Minutes ú6S

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 20, 2011 8:39 - A.M.

The meeting of the FDIC Advisory Commi t tee on Community

Banking ("Committee") was called to order by Sheila C. Bair,

Chairman, Federal Deposit Insurance Corporation ("Corporation"

or "FDIC") Board of Directors.

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 and

CEO, City First Bank of D.C., Washington, D.C.; Charles G.

Brown, I I I, Chairman and CEO, Insignia Bank, Sarasota, Florida;

Deborah A. Cole, President and CEO, Citizens Savings Bank and

Trust Company, Nashville, Tennessee; Craig M. Goodlock, Chairman

and CEO, Farmers State Bank, Munith, Michigan; James H. Gray,

Chairman, Beach Business Bank, Manhattan Beach, California; Jack

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, Uni versi ty of South Carolina, Columbia, South

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

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

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

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

Mexico; Bruce A. Schriefer, President, Bankers' Bank of Kansas,

National Association, wi chi ta, Kansas; Laurie Stewart, President

and CEO, Sound Community Bank, Seattle, Washington; Ignacio

Urrabazo, Jr., President, Commerce Bank, Laredo, Texas; and
J 069

Matthew Williams, Chairman and President, Gothenburg State Bank

& Trust Company, Gothenburg, Nebraska.

Members of the FDIC Board of Directors present at the

meeting were: Sheila C. Bair, Chairman; Martin J. Gruenberg,

Vice Chairman; John E. Bowman, Acting Director of the Office of

Thrift Supervision ("OTS"); and Thomas J. Curry, Director

(Appointive) .

Corporation staff who attended the meeting included:

Willa M. Allen, Ruth R. Amberg, William R. Baxter, Michelle M.

Borzillo, Luke H. Brown, Richard A. Brown, Jason C. Cave, Glenn

E. Cobb, Christine M. Davis, Patricia B. Devoti, Joseph A.

DiNuzzo, Doreen R. Eberley, Diane L. Ellis, Robert E. Feldman,

Ralph E. Frable, Steven D. Fritts, James J. Gallagher, Alice C.

Goodman, Shannon N. Greco, Tray Halverson, Nancy W. Hunt,

Michael L. Jackson, Kenyon T. Kilber, Ellen W. Lazar, Gil A.

Ledbetter, Alan W. Levy, Cassandra McConnell, Roberta K.

McInerney, Robert W. Mooney, Tariq A. Mirza, Arthur J. Murton,

Paul M. Nash, Christopher J. Newbury, Thomas E. Nixon, Richard

J. Osterman, Jr., Kent D. Oz, Mark E. Pearce, Grace Pyun,

Carolyn D. Rebmann, Claude A. Rollin, Barbara A. Ryan, Jon T.

Rymer, Robert F. Storch, Jesse o. Villarreal, Cottrell L.

Webster, Bucky Wells, Mindy West and Katherine G. Wyatt.

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

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

and Charlotte M. Bahin, Senior Counsel for Special Proj ects,

OTS, were also present at the meet ing.

Chairman Bair opened the meeting by welcoming the Committee

members and providing an overview of the day's topics,

incl uding: an FDIC study about core and broke red deposits; the

Treasury Department's new Small Business Lending Fund program;

the FDIC's efforts to implement the Dodd-Frank Wall Street

Reform and Consumer Protection Act ("Dodd-Frank Act"); emerging

risks for the banking industry; an introduction of Mark Pearce,

Director of the FDIC's soon to be launched Division of Depositor

and Consumer Protection ("DCP"); regulatory burden relief; and a

roundtable discussion. She noted that Jeffrey Goldstein,

Undersecretary of the Treasury for Domest ic Finance, would

provide remarks during the luncheon. Chairman Bair noted that

the FDIC hosted a forum the previous week on small business

lending issues, and she then provided an overview of that

forum's speakers and topics.
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Chairman Bair observed that the day's focus was to inform

Committee members about the FDIC's thinking on significant

communi ty banking issues and to obtain their input on them. She

introduced Paul M. Nash, Deputy to the Chairman for External

Affairs, who coordinated the agenda.

Mr. Nash introduced Diane L. EI i is, Deputy Director,

Financial Risk Management and Research, Division of Insurance

and Research ("DIR"), Melinda West, Chief, Policy and Program

Development , Division of Supervision and Consumer Protection

("DSC"), and Joseph DiNuzzo, Supervisory Counsel, Assessments,

Legal Division, who spoke about "Brokered Deposits/Core Funding

Issues." Ms. Ellis indicated that the Dodd-Frank Act required

the FDIC to complete a study about core and broke red deposits by

July 21, 2011. She stated that existing deposit rules,

particularly brokered deposit rules, might have become obsolete;

that the FDIC was looking for a better way to view deposits for

supervisory and assessment purposes; and an idea was to classify

deposits along a spectrum, from stable to potentially volatile.

Ms. West then inquired how members would weigh various bank

funding stability characteristics such as: customer

relationships; deposit size and whether it was insured; whether

the deposit was local or not; and whether the interest paid on

the deposit was above rate.

Member Urrabazo observed that the geographic source of

deposits can playa key role; his Texas bank had many deposits

from Mexico, some over a million dollars, and that those

deposits often raised a rate sensitivity analysis issue during

examinations. He stated that he gathered information over the

years that showed that the deposits were stable. Member Brown

discussed his bank's experience with remote deposits, noting

that although many of them are not local, his bank's policy of

maintaining close contact with remote deposit customers meant

that many such deposits could fairly be considered core. Member

Gray later provided an example of how his bank had developed

long-term banking relationships with doctors across the country

using remote capture technology. Member Stewart added that, in

her view, geography is less significant among consumer accounts

as well as business accounts. Her bank found that the most

important retention factors were the number of services used by

the customer, especial ly electronic services, and that geography

was not as important. Member Miller discussed an example of a

stable broke red deposit. Specifically, his bank had accepted

multi-year certificates of deposit through a broke red network
071

that paid lower interest rates than the rate offered by the bank

wi thin their local area.

Ms. Ellis observed that a theme appeared to be developing

that the customer relationship should be heavily weighted, and

might overcome other characteristics that might otherwise be

indicative of a less stable deposit. She asked about the impact

of technology on deposit stability; for example, if Internet

sourced deposits were more or less stable than "in-person"

deposi ts. Members Miller and Bridges shared their missiondriven banks' experiences in attracting deposits using magazine

advertisements and the Internet. The banks' experiences

indicated that such mission-driven deposits, made convenient by

newer technologies, were long-term and stable, even if they were

broke red deposi ts.

Member Schriefer opined that transaction accounts by

definition should be viewed as mostly core deposits. Member

Gray said that it is important to consider the bank's business

plan when thinking about interest rates and deposit stabili ty.

His bank offered a business savings account that paid a slightly

higher interest rate than a regular savings account. The

accounts had been successful and allowed the bank to reduce its

broke red deposits.

Member Brown indicated that outside rating agencies'

ratings of banks can affect the stability of deposits,

especially those above the insured amount, because the ratings

can affect the public's perception of bank-failure risk.

Chairman Bair observed that a current goal was to determine what

might happen to different deposits if the public perceived a

bank was weakening. She continued that, for insurance premium

purposes, the FDIC needed metrics that could be included in the

Call Report, and inquired about information banks maintained

regarding deposits. Member Cole described various deposit

characteristic information that her bank keeps, including length

of time of deposit and average deposit size. Member Goodlock

reported that his bank maintains substantial data about deposit

relationships but cautioned that relatively few community banks

do. He suggested that there should be a mechanism by which

smaller banks that did not track information would be allowed to

rely on more general information in order to have their deposits

classified as stable. Later, Ms. Ellis noted that if the FDIC

changed its approach to analyzing deposits, it would need

additional or different bank data, and that any data collected

on the Cal i Report could not be very nuanced.
The Committee then discussed deposit stability as it

relates to reciprocal deposits. Member Blanton stated that his

bank had a surplus of deposits, and that it used reciprocal

deposits to ensure that all of the deposits were insured.

Members Hopkins, Williams and Blanton indicated that their

opinion was that reciprocal deposits should be viewed as stable

deposits rather than broke red because the customers for whom

they are used are among a bank's most stable. Member Gray noted

that many entities that have fiduciary responsibilities make use

of the Certificate of Deposit Account Registry Service ("CDARS")

program and that it was easy to document such purposes.

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In response to a question from Member Williams, Ms. Ellis

described how the FDIC distinguishes between reciprocal CDARS

and traditional broke red accounts for insurance premiums.

Chairman Bair stated that she understood that CDARS could be

used to support stable deposits, as the Members reported, but

that she was also aware of CDARS being used in ways that did not

promote deposit stability. The problem, she indicated, was

differentiating between the two uses.

Member Hopkins cautioned against tying insurance premiums

to geographic territories because, he stated, community banks

would be disadvantaged when compared to large banks' whose

terri tories are the entire United States. Member Koch suggested

viewing deposit stability in an economic sense rather than a

definitional one; a bank should be able to estimate the interest

elasticity for all of its funding sources so that, when interest

rates change, it can estimate what deposits would flow in and

out.

In response to a question from Member Schriefer, Ms. Ellis

stated that in the recent downturn, institutions that failed

were about twice as likely to have broke red deposits as banks

that didn't fail, and failed institutions funded between two and

three times as much with broke red deposits as non-failures.

Responding to comments from Members Miller and Hopkins, Vice

Chairman Gruenberg agreed that risky lending often plays an

important role in the failures, but added that broke red deposit

concentrations contributed to liquidity failures. Chairman Bair

later observed that the FDIC often has to payoff brokered

deposits in failed banks because there is little acquirer

interest in them. Ms. Ellis added that the FDIC's loss rate in

failed banks with broke red deposit concentrations was about one

and one-half times the average.
073

Member Stewart provided a suggestion to reduce the burden

on some banks of reporting specific data to establish deposit

stability. The FDIC could establish thresholds for certain

metrics (such as the deposit ratio, percentage of broke red

deposits) and, if a bank fell below that threshold, it would not

be required to provide further data. If a bank missed a

threshold, she added, it could take steps to demonstrate the

deposi ts' stability.

Member Urrabazo had earlier expressed the view that a

bank's payment of premium interest rates was often an indicator

of CDARS being used in a way that did not promote deposit

stability. He suggested that examiners should question such

banks about their rationale for exchanging CDARS. Chairman Bair

later stated that there appeared to be agreement that paying

above market interest rates was a risk condition, but asked how

above market rates could be defined given geographic differences

and other factors. Member Schriefer suggested making a tie

between the cost of funds to Treasuries; however, Member Hopkins

indicated that his bank would have a problem with that approach

because it shares a market with credit card banks and their

geographic market is historically above market. Ms. West stated

that, once a bank becomes less than well-capitalized, it is

restricted from paying above market rates. She further noted

that the FDIC published a national rate to avoid a Treasury rate

tie because it was so low and penalized many banks. Member

Urrabazo observed that local deposits are more expensive than

funding from home- loan banks, and that community banks must

balance the stability of local deposits against their cost.

Member Brown shared an example of a new bank, without

problem assets, that had to curtail its lending due to

sensi ti vity to paying over-market rates; he commented that it

was important to distinguish between such banks paying above

market rates and banks that are troubled by a liquidity crisis.

Chairman Bair responded that such a distinction underscored how

difficult it is to calibrate the issue correctly and noted the

additional issues of identifying easily reportable metrics that

do not impose excess regulatory burden. Members Blanton,

Urrabazo, Bridges, Cole, and Williams discussed the challenges

of developing a guideline in light of conflicting goals. Member

Brown inquired whether the regulatory agencies had discussed

expanding the number of CAMELS ratings from five to ten, and

Chairman Bair responded that the FDIC favored a comprehensive

review of the CAMELS process.
074

Mr. Nash then introduced Jason Tepperman, Director of the

Small Business Lending Fund ("SBLF"), Department of Treasury,

and Steven D. Fritts, Associate Director, Risk Management Policy

and Examination Oversight Branch, DSC, who spoke about "Small

Business Lending." After noting that small businesses are more

dependent on bank lending than larger businesses and that

community banks are a backbone of small business lending, Mr.

Tepperman provided an overview of the SBLF program, a $30

billion capital initiative designed to work with community banks

to expand small business credit availability. He stated that

banks with assets of $10 billion or less may participate; and

banks under $1 billion may receive up to five percent of risk

weighted assets from the program, while banks between $1 and $10

billion may receive three percent. Mr. Tepperman stated that

the dividend rate that banks must pay for the funds would start

at no higher than five percent. He then described how the

dividend rate could be adjusted lower quarterly as banks

increased their amount of small business lending. Specifically,

if banks increased their small business lending by ten percent

over the baseline lending amount (calculated as the average

amount in the four quarters ending in June, 2010), the dividend

rate could be as low as one percent. Mr. Tepperman added that,

after two years, the dividend rate would be locked in for the

next two and a half years. He explained that the purpose of

this was to encourage banks to make their best effort to find

credi t -worthy borrowers and extend credit in the near term.

After the four and one-half year period, he indicated,

participat ing banks would pay a nine percent dividend rate.

Mr. Tepperman stated that the SBLF program defined small

business lending so as to cover much of the business lending

that community banks engage in, including: commercialindustrial, owner-occupied commercial real estate, agricultural

production finance, and farmland loans. He said that loans over

$10 million, or to businesses with over $50 million in revenue,

would not qualify for the program. Mr. Tepperman stated that

banks could use SBLF funds to refinance preferred stock that had

been previously issued to the Treasury in earlier programs. He

indicated that the one page program application was on the

Treasury website. Banks would also have to provide a short,

small -business lending plan that Treasury would share with the

bank's regulator.

Mr. Tepperman and Mr. Fritts described the regulator's

consultation role. Mr. Fritts stated that the FDIC will provide

Treasury with a bank's current supervisory information; it would

also review the bank's lending plan for safety and soundness
075 purposes, and evaluate whether it was realistic given the bank's -

overall supervisory condition. He added that the FDIC had been

asked to consult with Treasury on 48 applications. Mr. Fritts

stated that the banking agencies would provide information but

that Treasury would make the application and investment

decisions.

Member Brown complimented the SBLF program application as

easy to understand and complete. In response to questions from

Member Bridges, Mr. Tepperman described how banks that had

Capital Purchase Program ("CPP") money could transition to the

SBLF program. He also described how banks that were found

ineligible to participate in the program on first review would

be entitled to a second review for possible SBLF investment, if

the bank were to raise a matching private capital investment.

In response to a question from Member Schriefer concerning the

payback of SBLF money, Mr. Tepperman noted that the capi tal

could be perpetual and discussed methods by which program funds

could be repaid. Responding to Member Brown, Mr. Fritts

indicated that Treasury would evaluate a bank's repayment

abili ty.

Responding to Members Bridges and Blanton, Mr. Tepperman

clarified that the underlying legislation did not allow for the

inclusion of wholesale loan purchases or loan participations,

and that non-owner occupied commercial real estate was not

eligible for the program. Member Schriefer observed that a

program requirement that small business borrowers certify that

they had not been convicted of a sex crime appeared not germane

to SBLF, and asked if it would be applied to all bank lending

applications. Mr. Tepperman noted that the certification

requirement had been added later in the legislative process and

that Treasury was working on how to implement the requirement in

a commercially reasonable way.

In response to a question from Member Lewis, Mr. Tepperman

reviewed how the SBLF program related to Small Business

Administration loan programs. In response to questions from

Member Stewart, Mr. Tepperman indicated that the terms sheets

for mutual banks and Sub-chapter S corporations had not been

completed, but that he saw no reason why they would not be able

to participate in the SBLF program.

The Committee and panelists discussed what bank types would

find the SBLF program attractive. Mr. Fritts observed that the

program could be attractive to banks that have CPP money, and

are in stable condition, but are having difficulty acquiring
076

new capital. He added that the program could be financially

attractive to banks whose lending increases would lower the cost

of SBLF funds to one percent. Mr. Tepperman stated that,

al though Treasury did not have its own proj ections, he had seen

investment bank models which predicted 20-30 percent earnings

improvements for banks that lowered their SBLF rates to one

percent.

Mr. Nash inquired about an apparent regional variation in

SBLF interest. Mr. Blanton, from Georgia, indicated that his

bank would have to greatly increase its small business lending

just to reach the baseline figure specified in the program

before the SBLF dividend rates would be reduced, and opined that

his market did not have suff icient loan demand. Chairman Bair

observed that it was an unfortunate outcome of the program that

banks that had kept their loan balances relatively high during

the economic crisis would find them harder to grow in the SBLF

program. Member Goodlock, of Michigan, stated that there was a

dearth of qualified borrowers in his market. Member Brown

indicated that the SBLF program was more attractive in Florida,

where there was growing loan demand but limited access to

capital. Responding to Member Hopkins, Mr. Tepperman stated

that no SBLF applications had been approved yet but that

approvals and early funding should occur soon.

The Committee stood in recess at 10:21 a.m. The meeting

reconvened at 10: 43 a. m. that same day.

Ms. Alice C. Goodman, Deputy Director of the Office of

Legislative Affairs, and Ms. Ruth R. Amberg, Senior Counsel,

Consumer/Compliance Section, Legal Division, provided the

Committee with an "Update on Dodd-Frank Implementation." Ms.

Goodman noted that the FDIC was aware that there was uncertainty

among community bankers about the actual language of regulations

and about the new Consumer Financial Protection Bureau ("CFPB")

She observed that community banking had received some

accommodations in the legislation, such as the treatment of

trust preferred securities, and an exception for the executive

compensation rule. Ms. Goodman invited the Committee to provide

their views on a variety of subj ects, as discussed below.

Ms. Amberg described various rulemakings and other proj ects

in which the FDIC was engaged. She noted that many of the

implementation efforts had been about systemic risk mitigation

and deposit insurance reform, neither of which imposed much

burden on community banks. Ms. Amberg discussed proposed and

final rules that have already been published, and then those
0'17

that would be addressed in the next several quarters. She noted

that the FDIC provided the public with easy access to all the

ini tiati ves at www. fdic. gov/regulations/reform/ ini tiati ves. html .

Ms. Amberg noted that, pursuant to the FDIC's transparency

policy, the FDIC posted information about who had met with whom

about rulemakings and the nature of their comments.

In response to a question from Member Stewart, FDIC staff

and Committee members engaged in a sustained discussion about

the role of public comments on FDIC rulemaking. Mr. Nash said

that, before he started working at the FDIC, he had shared

Member Stewart's uncertainty whether public comments had much

effect, but that he had since seen that every comment is

reviewed and summarized, and FDIC leadership is briefed about

their content. Ms. Goodman added that Board members asked many

questions about public comments. Ms. Amberg observed that staff

reviews the comments carefully to identify possible changes to

proposed rules that could be recommended to the FDIC Board.

Responding to Member Urrabazo, Ms. Goodman and Ms. Amberg

discussed the FDIC's practice of summarizing the public comments

when it publishes a final rule. Member Urrabazo suggested that

the summaries might be more useful if they provided additional

characterization about comment trends the FDIC observed.

Member Goodlock suggested that Committee members encourage

other community bankers to provide comments on proposed rules.

Member Stewart agreed and noted that it is easy for a community

banker to assume that, if one person had advocated a point of

view they share, that there was no need for them to al so

comment. Member Blanton stated that his main Dodd-Frank Act

concern was the cost of compliance, that the new rules would add

another layer of expense. Later, in response to Member

Schriefer's inquiry, only one Committee member indicated that

their bank had an attorney on staff. Other members depended on

outside counselor non-attorney compliance officers to review

new regulations. Member Schriefer observed that there was

insufficient time for community bankers to engage in their

business and to fully understand the new requirements.

Member Cole indicated that many rules do not apply to

community banks by their terms, but that over time, they become

"best practices" to which community banks were eventually

expected to conform. Member Miller also indicated that the

"trickle down" effect of laws to community banks was a problem,

as well as the unintended consequences of rules. Member Bridges

stated that if a community bank engages in predominantly one

type of business, it may still be required to develop policies
) 078

and procedures in a business area which has little to do with

its usual business. She also later observed that the Dodd-Frank

Act legislation was generating a large number of regulations and

that community banks had to expend resources to determine which

ones were applicable and which were not.

Chairman Bair, Vice Chairman Gruenberg and FDIC staff

acknowledged the burdens that new regulations impose on

communi ty banks. Chairman Bair observed that every new

regulation imposes a higher incremental cost to community banks

than on large banks. She stated that the FDIC is sensitive to

the fact that the new regulations address issues that arose with

large banks, and that the FDIC needs to avoid unintended

trickle-down effects on communi ty banks. Chairman Bair

indicated that the FDIC has an interest in community banks

having greater balance sheet diversification and expressed

concern that new rules, if overbroad, might discourage banks

from entering new areas of business or growing smaller ones.

Vice Chairman Gruenberg recognized that, even though many of the

new rules do not impact community banks, there is significant

effort involved for smaller banks to sort through the many

publications in order to make those determinations.

Member Rainey suggested that the FDIC might initiate

conference calls for community banks when rules are published to

draw attention to the rule and explain the intentions behind the

rule. Such conference calls, she indicated, might help avoid

bankers being misled by consultants about a rule's purpose or

impact. Member Goodlock agreed that such calls would be

helpful. Member Gray suggested that, when the FDIC established

a new regulation, it could also establish a safe-harbor type

general policy that banks could follow if they chose.

Members and staff discussed ways to clarify what rules did

not apply to community banks. Member Bridges observed that a

statement in a rule that it applied to banks with "over $10

billion in assets" but was silent regarding banks under $10

billion, allowed for subsequent interpretation and expansion to

smaller banks. She and Member Miller suggested that an explicit

statement that such a rule did not apply to smaller banks would

help avoid future trickle-down effects. Later, Member Stewart

suggested that, when communicating about new rules, the FDIC

could provide standardized executive summaries that included a

table showing the size banks to which the rule applied. She

observed that such a standardized table could help community

banks prioritize their rule reviews, direct rules to the most

appropriate screeners, and generally increase efficiency.
~79

Chairman Bair agreed that executive summaries were helpful and

could also be used by the FDIC.

Earlier, Member Goodlock inquired about what influence the

FDIC would have with the CFPB and the consumer protection rules

the CFPB would write. Ms. Amberg noted that the law requires

the CFPB to consult with the FDIC as part of its rulemaking

process. Chairman Bair indicated that the CFPB Director would

be a member of the FDIC's Board and should come to understand

community bank concerns through that role. The Chairman also

suggested that the FDIC might assist the CFPB by formally

analyzing new CFPB rules for their impact on community banks.

Responding to Member Gray, Ms. Amberg indicated that it was

not yet known how many new or revised bank policies would be

required by Dodd-Frank Act regulations, al though she expected

that few would be required. Member Gray observed that revising

bank policies (as well as writing new ones) required bank

resources. Mr. Nash encouraged Members to contact the FDIC when

they saw potential trickle-down effects in rules. Chairman Bair

concurred, adding that the FDIC tries to be sensitive to

communi ty bank concerns and could provide comments to other

agencies' proposed rules.

Mr. Richard Brown, Associate Director, Regional Operations,

DIR, and Ms. Nancy Hunt, Associate Director, Capital Markets,

DSC, then spoke about "Emerging Ri sks . " Mr. Brown cont rasted

how much the risk management perspective had changed from the

middle of the last decade, which was viewed as a period of

moderation and lowered economic volatili ty, and the present, in

which the economy is dealing with the consequences of a great

recession. He observed that, while one must remain cognizant of

emerged risks, it is important to focus on emerging risks.

Mr. Brown then reviewed three emerging risks, the first

being a possible farmland price bubble. He observed that

farmland prices were in the midst of a great boom, and that

farmland prices had doubled in nominal terms in ten years. He

said that commodity prices are at an historical peak and that

the farm sector had earned near record incomes for ten years,

but observed that the farm sector is inherently volatile. In

evaluating the risk for the banking sector, he stated that farm

debt had increased 33 percent in the preceding ten years, but

noted that the increase was much less than the quadrupling of

debt that had occurred in the early 1980' s when a farmland price

bubble burst. Mr. Brown observed that most land transactions
involved

is owned

farmers, rather than investors, and that most farmland 080

wi thout any debt.

The second emerging risk Mr. Brown discussed was the rise

in bond prices and lowering of interest rates, and whether that

state of affairs could be relied upon to continue. He stated

that the large U.S. budget deficit was an important factor and

provided a variety of metrics about it and its relation to the

gross national product. Mr. Brown observed that the U. S.

continues to be viewed as a safe haven but noted that, if it did

not address its structural budget imbalances, it might face a

sudden and violent loss of confidence resul ting in high and

volatile nominal interest rates.

The third emerging risk Mr. Brown discussed was state and

local finance and municipal debt. He observed that states and

municipal it ies recently experienced sharp revenue drops and that

they often responded to such drops by cutting expenditures,

including employees. Mr. Brown observed that banks hold about

$170 billion of state and local debt, or 6 percent of the total

$2.8 billion of such debt. Al though historically viewed as a

safe asset class, he noted that some (though not all) analysts

were predicting severe credit problems. Mr. Brown indicated

that recent municipal debt price volatility and the withdrawal

of investor funds from the municipal market indicated some

uncertainty about the credit qual i ty picture going forward.

Ms. Hunt then described how DSC used macroeconomic analysis

information, such as described by Mr. Brown, and combined it

with off-site monitoring information and other tools in order to

alert examiners and the banking industry about trends that

should be considered in risk management. She noted that DSC's

interest rate risk advisory about one year before was an example

of the process. Ms. Hunt invited the Committee to share their

views about emerging risks. Member Gray identified two risks:

one was default risk, as exemplified by the municipal "dirt"

bonds that Ms. Hunt had earlier described; the other was a markto-market risk if interest rates rise, which could have a

significant affect on banks' balance sheets.

Member Williams spoke about a possible farmland price

bubble and noted that most banks in his agricultural area used

cautious underwriting standards, and that most land loans were

at about 50 percent of value. He also said that buyers were

local farmers, and that investor purchases had virtually

stopped. Member Williams indicated that it was important to

analyze the long term direction of the food-fiber-fuel demands
081

and stated that he had an optimistic view. Member Gray observed

that some Southern California farmers were repurchasing land for

agricul tural use that they had previously sold for housing

development. Member Schriefer discussed farmland appraisals,

noting that they used low (two percent) capitalization rates in

their cash flow calculations. Member Hopkins stated that Farm

Credi t banks had been very aggressive in farmland lending and

that this was the biggest driver of a bubble.

Member Williams stated that he favored building reserves in

good economic times, such as his agricultural bank was now

experiencing. He said that he had been disappointed that, in a

recent examination, his bank had been criticized for having a

too high loan loss reserve. Member Williams suggested that

regulators should support setting aside reserves for potential

bubble bursts. Member Blanton agreed, stating that building

reserves was prudent business. Ms. Hunt indicated that the

matter was the subj ect of international discussion and involved

a conflict of two different accounting approaches about how

banks should provision to build reserves for the future.

Member Hopkins observed that interest rate risk was his

greatest concern. Member Koch commented about municipal bonds,

advising that bankers should generate their own credit analysis

based on an extensive credit file as if it was a standard loan,

and not rely too much on outside ratings of "investment grade."

Relying only on brokers in an area where a community banker has

limited expertise is fraught with risk, he said. Mr. Brown

agreed that municipal bond qual i ty was very heterogeneous and

that ratings might be unreliable. Ms. Hunt added that FDIC's

guidance states that banks should perform due diligence and not

rely solely on credit ratings.

The Committee stood in recess at 11:59 a.m.

reconvened at 1: 56 p. m. that same day.

The meeting

Noting that the meeting was behind schedule, Mr. Nash

recommended taking time from the "Roundtable Discussion" panel

at the end of the day since the Committee members had already

provided updates about their local economic conditions during

lunch. Mr. Nash then introduced Mark E. Pearce, Director of the

soon-to-be launched Division of Depositor and Consumer

Protection ("DCP"), Luke H. Brown, Associate Director of

Compliance Policy, DCP, and Roberta K. McInerney, Deputy General

Counsel, Corporate, Consumer, Insurance, and Legislation Branch,

who discussed "Consumer Protection and Compliance Issues."
082

Mr. Pearce noted that, when the FDIC Board of Directors had

approved a reorganization last summer, the Board wanted to

maintain a strong connection between the risk management and

consumer sides of bank supervision. One way to achieve that, he

observed, was for Regional Directors to remain responsible for

both risk management and compliance so that a single point of

contact existed for the oversight of all aspects of insured

insti tutions. Mr. Pearce also discussed two key rationales for

creating separate divisions: first, to ensure that there is a

dedicated, enhanced, efficient and effective focus on consumer

protection issues; and, second, to align the FDIC's

responsibilities with the new CFPB. Having noted that he

started at the FDIC in November, Mr. Pearce stated that he was

taking a fresh look at the FDIC's consumer protection program

and invited feedback. In response to a request from Member

Schriefer, Mr. Pearce stated that he was trained as a lawyer,

had worked in community development on affordable housing

finance issues, had been the President of the Center for

Responsible Lending, and was later Chief Deputy Commissioner at

the North Carolina Banking Commission.

Member Goodlock noted that his bank was primarily a

residential lender and stated that he had grave concerns about

the CFPB. He said that he hoped that the CFPB would simplify

the compliance requirements of the numerous laws that apply to

residential lending. Member Goodlock added that he had used a

wide variety of financial products over 30 years of banking and

that a multitude of tools was necessary to help meet the credit

needs of people with limited means and education, as well as the

needs of the weal thy and well -educated. Mr. Pearce said that

CFPB had announced that one of its first initiatives was to

review mortgage disclosure issues, but noted that it would be a

challenging proj ect.

Member Brown complimented the FDIC on its risk-based

approach in a recent compliance examination at his bank.

Regarding spousal signature requirements, however, he noted that

the examination appeared to apply a guilty-until-proven-innocent

approach, wanting the bank to perform additional analyses that

Member Brown viewed as not required by the law. Mr. Pearce

responded that, while the Equal Credit Opportunity Act imposes

obligations on the FDIC that may have related to the examiner's

request, the FDIC had refined its examination procedures to

limi t the problem described, and said he would look into it

further.
083

Member Urrabazo raised the issue of overdraft programs,

stating that there was customer demand for the product, and that

more than 80 percent of his bank's customers had opted- in for

the program, despite its relatively high cost. Regarding the

recent overdraft program guidance, which becomes effective on

July 1, he noted that his compliance officer had a long list of

issues that were unclear in it, and recommended that the FDIC be

more precise. Member Urrabazo, whose bank was currently having

a compliance examination, also stated that the examiners had

asked to see the bank's written plan for complying with the

overdraft guidance al though it would not be in effect until

July. Member Williams later observed that there had been some

question among bankers whether the FDIC was stepping beyond

guidance and was writing rules instead. In a similar vein,

Member Goodlock asked how much flexibility would be allowed in

examinations about overdrafts. For example, he asked, would six

overdraft charges in a 12 month period necessarily require the

bank to take responsive action or might, in certain

circumstances, eight instances be al lowed?

Mr. Pearce stated that compliance with the guidance was not

expected until July and that this would be communicated to

examiners to assure consistent application. He added that the

FDIC was more explicit in the guidance about its overdraft

program expectations because it wanted to make it easy for

institutions to comply; he acknowledged that the specificity

caused the guidance to look like a rule. Mr. Luke Brown added

that the FDIC had sol ici ted publ ic comment on the overdraft

program guidance and received over a thousand letters that had

proved very helpful in refining the guidance. He added that the

FDIC wanted to provide clear information about what the guidance

would mean for each institution, to reduce wasted time and

resources.

Chairman Bair noted that overdraft lines of credit are not

regulated by the Truth In Lending Act, so that consumers do not

get annual percentage rate and other helpful disclosures when

overdraft charges are incurred. This lack of disclosures

impairs the consumer's ability to understand that they may have

lower cost credit al ternat i ves available to them, she said.

Chairman Bair indicated that guidance had been in place since

2005 recommending that banks monitor overdraft use and

communicate with recurrent overdraft users about alternate

products, but that few banks had taken action. Thus, she

continued, the new guidance provided greater clarity about the

FDIC's expectations about when the communications should occur.

The Chairman added that she thought that the most constructive
084

dialogue would be concerning communications between bankers and

recurrent overdraft users: what kind of communication needs to

take place; and what consumer responses should trigger what

banker responses. She indicated that consumers might choose to

continue using overdrafts frequently, but, if they did so after

being informed about alternative financial products, it would be

better than the present situation, in which overdraft programs

had a poor reputation and were the subj ect of rising consumer

complaints.

Member Rainey asked if there would be additional guidance

about ad hoc or non-automated overdraft programs. Mr. Pearce,

noting that about 70 percent of community bank overdraft

programs were ad hoc, confirmed that further guidance would be

issued, and would provide clarity on the use of discretion in

approving overdrafts. Member Urrabazo compared the ad hoc

approval of overdrafts in the past to the current automated

overdraft programs, and noted that more consumers were having

their overdrafts approved now, thus avoiding merchant charges

and possible legal problems associated with returned checks.

Mr. Pearce again noted that communication with customers about

al ternati ve products was a key point of the guidance.

Mr. Nash then reintroduced Mr. Fritts and Ms. Amberg who

spoke about "Regulatory Burden Relief." Mr. Fritts observed

that regulatory burden relief posed a challenge, but that the

FDIC uniquely understood community banking. He said that the

effort was greatly aided due to Chairman Bair's strong support,

and that she had instructed FDIC leadership to look in every

possible way to reduce burden, to find ways for the FDIC to work

smarter, better, more user- friendly, while being extremely

cognizant of how FDIC actions impact insured institutions.

Chairman Bair, at various points, asked the Committee to

identify their burden reduction priorities. Were their main

concerns about: existing regulations; Dodd-Frank Act

regulations being developed; or overlapping regulations? Or,

were their concerns, she asked, focused on specific items such

as the Call Report, pre-examination questionnaires, or HMDA

reports? Could some processes be further automated using

FDIConnect or other methods?

Referring to a previous burden reduction effort (known as

"EGRPRA"), the Chairman observed that the FDIC had no control

over the language of several burdensome regulations, such as the

Bank Secrecy Act and various consumer regulations, and

encouraged the Committee to identify efforts where the FDIC

could have the most impact. She also noted that any regulatory
085

change imposed burden, even change meant to ul timately reduce

burden, and inquired about the cost-benefit analysis the FDIC

should engage in to make its decisions. Chairman Bair repeated

her interest in developing a community bank impact analyses for

new Dodd-Frank Act rules.

The Commi t tee's discussion included both "big picture"

recommendations and discussions of specific topics. Among the

general recommendations, Member Stewart, suggested that

regulators and bankers might reframe the discussion from "zero

tolerance" of any compliance errors, no matter how little impact

the error might have on consumers or others, to focus more

efforts on regulatory compliance where there was an important

impact. Vice Chairman Gruenberg later observed that the point

of form over substance was important and that regulatory concern

should be focused on identifying things that had a significant

impact on people and holding inst i tutions accountable for those.

He added that regulators could undercut that objective by being

preoccupied with small violations. Chairman Bair stated that

the FDIC should set a tone with examiners to focus on meaningful

problems rather than technical violations.

Board Member Curry observed that bankers and examiners may

not share a common understanding about examination standards and

techniques, such as sampling. He suggested that a future

presentation by examiners might help explain variations in

approaches to different consumer regulations, as well as the

consequences of violations. Vice Chairman Gruenberg later

agreed that such a presentation could be a useful way to pursue

an important issue.

Member Cole suggested that the FDIC foster an environment

where bankers feel comfortable questioning an examiner's rule

interpretation. This would facilitate robust communications and

could lead to a reduction in interpretive mistakes by bankers

and examiners, she indicated, after relating an example in which

her bank challenged an examiner's troubled debt restructuring

("TDR") interpretat ion. On several occasions, Chairman Bair and

other members of FDIC leadership encouraged Members and bankers

to communicate problems and other issues to them. Chairman Bair

emphasized that examples of specific problems were especially

helpful, and helped to ensure that FDIC policies were being

properly implemented in the field.

Responding to Chairman Bair's request concerning burden

reduction priori ties, Member Goodlock recommended focusing

effort on minimizing the burden of regulations and legislation
08R

while they are in development. Member Gray inquired if, when

new regulations are written, regulators analyze how the new

regulation interacts with existing regulations on related

subj ects. He expressed the view that such reviews should occur

and that a consistent policy among rules should resul t.

Chairman Bair agreed that this would be preferable to merely

layering policies on each other, and later observed that some

laws needed reconciliation. Mr. Fritts noted that regulations

must be drafted consistent with their authorizing statutes which

are occasionally inconsistent. Ms. Amberg observed that the

CFPB has authority and responsibility to exercise its rulemaking

authority in a way that minimizes unduly burdensome regulations

on small businesses.

Member Goodlock did not favor adding new lines to the Call

Report concerning core deposits because many banks do not

maintain the information that would be needed, and the new lines

would require new definitions that would be subject to debate.

Member Rainey observed that the burden of adding new Call Report

lines would be acceptable if it ultimately provided better

information for regulators and an easier compilation process for

banks. Member Rainey also strongly favored further automating

the completion questionnaires and requiring that banks report

changes in information only to save time and better focus

bankers on changes that might increase risk.

Early in the panel, the Committee discussed some specific

issues that members viewed as unclear or burdensome. In

response to Member Goodlock, Chairman Bair noted that, while

many bankers viewed Home Mortgage Disclosure Act ("HMDA")

reporting as unduly burdensome, it did produce valuable

information. Al though HMDA is one of the regulations that the

FDIC does not control, Chairman Bair indicated that the FDIC

would be careful to apply a risk focused approach in HMDA

examinations.

The Committee also discussed recent interagency guidance on

the appraisal regulations. Member Hopkins stated that guidance

was causing compliance problems in rural areas. He, Member

Schriefer and Mr. Fritts then discussed appraisals, broker price

opinions, and independence requirements in performing

evaluations. Generally, Mr. Fritts stated that the guidance had

not made fundamental changes in appraisal requirements, but had

tried to al low the cost -effective use of technological advances,

and to allow bankers more flexibility to use alternative

valuation methods instead of full appraisals.
087

The Committee discussed TDRs and difficulties in defining

when they existed. Members Blanton and Lewis described

experiences with customers seeking loan accommodations and

expressed concern that providing assistance would later raise

TDR accounting or examination problems for the banks. Member

Lewis added that bankers had traditionally helped borrowers

through difficult times such as the present, but that potential

regulatory criticism of helping made it more difficult to

provide that assistance. Mr. Fritts and Mr. Storch clarified

that there is a two- step test in determining if a loan

modification or restructuring is a TDR. If the borrower is

creditworthy, then a modification would not be TDR, they

advised. However, if the borrower is experiencing financial

difficulties, and a banker grants a concession that would not be

granted except for the borrower's troubled condition, then a TDR

would exist. Both Mr. Fritts and Mr. Storch observed that

judgment had to be exercised, and regulators would look to

determine if the bank could show it had consistently appl ied

clear policies concerning the factors it evaluated in making its

judgments. Mr. Fritts stated that TDR levels are tracked on

Call Reports and that there were not many of them on banks'

balance sheets.

Member Williams stated that he agreed with an earlier

observation of Member Urrabazo that the FDIC tries to be an

advocate for community banking, but noted that many community

bankers felt that an adversarial relationship existed. Members

Williams, Blanton and Stewart, and Mr. Nash discussed the

importance of communications, by the FDIC and the Committee, to

dispel misunderstandings. Chairman Bair stated that the common

goal was to advance the public interest and that having

di versi ty in banking services and a robust community banking

sector is in the public interest. She added that one of the

FDIC's roles was to make sure that regulatory policies do not

disadvantage one sector over another and to assure public

understanding concerning the strength of banks of all sizes.

Members Lewis and Urrabzo agreed that communications were

important in rebuilding the image of the banking industry.

Member Urrabazo added that, if meeting minutes were distributed

faster, he could use them as part of his communications when he

returned home. Member Stewart suggested that full minutes were

probably not necessary, that a quickly published high-level

summary would be more helpful.

Chairman Bair had earl ier noted that, if the Committee felt

strongly about a subj ect, FDIC staf f could assist them draft ing

a Resolution that the Committee could pass and have transmitted
088

to the appropriate recipient, such as the CFPB. Member Stewart

later indicated that she favored a Committee Resolution as a way

to draw the attention of the regulatory agencies and the banking

community as a whole to the Committee's views.

Chairman Bair thanked the attendees for their time. Acting

OTS Director Bowman stated that he found the meeting very

helpful and informative. Responding to Member Lewis, Mr. Nash

indicated that the meetings were also very helpful to the FDIC

in getting input directly from bankers around the country. As

noted above, the "Roundtable Discussion" was not formally

convened.

There being no further business, the meeting was adj ourned

at 3:33p.m. ø0/- Robert E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

And Committee Management Officer

FDIC Advisory Committee on Community

Banking
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 20, 2011 - 8:39 A.M.

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

minutes are accurate and complete.

Sheila C. Bair 3c~

Chairman

Board of Directors

Federal Deposit Insurance Corporation

and

Presiding Officer

January 20, 2011, Meeting of the

FDIC Advisory Committee on Community Banking

Dated: April 6, 2011