the discussion on the final topic, the funding of the

deposi t insurance system. Mr. Murton described the FDIC's

proposed rule on prepaid assessments and opened the floor to

comments from the Committee.

Mr. Brown and Mr. Blanton expressed approval for the

prepayment rule, describing it as innovat i ve and creative, and

Mr. Gray approved of the proposed termination and refund date,

which he said should mitigate any danger of over-assessment. In

October 15, 2009
09

response to questions from Mr. Gray, Ms. Rainey, Mr. Goodlock,

and Mr. Blanton; Diane Ellis, Deputy Director, Financial Risk

Management and Research, DIR, and Chairman Bair explained how

quarterly assessments and the 2014 refund would work under the

proposed rule; they also explained that the rule is not final and

is still out for comment. Mr. Hopkins, Professor Koch, and Mr.

Murton discussed the reasons for needing three years worth of

prepaid assessments, and Professor Koch and George French, Deputy

Director, Policy, DSC, discussed the prepayment's potential

affect on bank liquidity and ability to lend. Mr. Murton

explained the FDIC's ability to exempt institutions that lack the

resources to prepay, and Mr. Hopkins expressed concern that

exemptions need to be kept confidential to avoid public panic.

Finally, Mr. Urrabazo, Mr. Williams, Ms. Cole, Chairman Bair, and

Ms. Ellis discussed the possibility of allowing institutions that

so choose to expense their prepayments all at once rather than

incrementally.

The Committee also discussed the assessment base for the

various assessments. Mr. Schriefer, Mr. Urrabazo, Chairman Bair,

and Ms. Ellis discussed the use of different assessment bases for

the special assessment of May, 2009, the regular quarterly

assessment, and the proposed prepaid assessment, and Ms. Roberta

McInerney, Deputy General Counsel, Legal Division, explained that

the FDIC has broad authority for structuring special assessments

but that making changes to the regular quarterly assessment

invol ves a more cumbersome process. Mr. Hopkins pointed out that

times have changed and institutions no longer fund operation

solely with insured deposits, and he suggested that switching to

a regular assessment base of assets minus tier one capital would

better capture the risk posed by an institution. Chairman Bair

responded that the FDIC would consider a change in the regular

assessment base, but she also stated that the Corporation would

need to do a great deal of research and planning before any

change could be made.

Mr. Murton explained the current balance of the DIF, and Mr.

Miller, Mr. Blanton, Ms. Stewart, and Mr. Murton discussed the

optics of a "negative" DIF balance and how to inform the public

of the true status of the fund. Mr. Williams and Mr. Murton

discussed the importance of keeping the DIF independent from

other government funds, and Vice Chairman Gruenberg pointed out

that Congress generally respects the independence of the DIF.

Mr. Murton also asked for the Committee's opinion on the use

of counter-cyclical methods to fund the DIF. Mr. Urrabazo

expressed support for maintaining high reserves during good

economic times. Mr. Blanton and Mr. Miller expressed support as

long as assessments are lowered at the appropriate times, and Mr.

October 15, 2009
10

Miller commented that new banks should not be exempted from

assessments just because the DIF is fully funded during good

times.

The Committee had a lengthy discussion on the FDIC's

resolution process. After comments by Mr. Blanton, James Wigand,

Deputy Director, Division of Resolutions and Receiverships

("DRR" ), gave an overview of the FDIC's receivership process.

Mr. Blanton, Chairman Bair, and Mr. Wigand discussed situations

in which the FDIC had auctioned loans and participations for less

than the workout offers that it had received. Mr. Brown asked if

improvements were being made in workout negotiations, and

Mi tchell Glassman, Director, DRR, and Mr. Wigand responded that

workouts can be difficult due to problems in obtaining early

information on loans but that the process has been improving as

the number of bank failures has increased.

Mr. Williams asked how many whole bank transactions the FDIC

has entered into during this crisis, and Chairman Bair and Mr.

Murton responded that 68 out of 98 failures have been resolved

with whole bank transactions. Mr. Williams and Mr. Murton

discussed the FDIC's loss rates on bank failures in the current

crisis, and Mr. Urrabazo and Mr. Glassman discussed the FDIC's

use of guarantors to mitigate losses. Mr. Williams stated that

the FDIC often receives undue criticism for its losses during the

resolution process.

Mr. Goodlock asked whether the FDIC could use loss share

agreements to assist in the sale of open institutions, but

Chairman Bair pointed out that the FDIC would need a systemic

risk determination to provide financial assistance to an open institution.

Mr. Williams, Mr. Blanton, Chairman Bair, Mr. Glassman, and

Mr. Wigand discussed the cost of FHLB loans during the

receivership process, particularly the prepayment requirements on

the loans, and they discussed methods for FHLBs and the FDIC to

work together to reduce costs on FDIC receiverships. Mr. Mil ler

expressed concerns over FDIC proposals to limit recovery by

secured creditors during a failure, which he said would limit

FHLB lending, and Chairman Bair explained that this proposal was

targeted at the use of short-term collateralized liabilities and

not at the FHLBs. Finally, Mr. Blanton, Mr. Miller, and Chairman

Bair commented favorably on the increased use of collateral exams

by the FHLBs.

Mr. Schriefer complimented the FDIC's increase in deposit

insurance coverage, and Ms. Ellis stated that the first analysis

of the program's effect would come out soon.

October 15, 2009
J 11

Chairman Bair asked if reducing the risk-weight associated

wi th insured deposits would help community banks, and Mr. Blanton

responded that anything that reduces capital requirements, even

if just a little, would be helpful.

Finally, Mr. Hopkins and Mr. Blanton asked if the FDIC could

speed up the execution of powers-of -attorney for the sale of

assets.

Chairman Bair then asked for comments on the function of the

Committee and what should be covered at subsequent meetings; she

stated that she hoped the committee would meet quarterly. Mr.

Gray approved of the format of the meeting, and Mr. Williams and

Ms. Stewart approved of the FDIC's Washington office as a

permanent meeting location. Mr. Schriefer and Mr. Blanton

suggested bridge financing as a topic for the next meeting, and

Mr. Urrabazo, Mr. Miller, and Chairman Bair discussed the

circulation of a draft agenda thirty days prior to the next

meeting. Finally, Mr. Lewis thanked the examination staff at his

bank for giving good feedback and asked if he could share that

feedback with the Committee at some future time.

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

Robert E. Feldman

~

Executive Secretary

Federal Deposit Insurance

Corporation

And Committee Management Officer

FDIC Advisory Committee on

Communi ty Banking

October 15, 2009
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

October 15, 2009 - 8:36 A.M.

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

minutes are accurate and complete.

Sheila C. Bair

Jc~

Chairman

Board of Directors

Federal Depos it Insurance Corporation

and

Presiding Officer

October 15, 2009, Meeting of the

FDIC Advisory Committee on Community Banking

Dated: January 13, 2010