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FEDERAL DEPOSIT INSURANCE CORPORATION

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ADVISORY COMMITTEE ON COMMUNITY BANKING

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MEETING

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TUESDAY,

MARCH 28, 2017

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The Advisory Committee met in the FDIC 

Boardroom, 550 17th Street, NW, Washington, DC, at 

9:00 a.m., Martin J. Gruenberg, Chairman, 

presiding.

PRESENT:

MARTIN J. GRUENBERG, Chairman, FDIC

TIFFANY BAER PAINE, President/CEO, Security

Bank USA

RICHARD T. BEARD, CEO/President, People's

Utah Bancorp

ADRIANA M. BOEKA, President/CEO, America

United Bank

ROGER BUSSE, President/CEO, Pacific

Continental Bank

ASIF DAKRI, Vice Chairman/CEO, Wallis State

Bank

DAVID J. HANRAHAN, SR., President/CEO,

Capital Bank of New Jersey

JACK A. HARTINGS, President/CEO, The Peoples

Bank Co.

CHANDLER HOWARD, President/CEO, Liberty Bank

DANNY J. KELLY, President/CEO, Hometown Bank

of Alabama
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ARVIND A. MENON, President/CEO, Meadows Bank

MARY ANN SCULLY, President/CEO, Howard Bank

JOHN M. TOLOMER, President/CEO, The

Westchester Bank

STAFF PRESENT:

BARBARA RYAN, Chief of Staff, FDIC

RUTH R. AMBERG, Assistant General Counsel,

Legal Division

RICHARD A. BROWN, Deputy Director and Chief

Economist, Division of Insurance and

Research

DOREEN EBERLEY, Director, Division of Risk

Management Supervision

DIANE ELLIS, Director, Division of Insurance

and Research

GEORGE FRENCH, Deputy Director, Division of

Risk Management Supervision

JANET R. GORDON, Associate Director,

Division of Depositor and Consumer

Protection

ROBERTA K. McINERNEY, Deputy General

Counsel, Legal Division

RAE-ANN MILLER, Associate Director, Division

of Risk Management Supervision

MARK PEARCE, Director, Division of Depositor

and Consumer Protection

LUKE W. REYNOLDS, Chief, Outreach and

Program Development, Division of

Depositor and Consumer Protection
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T-A-B-L-E O-F C-O-N-T-E-N-T-S

Page

Introductions

Martin Gruenberg......................... 4

Community Banking Initiative Update

Doreen Eberley........................... 8

Mark Pearce............................. 13

Diane Ellis............................. 31

Richard Brown........................... 33

The Handbook for Organizers of De Novo

Institutions

Doreen Eberley.......................... 56

Report to Congress on Regulatory

Review under the Economic Growth and

Regulatory Paperwork Reduction Act

(EGRPRA)

Roberta McInerney....................... 72

Rae-Ann Miller.......................... 76

George French........................... 77

Credit Risk Trends and Supervisory

Expectation Highlights

Doreen Eberley......................... 114

Rae-Ann Miller......................... 115

George French.......................... 137

Youth Savings Pilot and Symposium

Mark Pearce............................ 162

Janet Gordon........................... 163

Luke Reynolds.......................... 173

Closing Remarks

Martin Gruenberg....................... 191
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P-R-O-C-E-E-D-I-N-G-S

9:02 a.m.

CHAIRMAN GRUENBERG: I'd like to 

welcome everybody to this meeting of the FDIC's 

Advisory Committee on Community Banking. We have 

a full agenda for today and we'll try to keep on 

schedule and finish up about three o'clock so 

everybody can meet their travel arrangements.

Let me just give you a brief overview 

of the agenda for today's meeting. We're going to 

start off with a brief update on the FDIC's 

Community Banking Initiative, including the de 

novo outreach events we've conducted around the 

country, as well as recent changes to our pre-exam 

planning process.

And as part of that presentation, the 

Division of Insurance and Research is going to 

provide us a preview of the paper they've been 

working on that's based on a 2016 Summary of 

Deposits survey.

The paper analyzes recent deposit data, 

finds that banks as a whole attracted more deposits 
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last year while operating fewer offices in the 

aggregate, although the number of community bank 

offices around the country actually increased last 

year, interestingly.

That presentation is going to be 

followed by a presentation on our recently issued 

Handbook for Organizers of De Novo Institutions, 

which is sort of an easy, how-to, step-by-step 

overview of how to start a new institution.

That handbook addresses topics such as 

developing a sound business plan, raising 

financial resources, recruiting competent 

leadership, each of which is designed to ensure 

that the new institution is positioned to succeed.

We'll then have a brief break. And 

following the break, we'll have a presentation on 

the EGRPRA report that the three federal banking 

agencies presented to Congress last week, 

including

an overview of the key recommendations made in the 

report.

And after lunch, I think we're going to 
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have an interesting discussion of some recent 

credit risk trends and supervisory expectations 

that we outlined in a recent article in our 

Supervisory Insights journal. The article is 

going to focus on three loan categories: commercial 

real estate, agriculture, and oil- and gas-related 

lending.

And then, finally, at the end of the day 

we're going to have a session reviewing our Youth 

Savings Pilot Program and symposium. Since 

launching the Youth Savings Pilot Program in 2014, 

the FDIC has been exploring approaches that banks 

and their partner schools can use to combine 

financial education with the opportunity for 

students to open a low-cost savings account.

On October 21st of last year, the FDIC 

held a Youth Savings Pilot Symposium, bringing 

together representatives from nearly all of the 21 

banks participating in the pilot, along with many 

of their non-profit and school partners. It was 

really a terrific event.

The commitment of the bankers to the 
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program was really quite impressive. And we 

really feel as if it's really a productive path 

toward effective financial education for young 

people, which is why we thought it might be 

something that would interest you as well.

Given our experience with this group, 

we know you won't be shy in sharing with us your 

views and thoughts, and we certainly encourage you 

to do that. I think that's my two cents for this 

morning, and I'll now turn it over to Barbara Ryan. 

MS. RYAN: Thank you, Chairman 

Gruenberg. And good morning and welcome, 

everyone. So we're going to start our first 

session on the Community Banking Initiative 

update. And Chairman Gruenberg went through the 

entire agenda, so I'm not going to belabor this. 

But just to introduce everyone, we have Doreen 

Eberley, director of our Division of Risk 

Management Supervision, and Mark Pearce, director 

of our Division of Depositor and Consumer 

Protection.

And Doreen and Mark are going to provide 
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that update on Community Banking Initiatives as it 

applies to the examination process.

And then Diane Ellis is the director of 

our Division of Insurance and Research. Together 

with Rich Brown, chief economist, they're going to 

give us a preview of the paper that they've been 

working on that analyzes the Summary of Deposits 

data from last year.

So, with that, I will turn it over to 

Doreen and Mark.

MS. EBERLEY: Thank you. Good 

morning, everybody. I thought I'd give a quick 

update on some of the follow-on activities from our 

Community Banking Conference that we held last 

April. And I'll cover three topics there first.

The first is our de novo round table 

event. So, we had started those before our last 

meeting. We'd held two. Since then, we've held 

two more, one in Atlanta at the end of November and 

one in Dallas at the beginning of March. And they

went just as well as the first two, really good 

feedback. Nice full days, lots of questions, lots 
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of good discussion.

Our final two are scheduled for Kansas 

City on May 11th, and Chicago on May 31st. And I 

have to just say, again, another thank you to both 

John Tolomer for the idea, and David Hanrahan and 

John both for participating.

The banker panels that John suggested, 

that we have panels of de novo bankers come 

participate in these events and talk about their 

experiences going through the process, what they 

wish somebody had told them at the time, what advice 

they would give to an organizing group starting up 

an institution, has really been the hit of the 

sessions. Really great conversation.

And it actually gave us a lot of good 

information as we developed our handbook in terms 

of just thinking about the things that we needed 

to address in the handbook that bankers had 

questions about. So it was just a tremendously 

beneficial activity, and we look forward to the 

last two events.

The second thing I would mention is our 
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follow-on activities for developing the next 

generation of bankers. So, you'll recall we had 

the panel discussion about management succession 

and some of the challenges.

We had a university professor on the 

panel, Diane led this panel, talking about the 

activities as his school. And we thought that was 

something we should follow up on and try to have 

some more conversation.

So we did do that, and we spoke about 

it last time. Just at the end of October, we hosted 

a round table with university and colleges that 

offered banking degrees to explore ways that we 

could partner the schools with the banking 

community, and particularly community banks that 

are in need of bankers. You know, how do you get 

that next generation in the door and aware of the 

community banking career, and how they might go 

about getting involved.

So, since that meeting, we've held 

several follow-up meetings with the national trade 

associations to explore some next steps. And I'll 
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give you a highlight of the things that are under 

discussion. 

First is developing a national 

directory of all colleges, universities, and 

business schools that offer banking programs. And 

one thing that might be useful to hear a little bit 

from you about today, time permitting, is do you 

think that -- is it useful to have a directory of 

schools that offer banking degrees as opposed to, 

you know, just schools that would have students 

that might be interested in working in community 

banks? And the benefits of having somebody 

graduate with some experience in the community 

banking field and some knowledge of community 

banking. That would be helpful for us.

We talked about ways to identify 

additional schools for potential partnerships and 

have some ideas there. And then ways to facilitate 

internships that would provide beneficial 

experience for college students that are 

interested in a banking career, and some talented 

summer assistants for community banks. So, kind 
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of a win-win.

There's been a lot of interest in the 

idea of a directory, as well as the FDIC hosting 

additional round table events to help identify 

additional schools for potential partnerships. 

And the idea of internships has been very well 

received. And we're developing right now kind of 

a concept proposal for an internship program, how 

we would envisions something like that playing out. 

And I think by our next meeting we should have some 

more concrete information to share on that topic 

with you.

The third topic I'd mention is we've 

been actively engaged in planning the Interagency 

Minority Depository Institution Biennial 

Conference, which will be held next week in Los 

Angeles. And we have a large number of bankers 

registered. I'm very much looking forward to that 

event. We'll see some of you there.

And two other activities that I'll 

mention that'll be covered separately in later 

portions of the program today. First, in 
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December, as the Chairman mentioned, we issued for 

comment our Handbook for Organizers of De Novo 

Banks. Photo op. I'm very excited about that, 

and we got some great comments. We'll talk about 

that in the next session.

And then second, we finalized an issue 

of the EGRPRA, or Economic Growth and Regulatory 

Paperwork Reduction Act, report. So we'll talk 

further about that later. Turn it over to Mark.

MR. PEARCE: Great. Good morning, 

everyone. I want to also provide a quick update 

on the route we've taken with our pre-exam planning 

process. I think I've mentioned this at prior 

meetings, where over the last few years we really 

have gone to take a look at ways we can improve the 

pre-exam planning process so we can gain a better 

understanding of the institution in advance of the 

onsite portion of the examination, so that we can 

be more efficient and effective for the onsite 

portion of the exam.

So we implemented that a few years ago. 

And we've gotten overwhelmingly positive feedback 
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that it really has improved the onsite compliance 

exam, and reducing the situations where there's a 

lot of information requests on the onsite portion 

or places where there's concerns about whether all 

the material that was provided was actually 

utilized in the exam process. And so I think we've 

really seen some positive benefits from that 

program.

As a result of that, the amount of time 

that we've done offsite as a proportion of the 

overall exam has increased. And so we really have 

been able to streamline the onsite portion.

The one piece of feedback we've gotten 

from bankers has been, that's all good, but the 

pre-exam part of the process has a lot of questions 

and document requests up-front. So a lot of 

information to gather in advance to make that 

process effective. 

And so we've taken a look and had a team 

working on trying to figure out ways that we could 

refine that process. We still want to make sure 

we achieve the overall goals, but we want to refine 
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it and see if there are ways to reduce the 

questions, make sure we're just asking for 

information that we're actually going to use in the 

exam process.

And so the team has completed its work, 

and we'll be moving forward later this year with 

a process that will take the pre-exam and move it 

into two phases. The first, will take an overall 

look at the bank's compliance management program 

overall and just get an understanding of the bank 

and its risk profile. And then as we get closer 

to the onsite portion, we'll have a second request 

that just targets in on the specific items that were 

going to be within the scope of the examination.

So as a result of kind of bifurcating 

this process, we think we can reduce the amount of 

data requests and the information requests while 

still retaining the overall goals of the pre-exam 

planning process.

So hopefully that'll be an improvement 

on that one issue. But, overall, I think the 

program's been really successful in improving the 
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efficiency of the onsite portion of the exam.

MEMBER TOLOMER: If I might. From 

personal experience, one of the gratifying things 

about serving on this committee is we've had this 

discussion over the last few years about 

streamlining the process. And my personal 

experience, and our bank experience, was that we 

did provide all of the information that was 

requested.

It was reviewed, there was a 

questionnaire that you requested about a 20-minute 

conference call for clarification, which we had no 

problem with. I'd much rather clarify while 

you're doing your work than come in and ask for the 

clarification.

And one of the key things from my 

perspective was that your people came in, they were 

prepared, nothing was lost. That used to be one 

of the things that was very frustrating. You'd 

come onsite and, oh, I didn't have this, can you 

print that, can you print this. 

There wasn't any of that. You worked 
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in a conference room, you did your job. It was very 

thorough. When you had questions, you would bring 

the bankers in, get the answers.

We had a weekly, which I've instituted 

with our state regulators, a weekly basis to 

understand where do we stand today, is there 

something we can correct while you're here and at 

least have the dialogue.

And so we had a very good experience. 

It was open dialogue, it was meaningful. We walked 

away with some improvements that we have 

implemented as a result of that.

And so the process was very 

constructive. And it was constructive because 

your real, true professionalism was, "We've done 

our work, we understand your bank, we have some 

questions for clarification. Let us go to work, 

and here are some recommendations."

And so it worked really well. So I 

think, you know, from a standpoint of being on this 

committee and having the dialogue and seeing the 

result of that is a powerful thing. And so I think 
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you guys have done a great job. And if you can 

enhance it, that can only be better.

MR. PEARCE: Great, great. I 

appreciate the feedback.

MEMBER HARTINGS: Just one follow-up 

on the CRA exam. Have you changed the last year 

or so the examiner's workbook for CRA in the sense 

of how the questions are answered? I get a little 

pushback from bankers I talk to about it's a little 

bit more prescriptive. "I've got to check the box 

here" versus write a description in of maybe what's 

happening in CRA in their area.

And certainly, as you know, community 

banks are all in very unique communities so they 

have their own unique -- has that handbook changed 

substantially over the last couple of years? Have 

you gotten any feedback on that at all?

MR. PEARCE: No, we haven't had any 

significant changes in our CRA sort of pre-exam 

planning process, or the handbook related to the

Community Reinvestment Act. And I couldn't agree 

with you more that understanding the context of 
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where the institution's operating is really the 

critical element as it relates to CRA.

So, but let me go back and check to see 

if we've changed any of our questions. But I'm not 

aware of anything that would be a significant or 

meaningful.

MEMBER HARTINGS: And just to follow up 

with John, I mean, I can tell you our last CRA exam 

examiners did an excellent job educating us as 

well, you know. So, preparing us for that next one 

and to help us comply.

So, you know, and I give those -- you 

know, sometimes the folks on the ground, it takes 

a lot to get it up to, maybe to Washington, D.C. 

But they've done an excellent job and you need to 

know that as well.

MR. PEARCE: Great. Well, I 

appreciate the feedback. And it's really, you 

know, I think obviously there have been some 

changes in the regulatory environment in the last 

few years. And having our examiners being able to 

add value through the examination process has been 
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really a priority for us.

MEMBER BUSSE: Mark, I'd also add, you 

know, we're a growing institution. And we've 

added a lot of assets through acquisition and 

organic growth. What I can tell is that the 

process and the survey process and the pre-exam 

process have been very helpful to us.

But what it's resulted in is very 

consultative types of suggestions as we approach 

$3 billion range. So we're always looking to, you 

know, the examinations are more forward-looking 

than on "here are the things that you have to 

consider as you continue to grow. Here are the 

areas we want you to think harder about." So the 

list of things to do isn't necessarily shorter, but 

they're more focused. And that helps us grow 

successfully, so thank you for that.

MR. PEARCE: Great.

MEMBER BUSSE: It intertwines with the 

whole process.

MR. PEARCE: You know, obviously, for 

our examiners, having the opportunity to spend time 
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in advance in getting to know your institution 

really positions them to be able to provide that 

kind of collaboration in the process.

MEMBER TOLOMER: Put under the 

category of wish list, and I recognize there are 

fifty states, but what happened to us with our most 

recent CRA compliance is FDIC had one set of dates, 

New York State had another set dates. You were in 

almost simultaneously.

Is there a way to give us the same dates 

for the same review? And is there a way to not have 

two regulatory bodies looking at us at the same --

I mean, we have nothing to hide, it's not a 

question. It's just logistics that you end up with 

two regulators looking at essentially the same 

information, one that has a three-month difference 

in timeframe than the other. Just, somehow work 

together with the states. And maybe it's the 

states need to work with the FDIC. But to 

streamline the process to one set of dates, maybe 

one team dig in as deep as you want, and then, you 

know, so that would have been helpful to us.
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MR. PEARCE: That's a good point. New 

York is one of the handful of states that does its 

own separate compliance and CRA examination. And 

so there are a handful of other states that we 

collaborate with, and I think finding ways to make 

sure we schedule that efficiently.

Some institutions want them at the same

time, the state and the FDIC at the same time. 

Other institutions want them separately. And so 

trying to figure out what works best for the 

institution's --

MEMBER TOLOMER: Yeah, I don't think 

it's a problem at the same time as much as you have 

different dates. So the state would have to give 

one set of mostly the same documents but not all 

the documents. And so you have to be careful to 

make sure.

So at least if we were dealing with the 

same dates, it makes it that much easier that one 

package goes to both regulators, and you're onsite 

and you can look at and do what you need to do.

I will say that, you know, the FDIC came 
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in in quick order, did their job, gave us a report. 

So that was -- the process has already been 

completed with the FDIC.

MR. PEARCE: Okay. That's something 

that we'll take back and look into more.

MEMBER BEARD: Mark, could I follow up 

on that just a little bit? Just to give you an 

example, this last year, we had done an 

acquisition. We had a visitation last summer on 

compliance. And we got our report, I think it was 

in November of last year, at the time that you'd 

already scheduled the visitation or a full exam in 

January.

And so it kind of bunched everything up. 

So we had a visitation and we had a safety and 

soundness and we had a compliance, and then the 

Federal Reserve came right after that.

And so I don't know if there's 

coordination between the various agencies, but it 

seemed to me it was kind of an inefficient way to 

have all of them there within almost a six month 

period, and then to spread it out through the rest 
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of the year. Is there any way to coordinate that?

MR. PEARCE: Yeah, it's something that 

certainly we try to do, both on the consumer 

compliance side and the risk management side, on 

when those dates align. And then when you add in 

additional regulators, right, it can bunch up at 

certain times. But we sort of do the best we can 

at working through those schedules.

MEMBER MENON: Mark, I have a quick 

question. I agree with everything that people 

have said here about pre-exam plan. And we just 

had our safety and soundness exam in January. It 

went really well, we didn't have any problems. 

But this thing took three weeks. Is 

that likely to go down in timeframe, or is it always 

going to be as long as that? I mean, that's the 

been the case before.

MR. PEARCE: So, the compliance exam?

MEMBER MENON: No, I'm talking about 

safety and soundness.

MR. PEARCE: Safety and soundness.

MS. EBERLEY: So, that is something 
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we're looking to work on. Right now, I can tell 

you I don't have stats for every kind of asset 

bucket, but the median community bank is about $175 

million. And those exams, from start to finish, 

and we're not onsite that whole time, are about 30 

days.

On average, we do about 33% of exams 

offsite. So, 33% of the time, the hours of the 

examination -- and start to mail doesn't mean 

there's hours every day. It's when we go into the 

bank and when the report is mailed. And there's 

about nine people for the average $175 million 

bank.

We're working through the FFIEC, we're 

starting a project to take a look at all of that. 

But internally at FDIC, we've been thinking about 

how can we reduce our onsite time.

And one of the things that we've been 

working on for about the last 18 months, we talk 

about in the EGRPRA report, is a pilot project with 

technology service providers to get a standardized 

download of imaged loan files for those banks that 
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image loan files, and more than half do at this 

point.

And so if we can tell you we're coming 

in for an exam, we get your alert download, we take 

a look at the alert data, we figure out what loans 

we want to look at. And then we say we'd like the 

imaged loan file download for these loans, you can 

call the technology service provider, click a 

switch, whatever. We get the files and we can do 

most of that work offsite, and then come in prepared 

to discuss, very much like on the compliance side. 

And that's the biggest portion of hours 

for an exam. I'll tell you that the offsite work 

differs from region to region. So, in smaller 

banks, we're actually able to do more offsite. So 

our Kansas City region is doing about 43% of exams 

offsite right now. In the bigger ones, less so. 

So, New York, sorry, 24%. All the other regions 

are right around 38.

But that is something that we've talked 

about as one way to reduce burden. Because we hear 

you that you don't mind the exam, you mind having 
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all the people in your bank for two weeks or three 

weeks, and it's disruptive and there's nowhere to 

put them. And, you know, so, they're taking up 

your conference room, your boardroom, or wherever 

we have them. And so we think that's something 

that can be beneficial, that can be a win-win.

MEMBER HARTINGS: Doreen, if you have 

a technology provider put that together, the one 

thing I think's always important is to label it. 

I mean, we're an image shop, so we could send you 

that whole file.

But the difference between seeing the 

file in my shop and sending it over imaging is it's 

here but I can't tell, I can't flip the pages to 

know the financials are in the back, the number of 

files here, the insurance policy's there. 

So if you think about labeling it, we'll 

stick it in each label, and that way you're going 

to see it. Because part of our --

MS. EBERLEY: That's exactly what the 

program is, to make a standardized formatting of 

the file.
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MEMBER HARTINGS: That's great.

MS. EBERLEY: So you've got the loan 

documents, the collateral documents, the 

financials, you know, whatever other major 

categories. And we've been piloting. We've done 

a handful of exams so far using this, and we're 

working with two of the larger providers right now 

in the pilot. And it's worked pretty well. The 

examiners have liked it, the bankers have liked it. 

So that's something that we hope to bring home this 

year.

MEMBER HARTINGS: That sounds great.

MR. PEARCE: And this would be 

something we could utilize for the consumer 

compliance side as well.

MS. EBERLEY: Absolutely, yeah.

MS. RYAN: Any other comments on Doreen 

and Mark's presentation?

MEMBER BUSSE: Just one. Doreen, just 

following up on your comments concerning 

education. There is a program at University of 

Oregon, I think the director's in one of them
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MS. EBERLEY: Okay.

MEMBER BUSSE: I can tell you that the 

success of the program at the University of Oregon, 

it's oversubscribed. They've have more students 

interested --

MS. EBERLEY: That's great. Thank 

you very much.

CHAIRMAN GRUENBERG: I wanted to ask 

you, do you all, as community bankers, offer 

internships to students? And is that a useful 

vehicle for you in terms of eventually attracting 

people to work for you?

MEMBER HOWARD: I'd just make the 

comment that we offer them, and they're extremely 

useful. It gives the student an opportunity to get 

in-depth in a particular subject area. And we use 

them in risk management, we use them in our finance 

area. But it also gives us, you know, as an 

institution, the opportunity to look at the 

student. And that's proven to be really, really 

valuable.

In some cases, the students say, "I 
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didn't realize this was what it was. You know, I'd 

like to do something different." But by far, the 

vast majority, we probably gave six or seven a year 

internships, the vast majority end up working for 

us at some point. So it's very valuable.

MEMBER HANRAHAN: I agree with 

Chandler's comments. We've had a fair bit of 

success of bringing interns in and having them 

stick and turn into great full-time employees. I 

think the nationwide directory is a very clever 

idea.

I will say, though, for a rural bank 

like ours, the interns that have the highest 

likelihood of sticking are the ones that have the 

most local roots.

And so part of the screen we have for 

interns are the ones that we think are going to tend 

to remain local and not flip to a sexier job working 

somewhere when the internship's up.

MS. RYAN: Okay, well, let's move on to 

Diane and Rich.

MR. ELLIS: Okay, thanks. As has been 
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our practice, Rich and I are here to talk about the 

latest in our community bank research agenda. So 

Rich has a paper he is going to discuss here in a 

minute.

But before I turn it over to him, I want 

to draw your attention to this booklet or pamphlet 

in your package. It's a summary of the Community 

Banking Conference that was held here at the FDIC 

last April. So hopefully you find it a very useful 

summary of those proceedings.

Also, for someone who desires a lot more 

detail on this, we actually have transcripts that 

are hanging online at our FDIC.gov website. So I 

just want to draw your attention to that.

Rich now is going to talk about a paper 

that we released yesterday which analyzes our 

Summary of Deposits data. Now, I think all of you 

are probably pretty familiar with these data, at 

least you, every year in the summertime, you send 

us a survey of the summary of your deposits, your 

offices and branches and so forth.

The FDIC's actually been collecting 
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these data since its beginnings, in 1934, when 

there were about 3,000 branches in this country. 

Now there are over 82,000, I think, something like 

that. And these data are actually pretty useful 

for us and outside analysts.

It's really the best or primary means 

for analysts to get a sense of market share, not 

only physical presence, but also market share among 

and within the banking industry.

So, given the fact that we just released 

this paper, we thought it would be useful to explain 

the results and show you how we benefit from these 

Summary of Deposits statements.

MR. BROWN: Thanks, Diane. Good 

morning, everyone. And as we've been discussing 

consolidation with this group for some time, as you 

know, the number of charters has declined by 

two-thirds since the mid-1980s. At the same time, 

the median size of a community bank, according to 

our definition, has more than quadrupled, from $40 

million to $186 million.

So, while the definition of a community 
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bank remains consistent -- it's a bank that does 

lending, relies on core deposits, and has a 

relatively narrow, limited geographic area --

their size has increased over time.

And as Diane mentioned, we've become 

increasingly reliant in looking at the Summary of 

Deposits data to look at the physical presence of 

the branch offices. In 2015, we released a paper 

called Brick and Mortar Banking Remains Prevalent 

in an Increasingly Virtual World. And it showed 

the long-term increase that's happened over a long 

period of time.

It was interrupted by two events: the 

banking crises or the late 1980s and early 1990s, 

and the crisis in 2008. And we'll see the effects. 

What we have with this new paper that 

was written by Angela Woodhead, Nate Hinton, and 

Derek Thieme, in the front row here, it's going to 

show that that decline in the number of offices 

continues, has continued, while deposits have been 

very abundant in this post-crisis environment.

So I want to give you a very brief 
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overview. And hopefully we'll get to some 

conversation about the trade-offs between a 

physical presence and virtual presence, and also 

the implications of this trend for deposit 

gathering and for your efforts to manage expenses. 

So let's go to the -- there's a slide 

deck here, we have just a few slides. If you go 

to Number 2, it shows another annual decline, the 

seventh in a row, in the total number of banking 

offices operated by FDIC-insured institutions.

The historic high in the number of 

banking offices was 2009, where there were 99,450. 

The most recent year, the number of banking offices 

declined by 1.5% to 91,851. And that's been just 

about the annual percentage decline in offices for 

the industry over time since 2009. 

Now, despite this decline in physical 

offices, the growth in total deposits, the red line 

in Chart 2, remains strong at 5.8% during the year. 

And that's just a bit lower than the five-year 

average increase of 6.4%.

So this explains the title of the paper, 
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which is Banks Attract More Deposits While 

Operating Fewer Offices. 

Let's go to the next chart, if we can. 

One of the concepts that was explored in the 2015 

brick and mortar paper was the density of banking 

offices per 10,000 persons.

The red line in Slide 3 tracks the total 

density of banking offices going back to 1994. And 

so through the late 1990s and early 2000s, total 

density remained fairly steady at about three 

offices per 10,000 persons.

Density rose somewhat in the years 

immediately preceding the crisis, peaking in 2008 

at 3.22 per 10,000 persons. Since then it's 

fallen, density has fallen for eight consecutive 

years. By the middle of last year, it stood at 2.81 

per 10,000 persons. And this is the lowest level 

of office density in at least 30 years, looking 

back.

So, as you can see, though, in the blue 

line on the Chart 3, the total amount of deposits 

per banking office has roughly doubled since 2004 
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to over 122 million by the middle of last year. So 

that's really been a trend to gather more deposits 

per office. It's a trend that has accelerated 

since 2010, rising at a rate of about 7.8% annually. 

So again, this abundance, and with less 

brick and mortar institutions, including the 

non-community banks and the community banks, have 

been able to gather deposits.

If we go to Number 4, we're going to look 

a little bit more at density. Differences in the 

density of offices per 10,000 persons across county 

types is one of the breakdowns that was explored 

in the 2015 paper. 

The authors here have extended it 

forward two years. And as we before, we note the 

consistent differences in density between rural 

counties, micropolitan counties with populations 

between 10,000 and 50,000, and then metropolitan 

counties.

As you can see, density is perpetually

higher in rural offices. Why? It's more distance 

involved, so you have to have more offices to 
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provide the same service.

But, you know, the previous study noted 

the long-term stability in the density of banking 

offices in rural and micropolitan counties, and 

this little more pronounced decline in the density 

of metropolitan offices. But I think what we've 

seen is a little bit of fall-off in density in all 

three types of counties in the last couple of years. 

So this decline in density is getting a little more 

widespread, even though they're still more dense 

in the rural and micropolitan counties.

Let's go to Slide 5. The bottom line 

for the discussion, of course, is how these trends 

have affected community banks. Now, this is one 

look that the authors gave us, and that is the 

one-year deposit growth, mid-2015 to mid-2016, in 

offices located in metro areas, micropolitan 

areas, and rural areas. A couple of results stand 

out.

First, deposits grew faster overall in 

metropolitan areas. I don't think there's too 

much surprise there. Our previous research showed 
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that between 1980 and 2010, the total population 

grew in 88% of the metro countries, 70% of the 

micropolitan counties, but only half of the rural 

countries. In fact, that paper was about rural 

depopulation. It's a phenomenon in many rural 

areas. 

And by 2011, metro counties accounted 

for 84% of U.S. population and 88% of U.S. economic 

output. But the chart also shows that deposits 

grew faster for community banks than for 

non-community banks in all three types of areas. 

And, again, it's a little bit of an unexpected 

result.

So the reason, though, that 

non-community banks, their overall deposit growth 

is a little bit faster than community banks: they 

do more business in metro areas, and community 

banks lean a little more toward the smaller, 

micropolitan, and rural areas. So, where you do 

business matters. But still, in each type of 

county, community banks are the generators of 

deposits.
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Slide 6, and it's really a 

reconfiguration of Table 3 in the paper. And this 

is a very important thing that our authors did 

that's very important for this analysis, and that 

is merger adjustments.

If you compare two years in terms of 

deposits or offices and you just take the 

aggregates for the two years you're going to bias 

downward the calculations for a small size group 

or community banks as we define them.

Why is that? Well, certain community 

banks, they grow out of community banking status. 

Maybe they're acquired by a non-community bank. 

And that tends to skew, that makes community banks 

look like they're shrinking, it makes 

non-community banks look like they're growing.

So, what you have to do in merger 

adjustment is two things. One, you have to fix the 

definitions at the end of the period and the 

beginning of the period that you're analyzing.

And, two, you have to take the merger 

targets for the prior period and put them together 
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so you have essentially an apples to apples 

comparison. So I'll show you at the top, and this 

isn't in the paper, but if you look at the percent 

growth in total banking offices for community banks 

and non-community banks, looks pretty bad for 

community banks, -2.6% for banking offices versus 

0.9%.

And then percent growth in total 

deposits, again, community banks growing less than 

half the pace of non-community banks. But our 

analysts did the merger adjustment. It's a simple 

concept. It does take a little bit of programming 

expertise, which they have, certainly.

So let's look at the bottom. Merger 

adjusted, what happened? Percent growth in total 

banking offices, positive for community banks. 

They added 67 offices during the 2015-2016, while 

non-community banks were a lot more aggressive 

about closing offices. The community banks added 

67 offices, non-community banks shed 544 offices 

during this period.

And if we merger adjust growth in total 
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deposits, +5.8% for community banks, +6.1% for 

non-community banks. Not really a meaningful 

difference there. So if you see something in the 

paper that just looks at size classes and says 

changes or growth from period to period, make sure 

it's merger adjusted. It's critical to an 

unbiased analysis.

The bottom line on group seven, the 

total number of banking offices has declined for 

seven consecutive years. The density of banking 

offices has also slowly declined in the post-crisis 

era. Yet, total industry deposits continue to 

grow, supporting loan growth.

Our Quarterly Banking Profile has a 

community bank section, and for the last three 

years, total loan growth has been above eight 

percent. It's been a pretty healthy clip. 

And as I mentioned, for community 

banks, they saw higher, they saw faster deposit 

growth in 2016 than non-community banks in the 

rural, micropolitan, and metropolitan counties. 

They saw nearly the same total deposit growth on 
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a merger adjusted basis, and they added offices on 

a merger adjusted basis.

What I'm hoping we can do with the time 

we have left is for you all to talk to us a little 

bit about your strategic viewpoints on physical 

presence versus virtual presence, and what 

implications it has for deposit gathering and 

expense control.

MEMBER SCULLY: Rich, I have a couple 

of questions, maybe a little bit arcane. But your 

merger adjustments, I can see how you would adjust 

for numbers of offices. How do you adjust for 

deposits? I mean, do you just exclude all the 

deposits from an acquired institution, or?

MR. BROWN: No, you just, you 

basically, if one institution has acquired three 

others during the period that you're looking at, 

you take the institution that's at the end point, 

you find that institution in the previous period, 

you find the three certs that it acquired, and you 

smack the deposits together.

MEMBER SCULLY: So you would actually 
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be capturing the net effect of one off versus new 

acquired growth in that.

MR. BROWN: It really just focuses the 

analysis on organic growth and gets rid of 

structural change as a source of growth, which can 

be misleading.

MEMBER SCULLY: So I have another 

question. When you look at some of these -- and 

one of the things that -- and my colleagues will 

probably kill me if it leads you to ask for more 

data -- but one of the things that we've always 

found frustrating is that when you're looking at 

NICs for an organization, you can find NICs at an 

aggregate level. How much is DDA, how much is money 

market non-maturity deposits, how much is CDs? 

But you can never find that information at a branch 

level.

MR. BROWN: Right.

MEMBER SCULLY: So, you know, when you 

look at some of the deposit growth, I mean, it leads 

to the question, you know, is it related to pricing 

strategies at community banks? Is it actually 
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related to acquisition of, you know, what we would 

call core deposits? And our definition of core 

deposits is actually much narrower than yours in 

that it's transaction deposits. But, I mean, is 

that something that piques your curiosity?

MR. BROWN: Oh, you bet it does. 

(Laughter.)

MR. BROWN: But you know, I think, you 

know, the liability side is perhaps less detailed 

than the asset side anyway. And the Summary of 

Deposits doesn't push it any further, it actually 

comes back to total deposits. And so we'd love to 

understand more about it.

We have some various other sources, you 

know, you can look at some of the consulting or the 

vendors from outside who may have more information 

on publicly traded institutions, and data from

failed banks, things of that sort. But we don't 

really have any comprehensive sources right now. 

They're pushing it as far as they can with the data 

that we have.

MEMBER HARTINGS: Rich, do you have an 
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idea of the breakdown of the growth in deposits by 

mix at all? DDA, MMDA?

MR. BROWN: That has not been part of 

this paper. But again, it's something that in the 

community bank section of the QBP, there are some 

breakdowns there. And really we could look into 

perhaps doing more of a focus on that. Our focus 

increasingly goes to the liability side. And I 

think that's a good suggestion.

MEMBER SCULLY: I mean, I think you 

have the data to do it at an aggregate institutional 

level. You don't have the data, which for some of 

us is very frustrating. when you're trying to judge 

the effectiveness of your competitors. But you 

probably do have the data at aggregate institution 

level.

MEMBER HARTINGS: And just a follow-up 

on Mary Anne's question about the merger-adjusted. 

Is that really looking at the surviving community 

banks, what they did? I mean, is that a way to kind 

of rephrase it to say this is what the surviving 

community banks have done as far as growth in 
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deposits or growth in offices, rather than 

aggregate? Because the aggregate is, "I still 

lost numbers of institutions or number of 

branches." I mean, is that another way to 

paraphrase that?

MR. BROWN: It separates organic 

growth from growth that's generated by the change 

in categories from community to non-community and 

for growth that's induced by mergers. So you 

basically impose the merger before the fact so you 

can get to organic growth.

MS. ELLIS: Jack, when you asked, was 

there a particular question you think we ought to 

be exploring? When you asked about the, you know, 

the composition, the DDA versus time?

MEMBER HARTINGS: Probably a liquidity 

question, as much as anything. You know, if all 

that growth is in DDA, MMDA, and not in CDs, or you 

know, it's kind of -- it'd be interesting to know 

where we've seen that growth.

Each one of our institutions have kind 

seen that movement a little bit, and we'd like to 
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see that nationwide. Are we normal, are we 

abnormal? So I think that would be helpful.

MEMBER SCULLY: I actually think it 

would tell you a lot, because the mix is going to 

impact the cost of funds and therefore going to 

impact the net interest margin and the ultimate

profitability. 

Also, if there was a way to track the 

DDA portion, you know, it deals with this whole fear 

that some of us have that the payment system's, you 

know, moving away from us because of, you know, 

methods of accessing the payment system that the 

larger banks sometimes have an advantage of.

MR. ELLIS: Okay, yeah, that's 

interesting.

(Simultaneous speaking.)

MEMBER SCULLY: Well, it's one of the 

end results. But I also think the mix would tell 

you how that deposit growth is occurring, at what 

expense. And, again, the hold that the community 

banks might still have on the transaction deposits

and the interface with the payment system.
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MEMBER BUSSE: A lot of our changes, 

you know, we're still at 14 offices and two 

loan-production offices. That hasn't changed, 

and we've added a billion dollars in assets 

probably in the last few years with mergers and 

acquisitions.

But I can tell you that we still have 

a membership capacity, because the total number of 

remote deposit capture clients is increasing every 

year. So we're probably close to 40% of our 

deposits, you know, now come through remote deposit 

capture.

And then mobile banking is continuing 

to create efficiencies as well, so our efficiency 

ratio is, you know, hovering around the mid-50s. 

But I can tell you that there's still capacity at 

our offices because the traffic is changing and the 

nature of the deposit activity is changing.

So we could still grow another maybe ten 

or twenty percent without having too much 

implications for office size and locations because 

our business banking office is located centrally 
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to where we service our clients. But that’s 

changing.

MR. BROWN: Would you say density's 

declined further over time?

MEMBER BUSSE: Yes. I think we've 

become more efficient, much more efficient, with 

the same number of offices.

MEMBER SCULLY: Branches just aren't 

necessary for what they used to be necessary for. 

I mean, they're sales and service locations as 

opposed to transaction hubs.

MR. BROWN: I was going to ask, do they 

play important roles in lending size, small 

business lending, that sort of thing?

MEMBER BUSSE: Yes, definitely. 

That's where the capacity will be filled up. By 

leveraging that up, you're placing more of your 

lenders in those and your support folks, you know, 

and your administrative office may expand 

somewhat.

MEMBER TOLOMER: I think what you're 

going to see is that there is a need for a community 
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bank to add branches, but I think the industry 

overall will continue to see decline because 

there's -- we would have died, not died, but we 

would have had a much more difficult time growing 

without remote deposit capture and mobile banking. 

I think that is clearly the trend. The usage is 

up.

However, if you could ever dimension 

this, this is the real secret sauce, and that is, 

what is the impact of having of a branch? Because 

there is an impact, a positive impact, for people 

to be driving in their neighborhood, see your 

branch, and I can tell you on numerous occasions, 

I've had people say, "Now I can bank with your bank 

because you have a branch that's five or ten miles 

from my home."

There's a power, and that's the service 

and it's the convenience, and it's maybe the 

insurance policy if something goes wrong I can go 

see them in person.

MEMBER SCULLY: It's branding. And 

it's frustrating when you're trying to focus on 
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efficiency ratios. But for community banks, and 

I think that's why you see some of this growth, the 

branches are more important from a branding or 

credibility. I mean, on bad days, we call them 

expensive billboards, but --

(Laughter.)

MEMBER HOWARD: It's an interesting 

dilemma, we have an online account opening fund, 

so you do it electronically within certain limits. 

Our fastest, and we compare it to the average new 

account business an average branch does, our online 

account opening fund channel is doing two and a half 

times what a typical branch does with new account 

business.

So it's kind of an interesting dilemma, 

that you know you have a channel that's perceived 

by the public to be a very attractive one for doing 

business with your institution. But the billboard 

effect is very, very real.

You know, we're looking at strategies 

of creating locations that, you know, can take 

deposits, but they're more there for the billboard 
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effect than they are for acquiring deposits, 

because consumers bank differently now.

MS. ELLIS: So it seems like square 

footage can come down quite a bit if it's just 

serving as --

(Simultaneous speaking.)

MEMBER SCULLY: -- it's always a 

transactional vehicle, not a sales or service 

vehicle. So, you know, ten years ago you wouldn't 

have hesitated to open a branch without a 

drive-through if you were in suburban location. 

Not so much anymore.

MEMBER BAER PAINE: I do think that the 

challenges when you're in communities of 400, 1,000 

people, you still have to have that full-service 

facility. But for us looking into going into 

smaller communities, and we're a small community, 

do we look at an LPO versus a full branch? And like 

you said, square footage, do you bring that down?

And it does come down to efficiency. 

Our electronic traffic, even in a small town, our 

electronic traffic is 47% of our total traffic, 
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whether you're talking about debit cards or ACH or 

online banking and mobile deposits. We still have 

to offer all of those services.

Again, our community is 14,000 people. 

We have ten financial institutions in our town. 

We're definitely not unbanked. 

(Laughter.)

MEMBER BAER PAINE: So we do have a 

challenge, but there are all of these bedroom 

communities that are 40 minutes away and an hour 

away, and they may have one ATM in town or a very 

small location. Then what do you offer them? Do 

you offer them an LPO with a remote deposit machine, 

or how do you deal with that?

MEMBER HARTINGS: And I think, you 

know, you have to be careful. Just counting 

transactions is just like counting deposits. We 

have done, I think, an excellent job moving 

transactional transactions out of the institution 

and making it more efficient. But that 

relationship, when I want to borrow some money, 

when I want to open up an account, when I have a 
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problem with my credit or debit card, that 

relationship transaction that they still want, 

that's the importance of that branch.

And so you got to be a little careful 

when you just count numbers. Because, yes, we 

moved that check-cashing number out of 

institution. We just say it's because everybody's 

done direct deposit and we can pay bills online and 

everything else like that.

But those important transactions that 

have always been important to our institution, it's 

still coming in to our institution. And so I don't 

how we count the difference, but I think we have 

to kind of keep that in mind.

MS. EBERLEY: Mary Anne, can I ask a 

question going back to where you started, and if 

the Summary of Deposits data were broken down by 

mix, is that something that would be easy to do?

MEMBER SCULLY: Everybody knows what 

their mix is inside their own branches. I guess 

I'm being recorded, so --

(Laughter.)
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MEMBER SCULLY: No, everybody has 

them. It would be more fields of data, you know. 

And certainly for the megabanks that have thousands 

of branches. But, I mean, I would venture to say 

everybody around this table knows what their mix 

is in each of their branches. So you have the data.

MS. RYAN: Anything else? If not, 

thank you, Doreen, Mark, Diane, and Rich. 

And moving on to our next session, 

Doreen's going to stay with us and she's going to 

talk to you about the Handbook for Organizers of 

De Novo Institutions that she mentioned a few 

minutes ago.

MS. EBERLEY: Alright. So you each 

got a copy of the handbook in your packets. I would 

just caution that it is still draft. We put the 

handbook out for comment in December, and we have 

not finalized it yet. But this was part of our 

follow-on activities from the April 2016 Community 

Banking Conference. 

The Chairman committed at the 

conference, and we followed through, that we would 
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put out a publication giving banks guidance on our 

organizational groups, guidance on how to go about 

applying for deposit insurance.

So the publication is designed to do 

just that: to help organizers become familiar with 

the deposit insurance application process by 

providing hopefully a plain language overview of 

the various requirements and considerations. 

We divided the handbook into three 

primary parts, the first addressing pre-filing 

activities, the second the actual application 

process, and the third pre-opening activities. 

And I'll go through just an overview of some of the 

maybe most talked about topics that came up in each 

of our de novo events on each of these areas.

For the pre-filing meeting, we started 

the de novo events with a regulator panel that 

really stressed the importance of pre-filing 

meetings. You're not restricted to one. If you 

want to call it something else, you can have an 

exploratory meeting before a pre-filing meeting. 

You can have multiple exploratory meetings.
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But the point being that communication 

on the front end is really good. It helps us 

highlight any red flags that we see in a proposal 

so that it can go back and be reworked before you 

get too far down the road and too embedded in a 

concept and have to make a lot of changes. And it 

gives us an opportunity, too, to explain the 

process, just to make sure that the group 

understands how the process is going to work and 

create some transparency around that.

For FDIC, the pre-filing meeting also 

gives us an opportunity to establish a point of 

contact for an organizing group. So we use a case 

manager concept in our regional offices, so each 

institution has a case manager that handles their 

reports or examination reviews, their regular 

correspondence, any applications that are filed.

And so this relationship starts at the 

pre-filing meeting. The case manager that comes 

to the pre-filing meeting will be the one that will 

be assigned to that bank long-term so they get to 

know the bank from the get-go and start that 
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communication and relationship.

We've provided a timeline in the 

document of what to expect in terms of 

communication along the way, so where should you 

expect routine communication. Our process right 

now in the timeline is based on a four to six month 

time horizon. What happens during that time 

horizon is right up-front. Within three days of 

filing an application, we ask our case managers to 

acknowledge receipt, so to make sure that the 

applicant knows we got it and we're taking a look 

at it.

For about the next 30 to 45 days, the 

case manager will go through that application in 

detail and make sure that we have everything that 

we need for processing. So that's kind of a 

completeness review is what we would call that.

And typically speaking, if an 

institution has addressed and answered the 

questions in the interagency application form, and 

we do use an interagency form, it's joint with the 

chartering entities, so all of the states, plus the 
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OCC. One application gets you both your charter 

application and your deposit insurance 

application.

If those questions are answered and 

they don't raise any significant follow-on 

questions -- so, sometimes the answer in an 

application does raise some questions. But if 

not, then we consider it substantially complete as 

of the date it was accepted, and from there we begin 

the processing.

But that review takes some time. 

Deposit insurance applications are generally, you 

know, some inches thick. And just as an 

institution takes time and care to go through their 

business plan, we want our case managers to do the 

same, make sure that it's making sense and that we 

have what we need.

So once we accept the application as 

substantially complete, we move forward to a field 

investigation. And this talks about the field 

investigation process and what to expect there. 

And that involves a field examiner coming out and 
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meeting with the organizing group, talking through 

the process, interviewing each director 

individually, interviewing them as a group, same 

with the executive officers, and trying to gauge 

the understanding and commitment of the group to 

the business plan. Does everybody understand the 

business plan? Are they conversant in it? You 

know, want to make sure that everybody's buying in. 

And this was something that was really 

brought out in our discussion with our panelists: 

that you have to own it. The board of directors 

has to own the business plan. You'll get pressures 

from shareholders, you may have pressures among 

your board that the bank down the street's doing 

something different, we could make a quick buck, 

we could increase our returns. But really 

sticking to your knitting and what you built the 

bank to do, how important that was. And so we 

brought that out in the document.

We talked about the amount of capital 

that's needed, and that's based on the business 

plan. So whatever that business plan is that the 
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board believes makes sense in the marketplace 

that's where the bank will be established, the 

amount of capital's going to be dependent on that.

So we don't have a minimum number other 

than the two million that's in our 1998 statement 

of policy. We typically think it's going to be 

more than that. We're not going to have too many 

banks proposing to start up with that amount of 

capital.

And we had a lot of discussions about 

the importance of management, and we brought that 

out in the handbook as well. Some of the comments 

that we received during the de novo events were the 

importance of having an initial management team 

that had a broad range of experience and strengths, 

because you're going to be wearing lots of hats in 

those early days. And so you're going to need 

people that can do multiple things and that can grow 

with the institution, and just the importance of 

doing that.

We talked about the importance of the 

governance structure and the infrastructure around 
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that. So, policies, board policies, internal 

controls audit, preparing for all of that. And 

that is part of the startup activities. 

And we talked about information 

technology. One of the things -- so, I did say this 

was draft. We put it out for comment, public 

comment, on December 22nd. And we asked several 

questions in addition to just requesting comments 

on the document as a whole. And, you know, we 

sought to make sure that we were being clear and 

transparent and that the requirements were 

understandable, the procedures and processes for 

establishing institution were clear, and that we 

had adequately addressed the three things we were 

trying to address, pre-filing, the process, and 

pre-opening activities.

And we got some great comments back, 

really stressing an important issue, which is the 

importance of the information technology, your 

TSP, your technology service provider, contract, 

or your contract with your core processor.

We're going to add a bigger section on 
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that and try to highlight, really, the comments 

that we got from the bankers, the practical advice 

from bankers about thinking about what do you want 

your core processor -- you want to buy a core 

processor contract, negotiate a contract that's 

for the bank you're planning to be. You know, 

don't think short-term. Think out where you're 

trying to be, because everybody talked about the 

difficulty of conversions, not wanting to go 

through that, and making sure on the front end that 

you were building for the future.

Some bankers talked to us about --

actually, all talked about the need to have 

expertise in going through the contracting 

process. And that if you didn't have that 

internally on your team, several had used 

contractors for that process. So we'll walk 

through some of these issues and add another 

section.

The remainder of the comments were not 

substantive in terms of changing the document, so 

the content won't change. But we will add that 
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section before we finalize it, and we would 

anticipate having a final document out by the end 

of April.

Let's see, the last point I would make 

on the information technology as well, I think we 

have a good opportunity, our inspector general has 

recently looked at contracts between banks and 

technology service providers relative to the 

content or the guidance in the FFIEC, the Federal 

Financial Institutions Examination Council, 

handbook, Business Continuity Planning and 

Information Security.

And so I think we've got a good 

opportunity as well to kind of remind banks to take 

a look at that as they're negotiating their 

contracts right up front. You know, use the FFIEC 

guidance as part of your negotiations. You know, 

this is what the regulators are looking for as you 

go through the process. 

So that's really where we are with the 

handbook. Happy to answer any questions or talk 

about it further.
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MEMBER BOEKA: I have a question. 

Overall, did you receive comments from 

associations, bankers individually, or mainly the 

organizers?

MS. EBERLEY: No, we sought comments 

broadly. We put out a press release with the 

document and sought comments from anybody who read 

it.

MEMBER BOEKA: And bankers wrote back?

MS. EBERLEY: Yes.

MEMBER TOLOMER: As part of the 

process, you know, I missed the first three or four 

months of our de novo. Do you actually interview, 

does the FDIC interview board members?

MS. EBERLEY: We do, yes. 

Individually and as a group. So that's part of the 

field investigation.

MEMBER HANRAHAN: Doreen, I compliment 

you and your staff on this. Not only does it 

demonstrate the corporation's sincerity about 

having an open door for de novos, but I wish I'd 

had such a resource ten years ago when we were doing 
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what we did.

And thank you for adding more content 

on core processors. As I reflect on my experience 

ten years ago, that's the thing that I, in 

hindsight, was least prepared to deal with. So I 

think amplifying that here will be very valuable 

to others.

MEMBER HARTINGS: Doreen, give us an 

update on just numbers of de novo applications out 

today.

MS. EBERLEY: Certainly. We have six 

that are in process right now. Let's see, we have 

approved five since the start of, you know, the 

start of de novo activity post-crisis. So, since 

2011, I believe it is, approved five.

Four of those five have opened. One 

had determined not to open. And we have six active 

applications in process, most of which were 

received in the latter half of last year.

MEMBER HARTINGS: Is there a regional 

bend to that, I mean, were most of them out east, 

west?
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MS. EBERLEY: Yeah, coastal, I would 

say, would be -- so, we've got two in the San 

Francisco region, two in Dallas region, and two in 

the Atlanta region. Lots of talk of pre-filing --

or actually there have been lots of pre-filing 

meetings. And then there's also been a lot of talk 

about pre-filing meetings. So, groups calling, 

wanting to set up exploratory meetings and come in 

and have a chat. You know, groups that are 

interested. So that activity has definitely 

picked up, and I get reports from the regional 

directors on that. And that's increasing quite a 

bit.

MEMBER BUSSE: I'd echo David's 

comments about thanking you for this book. 

There's a great deal of interest in this. You're 

going to see probably a lot more applications as 

a result. And this a great product, thank you.

MEMBER SCULLY: And I think that a 

handbook provides you with a clear argument that 

you're being very transparent about the process, 

so it's not just saying we want more. It's 
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demonstrating how to ensure that there are more. 

I would echo as well, I wish had something like this 

12 years ago.

MEMBER MENON: Do you have an idea as 

to how much the average capital of the banks are 

proposing, the six banks you're talking about?

MS. EBERLEY: The six that are in 

process right now, I think the highest is 30 

million. I can't tell you what the lowest is. Of 

the ones we have approved, the lowest was, I want 

to say, 16 million, the highest 25 million.

And so it just depended on the business 

plan and where the bank was located and what they 

were trying to do.

MEMBER MENON: They may not grow very 

fast. I don't think you can do very much with less 

than 20 million anymore.

MS. EBERLEY: You know, I think it 

depends on, again, where the institution's located 

and what it's going to do. I think it's fair to 

say that the entry costs are higher now. And, you 

know, just the world around us has changed. We've 
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talked about the different delivery channels that 

are going to make your technology package more 

expensive that it was before. You know, there was 

no mobile banking pre-crisis. There weren't smart 

phone pre-crisis. So that's just a while new 

challenge. Cyber-security's another challenge 

that institutions face today that wasn't as 

prevalent before. So there are differences.

As you know, though, there are also some 

positives in terms of the way you compete and not

needing quite so many branch locations and not as 

big of branch locations. You know, being able to 

gain efficiencies quicker using technology. So, 

some pluses and some minuses.

MEMBER BEARD: Do you know what type of 

capital is coming in? Is it investor capital, 

professional investor capital?

MS. EBERLEY: No, it's largely been 

community-based, widely-held capital. Yeah.

MS. RYAN: Anything else for Doreen on 

this topic? If not, thanks. We're going to take 

a break right now 'til about 10:30. Thanks, 
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Doreen.

(Whereupon, the above-entitled matter 

went off the record at 10:09 a.m. and resumed at 

10:29 a.m.)

MS. RYAN: Okay, welcome back, 

everyone. So, next we're going to have a session 

to provide the committee with an overview of the 

FFIEC's Report to Congress on the Economic Growth 

and Recovery Paperwork Reduction Act, EGRPRA. And 

that report was just issued last week, and it 

summarizes all of the agency's efforts to review 

our regulations, and occurs every ten years.

Anyway, to tell you about the EGRPRA 

process we've got with us here today Roberta 

McInerney, Deputy General Counsel in our legal 

division, Ruth Amberg, Assistant General Counsel 

also in the Legal Division, George French, Deputy 

Director in our Division of Risk Management 

Supervision, and Rae-Ann Miller, Associate 

Director in the Division of Risk Management 

Supervision.

And so I'll pass it over to Roberta, you 
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can take it first. Okay.

MS. MCINERNEY: Thank you, Barbara. 

Good morning everyone, great to see you here.

So, as Barbara mentioned, the banking 

agency submitted our EGRPRA Report to Congress last 

Tuesday, March 21st. We expect the Federal 

Register Notice to be published shortly. And the 

report lays out how our three-year EGRPRA review 

was conducted and what we've done to date to address 

regulatory burden, and we outlined further 

measures that we will take to address issues that 

are identified through the EGRPRA process. We 

provided the highlights section of the report for 

your package. And as I think a lot of you know who 

have been on this committee, we have some new 

members, we conducted the review as part of the 

Economic Growth and Regulatory Paperwork Reduction 

Act of 1996, which requires the federal banking 

agencies, that's OCC, Federal Reserve and the FDIC, 

along with the Federal Financial Institutions 

Examination Council or FFIEC, to conduct a review 

of our regulations at least every ten years with 
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a mandate to identify outdated or unnecessary 

regulations.

Consistent with EGRPRA the agencies 

regrouped our regulations into 12 regulatory 

categories and sought comment from bankers and 

other stakeholders through four Federal Register 

Notices, each addressing three broad categories of 

rules and each providing a 90-day comment period. 

In addition, the agencies held six public outreach 

meetings across the country to provide an 

opportunity for bankers, consumer and community 

groups and other interested persons to present 

their views directly to agency senior management 

and staff, senior staff, on any of the regulations 

subject to EGRPRA review. In effect, we opened it 

up more broadly to, we opened it up to Dodd-Frank 

regulations and we listened to comments on any 

regulation that folks wanted to comment on.

I wanted to note that a number of you 

were in fact panelists on those outreach sessions 

and we thank you, again, for your participation. 

It was very helpful.
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So we held outreach sessions in Los 

Angeles on December 2nd of 2014, we started three 

years ago, we held one in Dallas on February 4th, 

2015, one in Boston on May 4th, 2015, Kansas City 

on August 4th, 2015. There we focused on world 

banking issues specifically. Chicago on October 

19th, 2015. And finally, Washington D.C. on 

December 2nd, 2015.

And I just want to emphasize, I've said 

this before but it really is important, that we 

really took the process seriously, our principals 

from each agency attended each of the outreach 

meetings, including our chairman, Marty Gruenberg, 

and I know Vice Chairman Hoenig attended some as 

well and heard all the comments from each of you, 

from everybody who spoke. And of note to you here 

today, the agencies we focused specifically on the 

effect of regulations on smaller institutions, on 

community banks and smaller state associations. 

Altogether, we received more than 230 comment 

letters from financial institutions, trade 

associations, some from consumer and community 
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groups and we also received numerous comments 

through the outreach sessions.

So, I just was giving the background, 

the legal background in what we did, and now I'll 

turn it over to Rae-Ann Miller to start talking 

about the specifics of the report and some of the 

highlights.

MS. MILLER: Thanks a lot, Roberta.

So the report describes several joint 

actions that the agencies have taken or plan to 

take, and George and I are going to talk about these 

in some detail, but there's four main areas; one 

is simplifying the regulatory capital rules for 

community banks and savings associations. Then 

there's streamlining call reports, there's an 

appraisal area where we talk about increasing the 

appraisal threshold for commercial real estate 

loans, and then we've got several other appraisal 

related actions. And then expanding the number of 

institutions that would be eligible for less 

frequent examinations for safety and soundness and 

BSA reviews as well.
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And then the report you have the 

highlight section, but the report also goes into 

some detail about individual actions each agency 

has taken to update its own rules and eliminate 

unnecessary requirements and to conduct some 

streamlining. I'm going to go over the FDIC 

section of the report with you when we're done 

talking about the inter-agency efforts and 

highlight some of the more important areas. But 

just in general, one thing we do note in the report 

that even though the formal review is over, it's 

kind of hard to believe it was three years in the 

making, in the report we indicate that we're going 

to continue efforts to tailor regulations to the 

size and risks posed by financial institutions. 

Of course, we balance that with the safety and 

soundness concerns as well.

So, I'm going to turn it over to George 

a little bit to talk regulatory capital.

MR. FRENCH: Okay. Well, thanks 

Rae-Ann. Good morning. So the report basically 

indicates that the banking agencies are developing 
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a proposal to simplify our generally applicable 

capital framework for risk-based capital. So, the 

report indicates the first area we would focus on 

would be replacing the current treatment of high 

volatility commercial real estate with a more 

straightforward treatment. Let me say there that 

throughout this process the agencies, and we have 

received many comments on the HVCRE through the 

EGRPRA outreach sessions.

(Laughter.)

Sort of on a separate project we had a 

Call Report simplification effort where we visited 

a number of banks and tried to determine which areas 

of the Call Report required the most manual 

intervention, and it was significant that the HVCRE 

was high up on that list of areas that required 

manual intervention. And also, I have to say 

through the exam process we continued to receive 

sort of interpretive questions. There's a certain 

amount of interpretation and softness in the rule 

that is, it's just there, and so we really would 

like to deal with the HVCRE issue, it's a high 
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priority, and we intend to do that.

The report also indicates we will be 

focusing on the current regulatory capital 

treatment for mortgage servicing assets and 

so-called timing difference deferred tax assets, 

and also holdings of regulatory capital 

instruments issued by financial institutions. So 

as you know, there's a deduction treatment in the 

Basel III rule, 10% of capital for each of those 

items, and then a 15% aggregate. So that creates 

a certain amount of management complexity in 

dealing with those issues. It's been the subject 

of many comments, so we intend to come up with a 

proposal to try to reduce the complexity there.

And then finally, we mentioned the 

current limits on the NARDI interest and regulatory 

capital. I don't know if any of you have actually 

had the pleasure of opening up that section of the 

rules, but those are extremely detailed, lengthy 

and somewhat complex I have to say, so we would like 

to find an alternative to that. So, the news is 

we've indicated that we're going to do this and we 
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plan to do it.

So with that, I will turn it back to 

Rae-Ann.

MS. MILLER: Thanks, George. So, the 

next main area is call reports and the EGRPRA report 

describes our efforts here. We certainly reported 

to this community, I know a number of you are new, 

but several times on our efforts to study new issues 

related mostly to the Call Report preparation 

process and burdens associated there, and to 

streamline the call report. We really, it was 

about a two-year process that we've been looking 

at this issue. We've met with trade associations, 

we met with bankers to get some feedback, these were 

big meetings. As George mentioned, we actually 

also had a focus group and did some targeted on-site 

reviews with bankers where we sat with bankers and 

chatted and saw first-hand what kind of issues that 

they were encountering. And George mentioned, the 

capital schedule was an area that was commented 

upon, as was the loan schedule in some other areas. 
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But we also beefed up our process to justify keeping 

Call Report items or adding new ones. And as we 

were going through this, we didn't wait, we wanted 

to do things on a flow basis, so in July and August 

both we issued certain burden-reducing changes in 

two different releases, and then in December 2016 

we finalized, as you know, the new streamlined 

FFIEC 051 Call Report, and that's for institutions 

with domestic offices only and assets of less than 

a billion dollars. It was on December 30th, 

actually, so we did make it.

The FFIEC 051 was created from the O41, 

and what we did was we removed certain existing 

schedules, we eliminated certain other data items 

and reduced the reporting frequency of a number of 

items. And in particular, one of the items we 

reduced the reporting frequency of was the entire 

schedule for small loans, the loans to small 

businesses and agricultural operations. And that 

was one we got feedback from that was a burdensome 

issue, and we also got comments on that in the 

publication process.
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So, the new Call Report will take effect 

on March 31st. It reduces the length of the O41 

from 85 pages to 61 pages, it removes approximately 

40% of the data items that are in O41, and we've 

also prepared a shorter instruction booklet as 

well. We noted that in the report that we expect 

further Call Report streamlining in the future, and 

then to George's point, any simplification in the 

capital rules is going to make preparation of that 

schedule far less burdensome. We also have 

additional burden-reducing changes to certain line 

items coming soon, and that's from our beefed up 

review that we did.

Also, I wanted to point out that when 

we adopted the 051 we indicated in there an openness 

to expanding access to beyond just those 

institutions under $1 billion. Another thing I 

wanted to point out is, I don't know how closely 

you read the Federal Register Notice on it, not 

everybody does -- I do, it's weird -- but there's 

an appendix to that notice that's really, really 

helpful, I think, and what it lists is the reasons 
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why we kept the items. And so the reasons range 

from because they're required by legislation or 

regulations, but there's also reasons -- we base 

our decisions whether to extend the examination 

cycle from 12 months to 18 months, a lot of it is 

on off-site surveillance systems, so that could be 

a part of the reason why we retain items as well.

In the appraisal area --

MEMBER HOWARD: So, great. I just 

wanted to interrupt if I could. I think this is 

directed to George; a year ago we were talking about 

the accounting rule that will take effect regarding 

institutions and how investment portfolios and the 

changes, having to go through these income 

statement versus the balance sheet. And there was 

movement to, or there was discussion, I should say, 

to how a line item on the Call Report that would 

help a reader understand what potential 

volatility, what it would come from.

MR. FRENCH: Yes, correct, our 

intention is to work with the other agencies to 

address that. We think that has merit. 
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Unfortunately, I don't have the answers to exactly 

where the process is right now, but we'll probably 

find out soon enough, hopefully, maybe even today. 

Yes, our intention we think that has merit.

MEMBER HOWARD: Okay, thank you.

MS. MILLER: Okay. So, moving onto 

the appraisal area; we also indicated in the report 

that we are developing a proposal to increase the 

threshold for requiring an appraisal on commercial 

real estate loans from 250 to 400. We did get a 

lot of comments on that, on both sides. We did have 

a lot of appraisers and appraisal-related industry 

comments as well as banker comments that were sort 

of split down the middle, as you can imagine.

(Laughter.)

(Simultaneous speaking.)

MS. MILLER: Publicly available 

comments. So, we also talked in the report about 

issuing a statement to our regulated entities, and 

this is something that we're planning to do to 

inform them of the availability of the Appraisal 

Subcommittee of the FFIEC has an existing authority 
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with the approval of the FFIEC to grant temporary 

waivers of appraisal requirements in rural areas. 

And so we want to remind the industry of that 

ability. Also, individual states have the ability 

to grant temporary practice permits which may help 

address temporary appraiser's shortages, and as 

those go across state lines.

To clarify our expectations regarding 

evaluations; we got a lot of comments when we were 

in the Kansas City outreach session in particular 

about confusion about when evaluations were 

appropriate. So in March of 2016 we issued a 

reminder, we call it kind of an advisory on when 

evaluations can be performed in lieu of appraisals. 

In the exam frequency area, as the process unfolded 

we did get a lot of comments; I think the first set 

of comments -- I remember Adriana being on that very 

first panel -- that was interesting planning, 

talking about --

MS. MILLER: Yes, it was. Talking 

about extending examination cycles, so we were 

supportive of that. And as you know, Congress 
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subsequently enacted the FAST Act, Fixing 

America's Surface Transportation Act. And among 

other things, it gave us actually discretion to 

raise the asset threshold for certain IDI's that 

qualify for an 18-month exam cycle, and that went 

from less than $500 million to less than $1 billion. 

So shortly, thereafter, in January, in fact we 

exercised that discretion, we issued a joint 

interim final rule to raise that asset threshold. 

So as a result of that, approximately, a little bit 

over 600 more institutions would potentially 

qualify for the extended cycle, and that would 

increase the number of potentially qualifying 

institutions to approximately 83% of all IDI's 

right now.

MEMBER HOWARD: So there's only few 

institutions between a billion and say $5 billion 

margin?

(Laughter.)

MS. MILLER: So, it's statutory as you 

know. But in general, the agencies reviewed BSA 

compliance at the same time, the safety and 
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soundness, so the institutions that benefitted 

between those asset sizes are now eligible

potentially for less frequent BSA reviews as well. 

And so in the report we had some other more minor 

areas that we are going to be taking some 

inter-agency action on, and one of them is 

clarifying guidance in the flood insurance area, 

and then we plan on issuing a proposal to increase 

the major assets, interlock threshold, and that's 

in the regulations that implemented Depository 

Institution Management Interlocks Act, it's 

another threshold that's been there for a long 

time. And we plan on enhancing some guidance that 

we have outstanding on Regulation O.

So, I want to just turn for a second to 

some FDIC initiatives, we have significant detail 

on each of the agency's efforts in the report, and 

we talked to you guys about these relatively 

frequently, but I just wanted to touch on a few. 

And Doreen talked a little bit this morning about 

the work we've done around de novo institutions, 
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it was definitely a frequent topic of comment, both 

in the written comment and in our outreach sessions 

for EGRPRA outreaches, as well as other outreach. 

So, we rescinded FIL 50-2009, and that was called 

Enhanced Supervisory Procedures for Newly Insured 

FDIC Supervised Institutions. So, by rescinding 

that it reduces from seven to three years, the 

period of enhanced supervisory monitoring of newly 

insured institutions. We also very early on -- I 

think it was in 2015, November 2015 -- we issued 

guidance in the form of question and answers on 

issues related to deposit insurance applications. 

Doreen was talking about the series of outreach 

meetings that we've conducted, and we've also got 

subject matter experts in each region who are, you 

can provide applicants with a dedicated source and 

points of contact for deposit insurance 

applications. Then, of course, Doreen, in the 

last session mentioned our public handbook. In 

the area of just in general, we're trying to reduce 

burden in applications, examinations and 

supervisory processes. We have a number of things 
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we point out in the report, and I just want to point 

out a few to you; again, in November of 2015 based 

on some early comments, we eliminated requirements 

for institutions to file applications under Part 

362 of our rules and regs to conduct activities 

permissible for national banks through certain 

bank subsidiaries that were organized as LLC's.

And when we put these filing procedures 

in place it was a new structure for us, but we 

estimate that over the ten years before we changed 

that requirement, probably the vast majority of the 

2,000 applications we processed involved LLC's, so 

the changes really will have resulted in a 

significant reduction in filing. We talked a 

little bit about the pre-exam planning process and 

we do highlight that in the report that for both 

types of exams we really think focuses us and allows 

us to do some work off-site as well as focusing your 

requests list needs.

We talked a little bit about 

FDICconnect and paperless types of exchanges that 

we engage in there. In 2016, and I remember some 
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comments of this coming in in the Boston meeting, 

we established a process to allow for the audit 

reports that are required under Part 353 to be 

similar to the FDICconnect. And then Doreen 

talked a little bit about our pilot process for 

reviewing loans off-site and getting those 

standardized image loan files. So the point there 

is to sort of reduce examiner base time at the bank 

while maintaining efficiencies and effectiveness 

of loan review.

We talk about, it's not something we 

often talk about, but we actually received OTS 

rules and regulations when that agency moved on, 

and we have rescinded so far 16 rules and 

incorporated them into our rules for institutions 

that were transferred to us. We also have a 

proposal out right now to rescind another, and we 

have 14 more in process of review. And we talked 

a little bit in our report about our Community 

Banking Initiative, and it's been a multi-year 

process. We talk about the Advisory Committee in 

the report, our Director's Resource Center, the 
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website and our technical assistance videos. We 

have like 25 out there now. We recently redid some 

banker guidance on deposit insurance coverage and 

we've done some outreach sessions there. We focus 

on our research agenda, Rich just was here in a 

previous session and they did that community 

banking study in 2012 which was really a landmark 

piece, but some people forget that we follow with 

other research that's appropriate for community 

banks and we've done things on consolidation, on 

minority-owned institutions, branching trends as 

an extension today of that, economies of scale, 

earnings performance, closely held 

institutions, and then rural depopulation, which 

is a huge issue.

We talk about the community bank 

quarterly banking profile and the detailed picture 

that presents, and hopefully that's helpful to you 

and other community bankers. And then our 

community bank resource kit which is a nice package 

kit with things like a pocket guide and an article 

that would be appropriate to you. We did one on 
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corporate governance that's in there, corporate 

governance for community banks, it's got our Cyber 

Challenge pamphlets in there. And then in the area 

of capital, apart from what George was talking 

about, we also issued a FIL in 2014 regarding S 

corps and clarified the way we would treat certain 

requests from institutions to pay dividends. So 

we basically told banks that unless there were 

significant safety and soundness issues, we would 

generally approve those requests for well-rated 

banks. We conducted quite a bit of outreach and 

technical assistance specifically for community 

banks and we have a community bank guide for capital 

rules. We have an informational video, we 

conducted face-to-face meetings and also did 

informational sessions in each of our six 

regions on the capital rules in particular.

And then we talk a little bit about 

communication efforts and we've really tried very 

hard to improve those, and we re-issued an updated 

guidance this year called "Reminder on FDIC 

Examination Findings," and that re-emphasizes the 
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importance about open communication regarding 

supervisory findings. We also added an additional 

informal review process at the division director 

level in that FIL for banker concerns that might 

not be eligible for another review process.

And then we tried to improve 

transparency in developing guidance and 

supervisory recommendations, so our board issued 

two statements which is basically for us as staff 

to guide us in developing supervisory guidance and 

recommendations and communicating those in written 

communications to individual institutions. And 

then in terms of sort of to close out this session, 

and we kind of highlight in the report things that 

we're thinking about in the future, we talked a 

little bit about this, but sort of modernizing our 

processes for actually conducting the examination. 

We talk about that in the report. We say we 

recognize that burden is not just from regulations, 

that's what this EGRPRA is about is studying 

regulations, but it also comes from processes and 

procedures of the on-site examination, the 
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communication processes that we're constantly 

engaging in, the overall oversight of the 

institution.

So we talk in the report about several 

steps that we and the other agencies intend to take 

to look for further opportunities to minimize 

burden to bank management, principally by 

rethinking our traditional processes by making 

better use of technology. And there's several 

areas to this process; and first we're going to 

explore potential ways to reduce on-site 

examination hours, likely by making the use of 

technology to do more. And that pilot that we're 

talking about is one way, and I'm sure there are 

other ways, of course, making sure that we still 

have an effective supervisory process, that's key. 

We're also going to look at the format of the report 

of examination to make sure that it's still a 

value-added tool for all stakeholders.

We last revisited this report format 

probably as an agency group in the early 90's, so 
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we've kind of all moved in different directions on 

the inter-agency report, but it's probably a good 

time to take stock. Does it have all the required 

information, is there a way to make it more 

user-friendly? It's certainly the exam reports 

haven't changed since I've been -- the way we 

present them hasn't changed since I've been an 

examiner, so perhaps there's better ways to do 

that. We're also going to take a look at our own 

guidance documents, this was covering, EGRPRA was 

covering regulations, but we have a number of 

guidance documents, and we're going to focus 

particularly right now on the inter-agency ones to 

start. Are there areas where we could streamline? 

And talking with my colleagues, it seems the best 

way to do this is to sort of look at the ones where 

there are multiple issuances on the same topic and 

is there something we can do to bring those 

together. A couple that come to mind are the 

liquidity in audits that have had numerous 

issuances. And then are there particularly old 

ones out there that we haven't revisited in a while.
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And then the final piece of it is sort 

of looking at our supervisory tools and which ones 

shouldn't we review. The one that comes to our 

mind, there could be others, is the Uniform Bank 

Performance Report, the UBPR. I don't know if you 

use that in your work? I know I like to read them, 

I might be the only person because they are very, 

very old-fashioned. They're very old-fashioned 

in appearance. We could probably enhance graphics 

making them more user-friendly, but perhaps I think 

more importantly is a consideration whether we're 

still hitting the right information, especially on 

that first page and whether we want to have 

different ratios to highlight.

So that's just sort of the report sort 

of announces that. Certainly I would imagine that 

this group is probably interested in that process 

and will be keeping you posted on that going 

forward.

So that's it with that, we'll certainly 

take any questions you might have.

MEMBER SCULLY: You mentioned, much 
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appreciated the acknowledgment you will work. Any 

new estimates on that?

MR. FRENCH: No, as soon as we can. I 

don't have a time for you.

CHAIRMAN GRUENBERG: Federal requires 

inter-agency rulemaking.

MEMBER HARTINGS: George, as you 

looked at HVCRE's, was there many comments on TDR's 

as well? I think what pains most institutions on 

TDR's is that life of loan label that you put on 

that. There isn't many regulatory announcements 

that require a life of loan. Was any of that 

addressed at all?

MR. FRENCH: I think you're going to 

have to help me out on the HVCRE issue with TDR's.

MEMBER HARTINGS: Well, it's certainly 

two different issues, but it probably deals with 

the same kind of clientele, commercial clientele. 

Again, my question is there any regulatory movement 

or room on TDR's?

MR. FRENCH: Oh, the idea that once 

you're a TDR you're always a TDR?
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MEMBER HARTINGS: Again, that's --

MS. MILLER: Yes, we didn't really get 

any comments on that, Jack, because that is a FASB 

type of pronouncement, so it's not required by our 

regulations. There has been not necessarily an 

EGRPRA but other outreach sessions. A question to 

us as Cecil comes through, will the TDR go away, 

because if you're reserving for the life of the loan 

at the front end do you really need the TDR 

designation has been the question. And we can't 

answer it because it is a FASB pronouncement. But 

in this process we didn't get any of those comments.

MEMBER HARTINGS: Then the other 

question that goes to you Rae-Ann, the increasingly 

commercial roles appraisal from 250 to 400. 

What's the magic number, 400, 500? It's a lot 

easier to remember. In our shop simplification 

means a lot, so why not pick 500?

(Laughter.)

MEMBER MILLER: Well, you could pick 

whatever you want. I mean, there's sort of like, 

if you were to inflation adjustments, which we did 
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an inflation adjustment, it's about 440 or 

something like that. But it's an inter-agency 

process, would have to be a NPR that we'll have to 

develop and go out for comment, so it's a 

negotiation process just like anything else. I'm 

quite sure we'll get a lot of comments on that 

number and whether we hit the mark the right way.

MEMBER HARTINGS: You know, I think 

sometimes we look at inflation adjusted and by your 

own stats, I think since 2005, we doubled the size 

of deposits per institution. Certainly assets may 

be greater than that, but we have to maybe look not 

just at inflation numbers but actually size of 

institutions because size of capital, all that kind 

of, I think you look at that. I think the other 

thing, and I guess this may go more to the 

chairman's prerogative or initiative down the 

road, is I know EGRPRA we appreciate that, you guys

looked at a lot of administrative rules and changed 

them which you can, but there's always this 

push-back when we get to statutory we can't make 

that change.
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Has there ever been a thought process 

that you create a wish list of statutory reasons 

that you think should change because you see it hold 

up the examination process or the safety and 

soundness or compliance? And I don't know that 

EGRPRA will let you do that, but it would make sense 

that they're the ones in our institution, you’re

the ones that kind of say this just isn't working, 

this should be something that needs regulatory 

attention.

CHAIRMAN GRUENBERG: Look, we have the 

ability is part of the EGRPRA process or apart from 

it to make recommendations for legislative 

changes. The report does contain some 

recommendations for legislative changes, which I'm 

open to suggestion.

MEMBER BEARD: Has there been any 

clarification of the guidance on real estate 

concentrations? I know we have had some examiners 

that seem to focus on our occupied versus 

unoccupied. Any thoughts on that?

MS. MILLER: Yes, we actually did issue 
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a reminder of our guidance and all the guidance 

documents that are applied to CRE which is not just 

the 2006 Inter-Agency Guidance, but we have Part 

360 for the Safety and Soundness Regulations as 

Appendix A, Part 365 which are the Real Estate 

Lending Standards and there's some other 

pronouncements. So, in 2015 we issued a reminder 

of that. Part 364 talks about concentrations in 

particular and banks needing to monitor 

concentrations, so no matter where they are, so our 

examiners will look and will ask for risk 

management practices around any type of 

concentration. So, if there's a large 

concentration of owner-occupied, certainly you're 

managing it accordingly and they're looking for the 

risk management practices about that.

The 2006 Guidance talks about 

supervisory criteria and uses two different 

criteria, ADC, and then non-owner occupied, and 

non-owner occupied 300 and a three-year growth rate 

of 50%. And that doesn't mean other areas are not 

looked at; it's basically just a point where 
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supervisory interests and attention might be 

considered that we're going to be looking at your 

risk management practices. You're previewing my 

afternoon presentation; when you look at the 

language in that guidance, there's no safe harbor. 

I mean, concentrations need to be managed and we 

look at them wherever they may be. And again, 

there are no regulatory limits on -- those 

supervisory criteria are not regulatory limits. 

MEMBER BEARD: I guess the specific 

question was I understand that guidance is on the 

300, but does it exclude --?

MS. MILLER: It does, it absolutely 

does.

MEMBER BEARD: And we've had examiners 

that include it.

MS. MILLER: Ah, I see. Well, yes, and 

examiners for the purposes of the concentrations 

page, is that what you're talking about?

Yes, I mean, I think depending on the 

institution, no matter where the concentration is, 

you need to look at it and need to look at risk 
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management about it, but if they are calling that 

part of the supervisory criteria, that would be an 

error. But if it's concentration owner-occupied, 

I think that's appropriate.

MEMBER TOLOMER: So you're going to be 

speaking more in the afternoon about 

concentrations?

MS. MILLER: Yes, yes.

(Laughter.)

MEMBER TOLOMER: So, I'm going to hold 

my comment until then.

(Laughter.)

MEMBER SCULLY: Rae-Ann, can you 

summarize since it's such a new report, I don't 

think we've had a chance to look at the whole thing, 

what was the FinCEN response to some of the concerns 

about SAR's and --?

MS. MILLER: Yes, I can. And they 

actually provided us a letter that's appended in 

here, so it's a pretty easy read. Their response 

basically says we appreciate the comments and 

concerns and they tried to give an indication about 
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how helpful that the material is to them in their 

enforcement work. So, as you know, we don't have 

sole authority on those areas. So, that was sort 

of their response. Also in the report, I can't 

remember if it's Footnote #163 or, but we did append 

some resources that you can look at FinCEN's 

website where they actually go and do some data 

about how they have used the material that you 

provide. And this particular committee, I don't 

know if anybody was on this committee when FinCEN 

came and spoke, and I think they've done a lot of 

that and they have reports that show how they use 

the materials, so that's how they responded to 

that.

MEMBER SCULLY: So, essentially, we 

understand it's burdensome but it's helpful when 

we want to change it?

MS. MILLER: That's a good way to 

summarize it.

CHAIRMAN GRUENBERG: I'd like to come 

back on the exam process for the agencies, the great 

pursuit coming out of the EGRPRA process. I really 
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think it has some potential when we talk about 

burden reduction for institutions. I meet with 

bankers and hear as much or more about the exam 

process itself as I do about the regulations that 

they have to deal with both in terms of the time 

it takes to conduct exams or the number of examiners 

that have to be present on-site during the exam. 

Tom raised the point, the coordination of exams, 

by a particular agency or different agencies that 

institution might be subject to. So, I actually 

think this is an area that holds significant 

potential without undermining our supervisory 

standards and to reduce burden on institutions the

meaningful way. And particularly welcome any 

thoughts you have today or going forward from your 

-- each of you has exam experiences, any thoughts 

you have on how we could improve the process. I 

think we are going to look hard at the potential 

of technology to be of assistance here.

We talked about earlier the use of 

technology to do more work off-site, and I think 

there's still significant potential there. So, I 
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think part of our commitment is to continue to think 

of ways to reduce regulatory burden, but I think 

this -- we have not done a real in-depth review of 

the agencies of the exam process itself and the exam 

report associated with it for a long time. We have 

the potential there of that work stream, I think 

all of the agencies are committed to it. I think 

has potential value and we're going to be looking 

for ways to outreach to industry for input on this. 

So, I just wanted to make a point.

MEMBER BOEKA: That sounds great 

because in terms of how long an exam on the site

takes place, this agency really sets the norm and 

the expectation and the bar. There is no way that 

the State of California when it's their term will 

take less days than whatever this agency has done, 

so if there is a way to set a different bar and use 

technology, I think everybody else will follow.

MEMBER BUSSE: If I can add, when we 

have our exams, there was a tremendous change and 

very helpful to us, so the consolidation of those 

examinations and coordinations very, very helpful.
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MS. MILLER: Just to your point, we 

talked very closely with our state counterparts on 

exam processes and I actually had a meeting on 

Friday with several states and tried to coordinate 

as much as possible on our processes.

MEMBER HARTINGS: Chairman, I think 

time on-site is really how we judge our 

examinations, so if you can reduce that from three 

weeks to two weeks, that's a real -- I mean, that 

is our time, that is the time we make sure we're 

there, we're having that conversation, I have all 

my senior staff there, so everything else gets shut 

down. So, that three weeks to two weeks means a 

lot to us. All the pre-exam that you got has been 

great, we've been able to give you the information, 

it's done in a more orderly manner. But I think 

the next part of that for improvement is that time 

on-site inside of our banks, would be helpful at 

least to myself and I think to my fellow bankers.

MEMBER BUSSE: Yes, but the one thing 

I would suggest to you, while it's helpful to have 

reduced time, I'm okay with having additional time. 
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But if what we experience continues, which is 

you're a growing institution, here are 

recommendations you might need to adopt to help us 

get to the next level, I mean that consultative 

approach has been very powerful for us because it's 

worked the time we spend in that additional time.

MEMBER HOWARD: Yes, I would also 

comment on that very similar point, the time that 

we spend, and for us exam we ended up doing it at 

the end of the week every Friday having kind of a 

debrief so that there was no point throughout the 

process how to do it longer than three weeks, but 

there was no point throughout the process where 

management and the examiners weren't touching base 

so that we were all on the same page, kind of 

understood what was going on. Occasionally, as a 

result of one of those debriefs, you would learn 

of an information request that you could fulfill 

right then and it just made the whole exam process 

just, much, much better. Much better. So I 

wouldn't want to lose that ability to have the very 

frequent conversations with the exam team 
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throughout the process.

MEMBER SCULLY: We have the same thing, 

and additional frequency, it just adds a level of 

predictability and transparency and it very much 

helped the process.

MEMBER TOLOMER: I learned something 

different in that I wasn't really focused on the 

time FDIC used on-site, and the reason is we did 

have the legal debriefing just like you did, 

Chandler, but also the interaction with the 

examiners to the bankers was of a caliber that 

everyone had done their homework. And so the 

discussions were professional agreement, but the 

reality was, and through the course of the weekly 

meetings we were able to change the group through 

change. So, I was less focused on the time we were 

there because the interaction was high quality, and 

so I'd be less concerned if it's two or three weeks 

or four weeks, but we're less concerned about that 

as long as the quality, the homework is done, the 

quality of the dialogue and the constant 

communication is there, it's less important. 
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Because, frankly, they sat in the conference room, 

they worked, then they came out and had something 

meaningful to discuss. And so from that 

perspective I can't even tell you how many weeks.

MEMBER MILLER: Yes.

MEMBER TOLOMER: I think from my 

perspective the last several exams we've had I 

started implementing a rule where I would call my 

local FDIC divisional person and say let's meet 

after every quarter to kind of go over what's 

happened in the previous quarter, what we're doing, 

what's happening at the site. Yes, and that has 

tremendously helped us, so the last several exams 

it's been they come in on Monday, they leave the 

next Friday, and that's it. And basically what 

they're saying is that we know what's going on here, 

they're just verifying what you've told us is 

actually there and we're in and out very quick. 

It's been amazing, most state and FDIC have been 

out in two weeks, and it's been great. They both 

come to our quarterly meetings, we have a cup of 
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coffee, sit down, here's our numbers, here's what 

we're seeing, we go over everything and they tell 

us if what they're seeing out there on the horizon, 

if what FDIC is seeing that, "Hey, be aware of these 

four, five items. Be aware of this or this is what

we're seeing happening in the industry." So, it's 

very helpful for us, too, and it's more proactive 

rather than reactive, so we're able to go out there, 

make adjustments before you guys come in the next 

time.

So, it works very well and I would 

encourage everyone to do the same if they have the 

time.

MEMBER KELLY: I actually got a call 

from my Atlanta case manager off-site, new exam to 

go over the call for and go over some changes in 

call report and the findings of the state and saying 

that it just occurred. Yes, when you get a message 

from your FDIC case manager and you don't know why. 

It's like, "Okay, wait a minute."

(Laughter.)

MEMBER KELLY: First call in 14 years, 
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but I would mention to kind of echo what's been said 

is the consistency of the exam team. It doesn't 

have to be the same exam team but someone within 

that group needs to understand the personality and 

the functionality, I guess, for lack of a better 

word, of the institution. I mean, we do all have 

personalities in how we behave, what we do, how we 

do it, and that makes for, again, where you don't 

even realize it's three weeks because it's been a 

good three weeks. You don't have to re-introduce 

your institution to these people every time they 

come and see you. So, that goes down a lot.

Now, I really think it enhances the 

off-site stuff because they understand what the 

data means; it's one thing you gather data, but if 

you don't have an understanding of the data, then 

it's really, doesn't have a whole lot of value. 

So, I think the consistency is good.

MS. RYAN: Any other comments on the 

overall EGRPRA process or the port or the 

examination review?

Okay. If not -- we're a little bit 
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ahead of schedule, so we can break, take an early 

break for lunch, if that makes sense.

Okay. Thanks to Roberta, Ruth, George 

and Rae-Ann. And we're going to have lunch up in 

the EDR on the 7th floor, and I'd say about 11:45. 

So you have a few minutes to catch up on things.

Thank you.

(Whereupon, the above-entitled matter 

went off the record at 11:18 a.m. and resumed at 

1:16 p.m.)

MS. RYAN: Welcome back, everyone. So 

we're going to now turn our attention to credit risk 

trends and supervisory expectations, topics that 

were outlined in the Supervisory Insights journal 

article from winter edition, and you should all 

have a copy of that article.

So we have with us here again Doreen 

Eberley, George French and Rae-Ann Miller to 

discuss this and other related issues.

So, Doreen, turn it over to you.

MS. EBERLEY: All right. Thanks. 

We did issue our supervisory insights 
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just a few weeks ago, talking about some of the 

trends we were seeing and went into some depth 

there, but thought it would be good to have a 

conversation today and get some feedback from you 

on whether you're seeing the same trends in your 

markets or not. And we'll go ahead and kick it off. 

So I think Rae-Ann's going to start.

MS. MILLER: Great. Thanks a lot, 

Doreen. 

And you should have a PowerPoint in your 

handouts from this morning that looks like that. 

And, yes, so this is going to -- all of these slides 

were pulled from the article. 

So we look at three different loan 

segments in the article: CRE, agricultural, and 

oil and gas. And we chose those because of the 

trends that we're seeing in those areas: in lending 

themselves and then in the underlying fundamentals 

as well, and the importance to our institutions. 

We say in the article this doesn't mean that people 

that are looking at the article should think that 

we have a negative view of any of these categories. 
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And you should also know that we look at other 

lending categories as well, but just some 

interesting trends that we wanted to point out.

So with that, I was going to go to page 

2 or slide 2, which is the first of the actual 

pictures. And this article was done as of 

September '16, so we obviously have another quarter 

behind us, but I did not update them for this 

presentation. 

So as of September 16th this chart is 

showing year over year growth in total loan 

balances. And it was about 6.8 percent. And you 

should also know that a large majority of banks, 

about 80 percent of banks actually experienced 

growth in their loan portfolios.

The lines on this chart are 

subcategories that are tracked by the call report

data. So as you can see, we're at overall over $2 

trillion in total CRE. That exceeds the previous 

high of about 1.9 trillion in 2008. And there's 

been growth in all categories. The multi-family 

segment stayed strong throughout the crisis and 
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even into the recovery. It's a little hard to tell 

here because of the scale of this chart, but it 

really did stay pretty robust.

More recent growth has been centered 

on -- that top line there is the 

non-farm/non-residential category. It's the 

biggest category in general. But we also see some 

pretty good growth in the acquisition, development 

and construction segment. But of course that is 

coming from a pretty low -- it was high during the 

crisis and then dropped precipitously. 

So overall growth we talk about a little 

bit more in the article, but it's basically just 

being driven by demand. We talk about the 

fundamentals in the market in the article, and in 

particular high CRE prices. We've got some --

we've got low cap rates generally improving 

vacancies, except in multi-family where vacancy 

rates are starting to show some cracks.

Moving to slide 3, we were talking about 

this a little bit earlier today. This slide shows 

the trend in the number of banks that meet the 
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supervisory criteria in that 2006 guidance. It's 

inter-agency guidance on commercial real estate. 

And these are banks that have total ADC loans of 

100 percent or more of total capital and those that 

have concentrations in non-owner-occupied CRE and 

a three-year growth rate of 50 percent or more. 

And then we talked a little bit this 

morning, but I want to say again what the 

supervisory criteria are and what they aren't. 

And I didn't have this in front of me this morning, 

but I'm just going to read a quote. The guidance 

says that, "An institution that has experienced 

rapid growth in CRE lending has notable exposure 

to a specific type of CRE or is approaching or 

exceeds the following supervisory criteria may be 

identified for further supervisory analysis of the 

level and nature of its CRE concentration risk."

So the supervisory criteria aren't 

regulatory limits or ceilings. They are basically 

areas where risk management expectations are 

definitely high, but there's other areas of the 

institution where we also have high risk management 
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expectations.

And the article also goes into some 

depth about the consequences of what happens when 

concentrations aren't prudently managed. And we 

cite some studies. And if you have a chance, these 

are pretty good studies our inspector general did 

that basically show aggressive growth in CRE 

coupled with poor risk management practices. Poor 

underwriting, loan administration were the 

proximate causes of most of the bank failures 

during this crisis. 

And there's also another element where 

banks that relied on wholesale funding for that 

growth were also more likely to fail. And they 

also did a separate study for us on acquisition 

development and construction lenders, ones that 

survived, and what were the factors that helped 

them survive? And basically the takeaways were 

that they had a well-informed and active board and 

very strong risk management practices, adequate 

capital, and they tended to heed auditor and 

examiner recommendations. And in fact, they said 
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that this last point was a differentiating factor 

for those that failed and those that didn't.

So this here, what this is showing you 

is that at the end of the third quarter of 2016 there 

were 521 FDIC-insured institutions that met one or 

both of the two supervisory criteria in the 2006 

guidance. So it's still well below that level 

observed in 2010. At that time about 15 percent 

of the banks, not quite 15 percent of the banks in 

the country were -- met these criteria. Now it's 

down to just a little bit over eight. It has 

increased the number even though it's still lower, 

has increased from 474 in the third quarter of 2015. 

And then the low point was in 2013 at 350.

So what we do next in the article; a 

little bit more detail, we've gone to look about 

how are these banks that meet the supervisory 

criteria -- how are they performing now and over 

time and how do we -- how do they compare to the 

general population? And when we talk about 

performance charts, we chose to use medians, which 

shows the typical bank versus averages which can 
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get distortions.

So I'm moving to slide 4, and this is 

sort of a snapshot slide. How are these 

institutions doing now? So at the median 

institutions that exceed the supervisory criteria 

have currently higher pre-tax ROA than other 

institutions, but in our view they're operating 

with a generally higher risk profile by any number 

of measures. Specifically they have lower 

capital, leverage capital ratios, lower total 

risk-based capital ratios and higher reliance on 

wholesale funding.

And then with respect to capital, we 

point out in the article that we do some time series 

on all of these factors as well, and we point out 

that since the publication of the 2006 guidance 

median leverage ratios for banks that meet the 

supervisory criteria have been roughly just over 

half of a percentage point to about two percentage 

points lower than the median for the general 

population.

So institutions that exceed the 
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criteria as a group are also exhibiting faster loan 

growth in other institutions, and that probably 

shouldn't surprise us since one of the factors in 

figuring out whether you meet the prong is growth. 

But one thing is that when a bank is growing that 

kind of growth can mask building risk sometimes 

because it typically drives down the ratio of past 

due loans and charge-offs as well as, at least the 

current model, it can make the allowance for loan 

and lease losses look strangely low. But this may 

be part of the reason why when you're looking at 

this chart institutions that exceed the 

supervisory criteria, they have currently lower 

ratios of past due loans and lower allowances 

relative to other institutions.

But I just picked on slide 5 one of the 

time series charts for asset quality just to show 

those ratios are low now, but obviously asset 

quality was a serious problem in the crisis and even 

during the recovery for many banks. And so this --

what you're watching -- what you're seeing here is 

the past due loan ratio. Delinquencies for 
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institutions exceeding the supervisory criteria 

were much higher for a longer period of time than 

for other institutions. And we didn't show it 

here, but in the article we do a time series on 

charge-offs that follow a very similar pattern.

The next slide, slide 6, is showing some 

performance of these institutions. You could see 

that at the median pre-tax ROA for the ADC lenders 

dropped very steeply and was then in or near 

negative territory for about three years in the 

aftermath of the crisis. Earnings criteria for 

institutions that met the growth prong was 

certainly a lot worse than other institutions, but 

tended to be at the beginning of the period, the 

late 2000s and early 2010s.

But what I thought was interesting 

about this chart is that the medians are much higher 

than the general population -- are higher than the 

general population in good times, but not really 

by that much. So at the median the question is did 

the -- the ROA doesn't seem to have matched the risk 

in these institutions. Profits evaporated very 
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quickly and very deeply during the crisis, 

especially for the ADC lenders.

Moving to slide 7, this is an 

interesting slide for us, and it's sort of an 

emerging trend. It kind of shows how institutions 

that exceed the supervisory criteria are making use 

of wholesale funding. So the use of wholesale 

funding by institutions with ADC concentrations 

has trended downward, still remains slightly 

higher than that of other institutions, but the use 

of wholesale funding by institutions exceeding the 

CRE growth prong of supervisory criteria remains 

quite a bit higher than that for other 

institutions. 

And we talked about earlier and it's in 

the article quite a bit is these IG reports and many 

other studies typically noted that reliance on 

wholesale funding was a contributing factor in many 

of the failures.

So moving to slide 8; and this is a 

little busy, but -- and there's more detail in the 

article, but I wanted to kind of talk a little bit 
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about there's metrics in the call report, but we 

talk about forward-looking supervision being not 

just metrics, but how are banks managing around 

those concentrations? And we just wanted to get 

a sense of some things that our examiners are 

seeing. And we do regularly chat with examiners 

and have meetings to discuss credit risk trends. 

And this is just sort of a snapshot of some 

weaknesses that they're noting.

And I don't want to read them all, but 

a few things that I did want to point out for you 

is within the category of weakening underwriting 

practices. We are seeing increasing, in some 

cases excessive use of cash-out financing and 

IO-type of lending, sometimes together, and 

particularly in certain markets that are very, very 

competitive. We also see low cap rates 

particularly in the multi-family segment, but also 

some examples of low cap rates in other segments 

of CRE. And I presume when we get to the discussion 

point, we'd like to hear if that's something that 

you're seeing as a competitive issue.
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MS. EBERLEY: And, Rae-Ann, can I jump 

in here a minute?

MS. MILLER: Please.

MS. EBERLEY: I think one thing to make 

clear is that these are not the things we're seeing 

at every institution that's concentrated. It's 

just that those where we're citing weaknesses, 

these are the weaknesses --

(Simultaneous speaking.)

MS. MILLER: Yes, I should have made 

that clear. Yes, this is not widespread. It's 

just things that are an emerging area.

MEMBER HOWARD: But they are some of 

the same things that we hear from a competitive 

standpoint when we're looking at a deal. 

MS. MILLER: Yes.

MEMBER HOWARD: And we can't make 

it --

MS. MILLER: How do they do it? Yes.

MEMBER HOWARD: We can't make sense of 

that.

MS. MILLER: How do they make it work? 
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Yes.

MEMBER HOWARD: And how do they price 

it if they don't reprice for the risk and then they 

adjust some of the other underwriting? So we 

appear to be not competitive in some of these cases.

MS. MILLER: Yes. So I'll move to 

slide 9. This is another one that's a little bit 

busy, but I wanted to talk a little bit about 

agricultural banks. So in the article we note that 

about one in four banks in the United States is 

characterized as an ag bank, and that's a 

definition that we have historically used in our 

research, in Rich's research. That means a bank 

where ag loans are 25 percent or more of total 

loans. So that actually captures a lot of banks.

But we wanted to be a little bit more 

focused in the analysis because a lot of ag banks 

don't actually have a lot of loans. So what we did 

was to get a more focused group we actually took 

a look at banks that had a 300 percent concentration 

or more in total capital in ag loans. And again, 

it's an analysis cut. It's not a supervisory or 
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regulatory limitation or ceiling. We just kind of 

wanted to look at performance of concentrated 

institutions over time. And particularly during 

the last few years there's been an environment of 

low and volatile prices in commodities.

So as of September there were 500 banks 

that exceeded 300 percent or more. And this slide 

shows ag loans are growing in general after being 

flat during and just after the crisis. And 

probably not surprisingly they're growing faster 

at those institutions with existing -- the 300 

percent.

The rise in ag lending is due to a number 

of factors, of course. We do talk to our examiners 

in the middle of the country. And I'm sure you 

guys -- Tiffany probably has a better sense than 

I do of this, but what they report is a number of 

farmers who were self-financing. They had been 

flush with cash when prices were high in the earlier 

part of the decade. They're now having to come 

back and finance because they've exhausted those 

stores and they've got diminishing working capital 
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positions, is sort of the story that we've been 

hearing.

On page 10, this is the same chart of 

median ratios that I showed for the CRE banks. And 

what we did here though is we showed the ag banks 

that have the 25 percent of their loans in ag and 

also the 300 percent concentrations. And similar 

to those -- to the CRE institutions, those with ag 

concentrations have higher earnings than the 

general population, but they're also operating 

with somewhat lower capital ratios and greater use 

of wholesale funding.

Unlike the CRE, those loan growth rates 

are slower than other institutions, and 

institutions with ag concentrations have slightly 

lower ratios of past due loans and slightly lower 

allowances relative to other institutions. And 

it's -- there has not been at least stress in any --

any stress that's been in the ag economy, have not 

thus far shown themselves to a meaningful extent 

in loan delinquencies, unlike the CRE where there's 

been a lot of growth, sort of seems to be logical 
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for the low past due rates.

We also -- I didn't pull them here, but 

the article has some time series charts that show 

performance of ag banks over time. And those that 

are concentrated generally weathered the 2008 

financial crisis much better than other types of 

institutions. Their financial performance as a 

whole remained very good heading into 2016, and 

none of them, neither the ones that have a 25 

percent of their total loans in ag or the ag 

concentration institutions, experienced that 

pronounced decline in ROA that other institutions 

experienced during and after the crisis.

So page 11, slide 11. I did want to 

point out -- again this is another emerging trend 

for ag banks and ag-concentrated banks where their 

reliance on wholesale funding has increased quite 

a bit in the last few years. We think this may be 

in part a way to meet the increasing loan demand 

from farmers in response to their stressed farm 

income. 

And when we talk about ag, people really 
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haven't perhaps thought about this sector lately. 

It's been awhile. The 1980s was probably when we 

had a number of ag banks that were in crisis when 

people may have thought about it, but declines in 

commodity prices, farm incomes that have occurred. 

There are still cyclical factors that can affect 

those borrowers in that sector. 

So again, we've had some recent 

feedback from the FDIC examinations. Just like I 

did with the CRE, we talked to our bankers, I mean, 

our examiners in the middle of the country. Not 

everybody, but some instances have been noted where 

the borrower cash flow margins are eroding or 

negative. Carryover balances have to be 

restructured into longer-term loans. 

In particular, we have the borrowers 

that have a high operating -- high-cost operating 

structures, and this is usually people who rent 

rather than own the farms -- are more heavily 

indebted than others and seem to be coming back and 

experience the most cash flow stress. And the ones 

that have their properties rent-free seem to be 
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better positioned to deal with the depressed 

commodity prices is what we're hearing.

So moving to slide 12 and getting into 

the oil and gas area, unlike CRE and ag we don't 

have a call report item that tracks oil and gas 

lending, but we do have -- some of the larger banks 

have issued public pronouncements about some of 

their exposures. We have publicly available 

shared national credit results which talk about 

disproportionate impact from oil and gas lending. 

So in the article we kind of look at 

overall C&I lending as a -- not necessarily a proxy 

for oil and gas, but certainly there were --

delinquencies had gone up the last few quarters, 

probably driven at least in part by oil and gas 

lending.

And direct lending to oil and gas 

producers is in that loan category of C&I, but it's 

harder to get a handle on the indirect lending. 

And I know a number of you operate probably -- and 

I know, Asif, in these areas, but there's a lot of 

indirect lending to support services, trucking 
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companies. And you've got even restaurants and 

people building houses for oil field workers and 

those workers getting mortgages. 

So this slide here, we tried to take a 

very broad brush attempt, if there was a way we 

could try to capture sort of that indirect 

performance. So all we did here was we showed the 

median, non-current and past due rates for banks 

that were domiciled in three energy-dependent 

states: Texas, Louisiana and Oklahoma, and just 

compare it to all other institutions.

And of course this does -- these states, 

many other industries are important to these 

states. Performance trends are going to be driven 

by a lot more than just oil and gas. And certainly 

these levels are not eye popping and manageable, 

but it's reasonable to assume that the overall 

deterioration in the energy sector is probably a 

factor.

Feedback from our examiners show very 

few banks have direct exposure, but they do have 

some downstream exposure to support industries. 
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And in some examples examiners have reported back 

in particular loan policies haven't been covering 

these types of indirect lending and the tracking 

of indirect lending has not been appropriate in 

some cases. 

MS. EBERLEY: Or factored into 

allowance methodology, so really thinking about 

the indirect exposure and how it could hit your 

portfolio and then factoring that into your 

analysis.

MS. MILLER: Yes. And slide 13 is 

just -- we go into a little bit more detail about 

what all of these pronouncements say, but this is 

just sort of a list of resources, chronologically 

basically, or close to chronologically that we've 

issued on lending in general and these particular 

issues. 

So we have basically longstanding 

expectations for prudent credit risk management. 

All of our guidance centers around adopting and 

implementing lending policies, practices, 

underwriting, all of those things that are 
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appropriate for the size and complexity of the 

bank's business model and maintaining strong 

administration oversight of lending activities and 

the related funding strategy, which is that 

emerging trend of more wholesale funding, as well 

as ensuring adequate allowances and capital 

levels. 

So we talk about -- this is not news to 

you, about risk management around loans is 

critically important. It's something we spend a 

lot of time on at the exam. It's for the most part 

the biggest asset class in most institutions. And 

then we go back at the -- in the conclusion of the 

article to talk about the studies again and the 

serious consequences of not appropriately managing 

your risk and that now is the time to focus on 

strengthening the risk management practices as 

portfolios and concentrations are building, but 

before problems hit the bottom line. 

And then especially now when loan 

demand is strong; Chandler just talked about it, 

competition can sometimes tempt institutions to do 
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something you might not normally have done. And 

underwriting standards get loosened and loan 

administration practices sort of can slack off, so 

in order to keep your market share and stay 

competitive, like you just said, we see a little 

bit of that happening now in certain instances.

So those are sort of the major 

takeaways, but George wanted to say a few remarks 

before we turn it over to questions.

MR. FRENCH: Yes, so I just wanted to 

say a few things about the observations Rae-Ann 

made regarding the use of wholesale funds by banks 

with concentrations. 

So as she said, the article points out 

that as a group banks with commercial real estate 

and ag concentrations are making greater use of 

wholesale funds including broker deposits and 

listing services. And the article also points out 

that reliance on wholesale funding was a risk 

factor for bank failures in the crisis. 

So in this regard a couple of things 

come to mind. First there is nothing inherently 
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wrong with wholesale funds. They can help match 

in balances between prudent lending opportunities 

and core deposit availability in the local markets. 

They can also help banks that are trying to match 

maturities between assets and liabilities. So 

there's certainly room for a prudent use of 

wholesale funds.

Part of the difficulty of assessing the 

risk off site is that we really need to understand 

the risks the banks are taking on the asset side, 

what they're doing with the funds. So that's a 

very important part of what we do in the exams 

focusing on the loan underwriting and other issues 

that Rae-Ann discussed.

Another important aspect of what we 

need to see on site is the -- sort of the bank's 

overall funding strategy. And it can be hard to 

assess off site. So for example, a bank might be 

making use of high-cost Internet deposits, and from 

our off site information that would just be lumped 

in with other core deposits if they're not brokered 

and they're not listing service deposits.
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So having said all those qualifiers, I 

think as the article says a confluence of these 

concentrated and risky or rapidly growing loan 

portfolios with reliance on wholesale funding is 

a risky mix, so we continue to sort of preach that 

supervisory message of prudence and the kinds of 

things that Rae-Ann was discussing.

Now even as this article was being 

prepared we saw the interest rate environment start 

to change and we've seen two changes to the federal 

funds rate in the last couple of months. I think 

we'd be interested in hearing from you not only 

about all the issues with concentrations, but what 

you're seeing in your markets. What are you seeing 

on the funding sides in terms of deposit pricing, 

depositor behavior?

I think we think that the rate increases 

are probably good news for banks with good core 

deposit franchises for many banks. There may be 

banks that have more reliance on reg-sensitive 

funds. And especially if they have asset quality 

problems or develop unexpected asset quality 
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problems, that could pose issues with their fund 

providers, their counterparties and could lead to 

liquidity pressures.

So having said all that, we're going to 

throw it open to you and hear what you're seeing 

in your areas.

MEMBER HOWARD: Surprisingly, at least 

in our market area, we have not seen any increases 

on the funding side. We anticipated that we would 

begin to see that sooner than we are. The larger 

institutions and even the smaller institutions are 

pretty much holding stable on the funding side.

On the other side where those 

institutions have a lot of variable rate loans, 

obviously we're beginning to enjoy a little bit 

wider spread there.

I just had a question on slide 6 that 

you had here in your package there where it shows 

for acquisition and development of loans, right?

MS. EBERLEY: Yes.

MEMBER HOWARD: What would explain 

that sawtooth there?
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MS. EBERLEY: Probably it's 

seasonality and when you're taking your 

charge-offs. So oftentimes you're going to take 

your charge-offs at the end of the year. It's a 

very --

MEMBER HOWARD: And so you're doing 

better for a month?

MS. MILLER: Yes. It's very marked, but 

yes, quarter end.

MEMBER HOWARD: Say for a quarter?

MS. MILLER: Yes. When the examiners 

came in.

(Laughter.)

MEMBER BUSSE: We have not experienced 

any noticeable change with deposit increased 

interest rate activity on the deposit side, so with 

regard to our core deposits, they're primarily core 

funded with deposits, etcetera. But I would say 

that our anticipation is another couple of 

increases we'll see pressure. 

And to your point, if you're a 

fixed-rate shop like a lot of banks are, if you're 
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an 80 percent or something, you're going to see a 

squeeze start to take place. There's also some 

pressure right now on the competitive front where 

people are trying to lock in rates, so you might 

see an increase of loan activity that will take 

place where they're trying to lock in long-term 

rates. That could create a future squeeze. And 

so how much of that is taking place and what kind 

of activity is it where you can reprice? That 

could be a future risk as well.

But I would say that for the most part 

there's been no noticeable change yet. Our 

manager's margin remains fairly stable and our 

yields are up slightly, which is good. So the net 

effect has been a positive effect on a monthly basis 

on the interest income side at present for us. And 

it's minor, but it's still noticeable. 

MS. MILLER: And do you have a lot of 

variable-rate loans? I'm sorry.

MEMBER BUSSE: We only have about --

no, we don't have -- most of ours are fixed-rate 

loans. But that's where the benefit took place. 
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And so that's why it's more modest for us than it 

would be for other institutions. 

MEMBER HOWARD: And so we have a lot of 

variable rate paper, and while we didn't have the 

earnings over the past several years to the extent 

that we might have gotten with fixed-rate paper, 

it was kind of deliberate to take a little less in 

earnings, take a little less risk that way, but 

hopefully getting when rates increase, and 

underwrite appropriately as well. That's where 

the underwriting -- in a lot of cases we just 

couldn't make sense of it, particularly going out 

with fixed-rate product for -- in commercial real 

estate for long periods of time. And we just 

couldn't compete with it.

MEMBER SCULLY: I think we're seeing a 

lot of the same things. I mean, on the deposit side 

we've not, knock on wood, seen any pressure on 

deposit pricing. We've seen a little bit of 

increase in the fixed-rate loans, but the 

interesting thing is that we're still seeing a huge 

appetite on the part of our competitors in doing 
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the 10-year fixed rates and in some cases 15-year 

fixed-rates which --

MEMBER HOWARD: Fifteen-year 

fixed-rates.

MEMBER SCULLY: Yes, and on one hand 

you can say, well, it's reflective of the yield 

curve. You've got a flat yield curve and the 

10-year hasn't changed as much as the short-term. 

Some of them are also going with shorter 

amortization schedules, and so I think they're 

justifying it that it's really only a seven-year 

average life. But for whatever reason I think 

we've been a little bit stunned by what you're 

seeing here, there's still a lot of go, we want to 

do a lot of this, and consistently less stringent 

underwriting. 

So we're usually less concerned about 

the rates and the yields because we have a similar 

funding strategy to Roger, but the underwriting 

just gets weaker and weaker in terms of the 

percentage of non-recourse and the LTV percentages 

and the debt service coverage percentages. 
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And one of the things that we're also 

seeing is that it's the CMBS market and then you 

still got stuff coming off. And I don't know much 

of what you think has been growth in here is really 

just a shift in market share, but certainly some 

of what's happening is not necessarily an increase 

in CRE activity in the market as much as banks are 

getting a bigger share of it because people aren't 

going to the CMBS market to refinance.

MS. MILLER: That was definitely 

evident especially in the larger institutions. 

They were just keeping more of those high-yield 

assets. So why give it to the CMBS? But we did 

see a new deal in the fourth quarter in CMBS. It 

was a pretty big deal. 

MEMBER DAKRI: We've seen in 

depositories something little bit unusual, because 

we have metro areas and also rural areas. So in 

the metro side not much movement in rates. Pretty 

stagnant there as far as depository rates, but in 

the rural areas we've seen a lot of the banks --

maybe not recently, but in the last year, 
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year-and-a-half they've been increasing their 

rates, their CD rates. They're more of a bond 

bank, if you will.

They're going out, buying 

annuities, extending their maturities and their 

duration on all their portfolio. And in order to 

do that they're going out offering 135 on a CD. 

This was 12 months ago and you're kind of shaking 

your head going what, what are they doing? But, 

so that's the only real difference we've seen. In 

the metro areas, the Houston and Dallas area 

there's not much of a change. Still see the 

increase out there in the country.

MEMBER KELLY: How do you explain the 

delay? I mean, what do you guys think is causing 

the delay in the deposit reaction, or is there --

MEMBER BOEKA: I think that our clients 

are desensitized and fatigued. And because of 

that we haven't seeing flight to other sources. 

But it's still early in the game. All of our 

modeling shows that -- and we're a fixed-rate, 

five-year maximum. Eighty percent of our loans 
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are fixed-rate five-year. Life is less done by 

this because of life.

(Laughter.)

MEMBER BOEKA: Sales and not so much 

refinances, but change of ownership. But then 

when it accumulates to one percent more than what 

it is right now, when we did the last modeling, at 

that point every single indicator begins to move. 

So that's when the needle moves. But we're 

watching all of our time bases to make sure that 

they're not baulking from institutions and we 

haven't seen any change in behavior other than our 

competitors are the credit unions, and that's where 

the money goes. Whenever it has to go some places, 

it goes to credit unions.

PARTICIPANT: That's what happens when 

you have to pay taxes.

MEMBER BOEKA: Yes.

(Laughter.)

MEMBER HARTINGS: I don't know if I can 

add any on interest rates, what we're paying on 

depositors. I think the same way in our area, that 
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it's not changing. 

Might reflect a little bit on 

agricultural credit. We're not considered an 

agricultural bank, but we still do a fair amount. 

We're seeing those funds being used out of their 

accounts, their DBA balances being drawn more than 

lending. And even in your examples it's kind of 

interesting that even the high concentrated only 

grew by five percent of loans. But we definitely 

are seeing -- which is kind of good news. They've 

kind of built up their reserves and they're 

starting to use it now. So we are seeing that those 

DBA balances get drawn down. So that's I think a 

fact that we've seen in the agricultural community.

MS. EBERLEY: Yes, I think that's 

consistent with what we're seeing by and large in 

the Kansas City region, that the farmers have gone 

from being net depositors to net borrowers.

MEMBER BEARD: I'm curious, is there 

any study where you've looked at non-interest 

bearing deposits and how they've reacted 

historically? So in Utah it's very similar to 
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what's been said, but there's a lot of banks that 

have high -- we're about 31 percent of our deposits 

are non-interest bearing. And I've been 

concerned, as was said, that when you get over a 

one percent move that you're going to have people 

suddenly paying attention, whereas up until now 

it's been you don't get anything anyway, so it 

doesn't really matter if you leave it there.

MS. MILLER: I am not aware of any 

study; we haven't conducted one, on the behavior 

of deposits, but it's interesting. And added to 

your interest is we haven't been through a cycle 

like this to when the account opening procedures 

are so different, people are used to opening up even 

transaction accounts online. 

So I see some of the specials and people 

trying to lock in. I've been noticing some 

specials. And there are sites that actually 

aggregate the specials. So if you want to open up 

a new checking account, who's going to give you the 

biggest bonus? And because they're trying to get 

you in there with a transaction account before 
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rates start popping. So I think just because 

they're interest bearing or not, this is going to 

be a really interesting time frame and see who 

chases what. 

And like you said, the fatigue. When 

that runs off, are people just -- when will clients 

start demanding is going to be very, very 

interesting. I was very interested in your 

conversation this morning about breaking down the 

different deposits, because I've been very 

interested to see what these trends are going to 

show.

MEMBER MENON: Well, can you testify on 

the cap rates? I mean, we have certainly seen the 

cap rates being a problem in Nevada. Some of those 

rates are as low as four percent and borrowers are 

coming back to do cash out transactions. And we're 

seeing more and more of that. And as the value of 

the property is going up, they want to take more 

cash out. And there are banks that are 

accommodating that kind of stuff. We have so far 

said no. We may allow a small amount for some 
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property improvement or something of that sort, but 

aside from that we have just kind of turning them 

away. But there are banks that are accommodating 

those kinds of things.

MEMBER KELLY: Is there a common type 

bank? Is it regional banks that you're seeing that 

are relaxing the --

(Simultaneous speaking.)

MEMBER HOWARD: I mean, I just think 

about what I hear from some of our lenders. In 

fact, a couple of them a few weeks back, because 

I'm pushing them to do more business, came in and 

handed me a couple of charge sheets that they have 

that are both from larger lenders and they were 

trying to explain to me why they couldn't compete. 

But the ones that I'm a little bit familiar with, 

it tends to be the bigger lenders. And if you dig 

a little bit deeper, it always seems to fall into, 

well, we have a broader relationship with this 

particular client, so we can make this exception. 

But still at the end of the day we can't compete 

with it.
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MEMBER BUSSE: I would agree with that. 

I think it's larger institutions. It's not 

necessarily your community banks you're competing 

against. If there's a relaxing of standards or 

waiving of some kind of guarantee or recourse, 

we're seeing it more in the larger institutions. 

Rates are much more competitive, or that's where 

rate pressures take place as well and they extend 

their terms. I think that would be the majority 

of our experience. 

Anecdotally I can tell you we've said 

no more than we've said in the past and it's because 

of folks who tried to draw equity out of businesses, 

even with the low cap rates, and we're not very fond 

of that unless it's used for improvement of the 

property or it just doesn't make much sense. To 

me that's always troublesome. And maybe it's a 

good practice on their part to get additional money 

out at a low interest rate, but we've typically seen 

that side.

And then also there's been a push to 

speculate on some development projects that are 
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overdue in some areas because people are trying to 

again lock in their projects at a lower interest 

rate. So there's been a reluctance to invest in 

those or take those kind of risks. So it's 

interesting. And you'll see probably a lot more 

of it, but thank you for the information.

MEMBER DAKRI: On the oil and gas side 

of things, are these only Texas, Oklahoma and 

Louisiana banks?

MS. MILLER: We just used banks 

domiciled in those -- so it would be wherever your 

domicile is in those states, yes.

MEMBER DAKRI: In those states? Okay.

MS. MILLER: Yes.

MEMBER DAKRI: I was just curious, but 

I've seen in my experience of the last several years 

that we've had some out-of-state banks doing loansin the area and I think they probably got hit 

probably worse than the Texas banks did, because 

we understand that we're in a ghost town, whether 

you're going 25 years out, or --

MS. MILLER: That was the feedback when 
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I did a Houston round table down there. That was --

the feedback was, boy, we're in the final throes 

of expansion here and then a big bank from 

California comes in and starts do to this stuff and 

there's stuff that they didn't want to touch.

But, yes, this is a very broad brush. 

We don't -- it wasn't -- it was just sort of a proxy.

MEMBER DAKRI: That actually happened 

in 2007, too. We had a lot of out-of-town --

out-of-state banks, I should say, come in and do 

crazy stuff.

MS. MILLER: Yes.

MEMBER DAKRI: Still keeping in touch.

MEMBER KELLY: With your multi-family 

ADC stuff, is it captured in the -- somebody's who's 

been in like acquisition development on 

multi-family captured in that ADC, or I mean a --

MS. MILLER: Yes, if it's building a 

multi-family unit, it's going to be captured in the 

ADC.

MEMBER KELLY: Okay.

MS. MILLER: And when permanent 
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financing comes in on the business when it's 

complete, it's captured in multi-family. Good 

point, though. CHAIRMAN GRUENBERG: I'm going to 

say this has been an interesting discussion. Does 

this feel like, you all -- we're at a bit of an 

inflection point in this cycle here from your 

perspective, I'm just sort of curious from the 

standpoint of your institutions, or not 

necessarily?

MEMBER SCULLY: On the asset side?

CHAIRMAN GRUENBERG: Are your lending 

activities pretty much continuing?

MEMBER SCULLY: Yes.

MEMBER HOWARD: In our case we have --

whenever we've had the opportunity for a refinance 

with an existing customer, we would do it, but we'd 

always do it to a variable product. So we have a 

lot of variable paper. So if it was an inflection 

point, even though it's underwritten, we believe 

very conservatively, you know, 25 or 50 basis 

points doesn't have very much of an impact, but if 

it gets to be 150 basis points, we'll hopefully have 
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done our underwriting the right way. 

MEMBER HARTINGS: Yes, I think we're 

also in this with -- if I would have done this 20 

years ago, I would have had a much higher loan to 

deposit ratio. I'm going into this with about a 

60 percent loan to deposit ratio, so I've got 

investments, I hate to say to burn, but I can burn 

off if I need to. So that's another reason why you 

probably don't see the competition to rates yet. 

Liquidity is another issue. We 

probably have all sat on a little bit extra 

liquidity kind of wondering what to do, kind of 

letting that go off a little bit. 

And then I give I guess our customers 

a little bit of credit. And I look at the 

agricultural customers, that I give them credit for 

having that money put back away. At least they're 

starting to use that first. They don't have to 

refinance what they've got right away. So I mean, 

I think there's a little bit of planning out there 

as well. There's a little demand. 

And what happens when we're all done 
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with that? Then we're at the next step. But I 

think that's what -- that's at least what we're 

seeing in our area right now. 

MEMBER SCULLY: I also think it's an 

example of maybe the banks just being a little bit 

more disciplined.

MEMBER HOWARD: Yes, I think you're 

right. Yes, particularly on the deposit pricing 

side.

MEMBER SCULLY: Because everybody 

knows that once two or three people move, it's --

the dominos will start to fall and I think people 

are just being more disciplined on that side. 

Maybe less on the asset side.

MEMBER HOWARD: But I don't even hear 

about it at the Safe Banking Association meetings. 

You don't hear anything about any plans to raise 

rates on the deposit side. It's not even really 

a topic where in past volatility with rates, a lot 

of the talk was about the -- when I raise rates what 

it's going to cost me. And how you're -- there 

seems to be very -- not much conversation.
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MEMBER BEARD: I'm curious. Has there 

been any study of the credit unions, because in Utah 

you have aggressive pricing on deposits from credit 

unions. And like I said earlier, we're not seeing 

it in the banks, but it's -- there's billboards up 

and all sorts of things. And I'd be curious to know 

if anyone is looking at the risk from a credit union 

standpoint on the banking.

MS. MILLER: Yes, we don't have any 

projects underway. Like I said, as things are 

moving through, I think we're going to be observers 

and -- active observers like you all.

MEMBER KELLY: Yes, for an insurance 

company.

MEMBER BEARD: Is there any 

coordination with the NCUA in terms of what they're 

regulating or their concerns?

MS. MILLER: We -- the NCUA is on the 

FFIEC, and we do have regular conversations with 

them on a staff level as well.

MEMBER DAKRI: I think when we're asked 

about an inflection point, in the Houston market, 
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Texas market we're running a little bit 

counter-cyclical to the rest of the national 

economy. We were high when everyone else was low 

and we've kind of dropped down a little bit in the 

last couple of years with the oil prices coming 

down.

There was a thought recently with OPEC 

changing their mind and cutting production that 

things would start coming back. And we saw a 

little bit of a bump, but now we're kind of 

stagnated again with oil prices. So personally 

for me I think we're at that little bit of an 

inflection point where we've got to start 

increasing, or we could just fall right off again. 

A lot of people have burned through 

their cash reserves the last couple of years 

related to that field. While some of the 

manufacturing has come back, I think it might be 

short term. Some of the quotes out there, there 

was 1,800 rigs in use 2014. It went to 400 

nationwide in February of last year. We're back 

over the 700 range right now, but the thought 
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process is we're not going to go back to 1,800 any 

time soon, if at all. So I guess the new norm is 

about $50 a barrel. Is that what we're going to 

look at? And if that is, it's going to create a 

lot of ripples I think overall in the real estate 

market especially. They're just not there, the 

Class A, as we discussed over lunch. 

The office market stateside is pretty 

shot in Houston, I'll say that. It's not in good 

shape at all. And what's the next domino to fall 

in that respect? So that -- we are I think at 

somewhat of an inflection in the local Houston 

economy. 

MEMBER SCULLY: It's much harder to get 

around in the mix on the deposit side, but the other 

thing that's curious is how different asset classes 

are going to perform within that side, because when 

you start to look out -- I mean, the industrial 

platforms, it seems like it's a lot more stable than 

office and retail. And this is the first time I 

think when office has really started being a little 

bit suspicious. And if you start thinking about 
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really long-term trends, you'll just get scared to 

death about either office or retail. 

(Laughter.)

MS. RYAN: Okay. Well, thank you, 

Doreen and George and Rae-Ann.

And we'll move onto our last panel, 

which is on the Youth Savings Pilot and Symposium. 

So we introduced the Youth Savings Pilot in 2014 

and last year we had a symposium.

So to discuss that we're going to have 

with us Mark Pearce again back. And joining Mark 

is Janet Gordon, Associate Director in the Division 

of Depositor and Consumer Protection, and Luke 

Reynolds, who is Chief of the Outreach and Program 

Development Section in the same division.

So, Mark?

MR. PEARCE: Great. Thanks, Barbara.

So this morning when we were doing the 

community bank initiative, I felt a little bit left 

out because Doreen, if you remember her remarks, 

she help up something that was released.

(Laughter.)
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MR. PEARCE: And then it went to Diane 

and she held up something.

(Laughter.)

MR. PEARCE: And that was released. 

And I felt left out. 

(Laughter.)

MR. PEARCE: So I came back again to 

hold up what we're releasing this afternoon, which 

is a report out from our Youth Savings Pilot. I'll 

let Janet and Luke do most of the heavy lifting in 

talking about the two years that we spent looking 

at the intersection between financial education 

and opening accounts for young people. Really a 

tremendous project and really ties together two 

different things that we do. We've had a 

long-standing commitment to financial education, 

helping people manage their finances and also 

helping bring people into the banking system, 

connect them to an insured depository institution. 

So with that brief intro, I'll turn it 

over to Janet. 

MS. GORDON: Great. Thanks, Mark.
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Yes, hold it up.

(Laughter.)

MS. GORDON: It's in your package. 

That's sort of a pre-copy. 

As Mark said, this is really a 

long-standing commitment to financial education 

from the FDIC, as you are probably well aware. 

It's the 16-year anniversary of Money Smart. And 

we have Money Smart for adults and Money Smart for 

young people, and they continue to offer free 

comprehensive curricula in a format that's easy to 

download and can be used in a wide range of 

settings. And today the report is available 

online at fdic.gov/youthsavings, to anyone who 

wants it. 

And it really is a report on the key 

lessons we've learned from the Youth Savings Pilot. 

We're excited to discuss the findings and to get 

any of your feedback on how we might encourage other 

financial institutions to support both youth 

financial education and youth savings.

So the two-year initiative involved 21 
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banks of all sizes. It was really designed to link 

financial education to savings. And Luke and I 

will go over the context of the pilot, what we --

why we did it, some of the lessons learned about 

the models used, the account types and 

characteristics and why they're particularly 

responsive to young people, and the educational 

elements. And we'll talk along the way about the 

benefits to both students and banks. 

So take yourself back to the time when 

you went to school, either as an adult or a parent, 

or as a student, and recognize that this is really 

a part of our work to promote broad economic 

inclusion. 

So schools are central to communities, 

and we all really recognize that. And the focus 

is on schools that have a significant proportion 

of low and moderate-income students and on bringing 

them into the financial mainstream at a young age. 

And we've seen that the work of the banks in this 

pilot really does that effectively. And not only 

that, but it coalesces parents, teachers and others 
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around the impetus to improve the lives of their 

children. And that's a huge motivator for 

everyone, including the bankers.

So this all got started several years 

ago. Nothing gets done too quickly. We've been 

working on this for a number of years with our other 

federal partners as part of an overall federal 

initiative to support the financial capability of 

young people. And we did this because financial 

education, like every -- almost every other kind 

of skill, is best developed at a young age, both 

the executive skills necessary to sort of plan for 

the future and the very basics of what is finance 

and what is compound interest and other good 

subjects like that.

So we really looked at the 

long-standing benefits for young people and their 

families and we knew from research that it's more 

effective when students have an opportunity to have 

an actual savings account. So hands-on learning, 

once again in educational parlance, is the way to 

go. And Treasury research specifically found that 
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students have a better concept of finance and also 

a more positive attitude toward banks and are more 

likely to have bank accounts if the banks have a 

branch or outlet in the school. So this is 

something we wanted to focus on.

We also knew that a lot of banks are 

already doing this, but we didn't know who they 

were. So the two-year pilot began really with the 

objective of identifying and highlighting 

promising approaches to that experiential 

financial education that combined the federal --

the financial education with the opportunity for 

a savings account. 

And we asked for expressions of 

interest from institutions around the country and 

then we selected 21 banks, both those that had been 

doing this for a number of years because we figured 

they had something to teach us, and also we went 

to institutions that just wanted to do it for the 

first time and were ready to sort of leap off the 

diving board and get in the water and try and swim. 

So we were trying to do a little matchmaking there 
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by having institutions teach each other something. 

And that was sort of a core feature of the process 

of the pilot, to have the learners and the teachers 

at the same table. And that really worked well.

We had almost 100 individual interviews 

during the course of the two years. Lots of group 

calls where the learning took place. We were 

really providing each other technical assistance 

as well as we worked very closely with the schools 

themselves. We actually interviewed the school 

leaders as well.

And then the pilot participants said 

that wasn't enough. They wanted to come to 

Washington and talk to us further. So we had a 

symposium. Nineteen of the twenty-one banks sent 

representatives, and about nine schools as well. 

And they helped us refine what we learned. 

So what did we learn? Since time is 

really limited, we're going to talk about three 

things: the program types -- and Luke is going to 

talk a bit more about the types of savings accounts 

and how we sort of learned about success along the 
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way.

So the report has a lot of detail on the 

three basic program types that banks adopted. And 

so I'm not going to go into excruciating detail, 

but there were three approaches, and they were used 

in a very flexible way: based on the community, 

based on the bank, and based on the age of the 

children. 

So some banks actually started 

full-scale bank branches in schools, and they did 

this, a permanent branch on school premises, 

usually for older students who may even be working 

and may even have significant income. They used 

experienced bankers in the school, but they 

generally also employed students in the branch. 

So some of them actually employed students, and 

that was a very extensive training program and a 

learning activity and a career development 

approach. But others had volunteer students. 

And the on-site bank branch really 

allowed for a lot of financial education that was 

very hands-on and helped people save throughout the 
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school year and really build a very robust concept 

of what a bank was and how they might get involved 

in finance even as employees.

In-school banking is the second model, 

which really is sort of like having a banking day 

and showing up at the cafeteria, the library with 

a banker and linking very closely to the teachers 

and what they're teaching that week, as well as 

employing volunteer students. And often this is 

younger people and even kindergarten, first, 

second graders. So it can be very interesting to 

see kids grab onto serving their peers and 

educating their peers.

And finally, some banks simply did the 

financial education in the school, but then took 

people to the branch, to young people to the branch. 

Sometimes had family days, sometimes also combined 

it with a tour of the branch. So it was a 

connection to the local branch. And to some extent 

that was possible in communities where the school 

was close by and where that worked well, but they 

also provided transportation.
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So as I said, the models were used in 

different situations. Some banks used more than 

one. And there were really several things that 

contributed to success, and it's a fairly long list 

of why it worked. Certainly the enthusiasm of the 

banker and the champion at the school was part of 

that. 

Bankers really learned that a 

partnership with the school requires an 

investment. It is not something that is one and 

done or happens overnight. It is like a customer. 

If they happen -- if the school happens to be a 

customer, the school system, that's good, too, but 

often the connections were made through family and 

friends. This is not surprising. But it really 

took time to develop clear expectations and trust, 

and often it helped to have things written down.

And the other thing that helped was 

really involving the students very closely in the 

process. So we all know that maybe having a banker 

come in and talk about a bank has one potential 

impact, but these folks really had older peers 
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teaching younger peers, and that really engendered 

what we'll call sort of leadership from the older 

students. And maybe they even thought banking was 

cool because the younger students get to see an 

older student really engaged. There was a lot of 

inter-generational education that way, and it 

seemed to work very well.

And finally, there was a definite 

impact in the broader community. Banks generally 

felt that -- three-quarters of the banks said they 

engendered new accounts and new relationships, PR 

and other factors that was affecting their 

visibility in the community and their long-term 

deposits. And one bank even went so far as to make 

mobile banking an important part of the process and 

maintained their connections with students as they 

left town and went to their usually nearby college 

or work environment. So it really allowed for that 

growth in a relationship over time for some of these 

institutions.

Luke, you want to talk a little more the 

accounts and the account characteristics?
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MR. REYNOLDS: Certainly.

So all banks in the pilot offered 

savings accounts. Some also offered 

transactional accounts, particularly for high 

school students. The accounts offered were 

generally low-cost, consistent with the FDIC model 

Safe Account templates.

Three common ownership structures 

were: first, non-custodial accounts. So the 

advantage to these were that minors could open 

these up in the school without having to have the 

parent complete paperwork and send it back and the 

learning opportunity for the student is maximized. 

The second type are custodial accounts 

where a parent or guardian is the custodian. These 

have the advantage of particularly have the 

opportunities to involve parents in the program. 

And they're often also used when state law is 

unclear about whether an institution can offer an 

account to a minor.

And the third are trust or custodial or 

other administrative accounts held by a school or 
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non-profit partner. So in some cases schools 

really took a leadership role and were -- actually 

had the account and were at the bank and were 

essentially the students' banker. Other times a 

non-profit or community foundation wanted to 

facilitate a community-wide college savings 

program and open a custodial account at the bank.

I want to just mention in February of 

2015 the banking agencies issued guidance to 

encourage financial institution youth savings 

programs and answer related frequently asked 

questions. And it's really complemented by a tool 

the Conference of State Bank Supervisors released 

last year, which helps banks identify state laws 

pertaining to youth banking programs. So for 

example, you can see if your state has a law 

specifically allowing minors to open accounts. 

Your state may have a state bank at school program, 

for example. You can find a link to that from the 

web site I'll talk about in a minute.

Second, I want to talk about financial 

education. Banks found it was important to 
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emphasize financial education to students' lives 

such as by, for example, saving for prom. In 

addition to peer-based financial education that 

Janet just talked about, banks found value in 

working with teachers to make lessons relevant. 

And banks did not always teach financial education 

in a formal way. It was not always 

classroom-delivered. Sometimes banks viewed 

themselves as providing financial education during 

the life cycle of an account, one on one by the 

banker providing -- or the student, peer-based 

student providing education to their colleagues.

As an example, one bank in our pilot in 

Tennessee partnered with a school district in 

Kentucky and all the elementary schools in that 

district, students in them had an opportunity to 

open a savings account. The teachers picked the 

lessons from Money Smart and then the bank came in 

to teach the lessons from Money Smart.

So moving forward we saw during the 

pilot that banks valued learning from one another. 

Banks in one part of the country valued talking to 
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banks in another part of the country about how they 

were engaging students and parents. And we saw 

there being value in us supporting those 

conversations.

So we're now welcoming banks, FDICsupervised institutions, that want to carry out a 

program to combine financial education with the 

opportunity for children to open a savings account 

to express interest in joining what we're calling 

the Youth Banking Network. 

The FDIC's Youth Banking Network is an 

opportunity for us to facilitate conversations and 

dialogue bank to bank on how to promote youth 

savings and we want to get ideas on what we can do 

to build our financial education resources to be 

more useful for school banks and other youth-based 

financial education programs.

For example, during the pilot we heard 

one of the challenges is getting parents involved 

and getting permission forms returned from 

parents. We have parent caregiver guides in Money 

Smart, but we know we can do a little more work to 
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make those more complementary for youth banking 

programs.

So you can go onto our web site, 

fdic.gov/youthsavings, and find our new Youth 

Banking Resource Center. There you can find 

information about the Youth Banking Network. You 

can view the report that Marc just showed. You can 

view a road map in which we provide sort of a --

essentially a road map for the launch of a new 

program. And you can view complementary resources 

from FDIC and other agencies and other 

organizations. Again, that's fdic.gov/youth 

savings.

I'll turn it back to Janet.

MS. GORDON: Great. So you can see 

that we've formed this network, and certainly all 

the existing Youth Savings Pilot banks and some of 

the ones that were runners up are going to be 

invited to join the club, but it's open for anyone 

who's really interested in this topic. And we'd 

love to hear from you about how we might promote 

it, how you'd like to get involved, any other 
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suggestions you have. We're really looking to 

expand the reach of this report. And we'll even 

go out and talk to people individual in their 

communities to some extent. We're really looking 

to make sure that the success as we've seen in other 

communities are available to all. 

MR. PEARCE: Yes, and I just want to 

sort of add on, having participated in the Youth 

Savings Symposium that we had last fall I was really 

struck by three things: One is just how hard --

I mean, obviously schools are under tremendous 

pressure, and finding opportunities to get 

involved in a school to just teach financial 

education is -- in and of itself could be 

challenging for an institution to figure out how 

to navigate that, but to be able to not only deliver 

the financial education, but also offering savings 

account opportunities. Putting those together 

really does take a champion both of the bank and 

at the school. It could be the administrator, it 

could be the principal, it could be a teacher, but 

you need a champion inside. So that was number 
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one.

Number two, it was really interesting 

to see how much the banks that are involved in the 

pilot wanted to talk to each other and how their 

enthusiasm to share their stories of how they were 

approaching the challenges and opportunities 

differently -- there was a lot of learning amongst 

the pilot participants. And as Janet mentioned 

earlier in her comments, we hadn't planning on 

having a Youth Savings Symposium, but they 

basically demanded it of us, that we wanted to get 

together and have an opportunity to talk with each 

other and their school partners to figure out 

what's really working and how we can learn from each 

other. And so that really was the genesis for our 

Youth Banking Network.

And then the last, which for me is --

I sort of saw this, and there's a little bit of 

research that says if you compare the education 

with the account opening, it really kind of builds 

on both components are greater than each 

individually. And so it informs better 
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relationship long term with an institution, a more 

favorable view of banks, better savings behavior.

But the thing that I was really struck 

by is how it changed some of the lives of the kids, 

that they got to participate in managing branches 

and thinking of this as a potential career path to 

go into, which I know is something we talked about 

here as to train future bankers, but that's sort 

of the impact it had on the kids and their lives, 

even far beyond financial education. It was 

really remarkable.

So some maybe additional thoughts. 

How do you think we can take this further?

MEMBER HANRAHAN: Mark, it's cool to 

bring this -- I'm sure there's lots of good 

intrinsic reasons the banks will want to do this, 

but in response to Janet's question about how to 

promote it, as I flipped through here as you were 

speaking, I see that you touch on CRA credit to the 

extent that children and LMIs are being educated. 

Can you elaborate on how a bank would have to 

document the delivery to a certain audience in 
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order to have a firm hook for CRA service credit?

MS. GORDON: Sure. And some of this is 

in the Q&As, but in a word you have to probably 

select a school with a majority if students on 

reduced lunch. And that is the simplest. That's 

not the only, but it's the simplest. The other 

ways would be to get other information from the 

school or a sort of letter from the school, or even 

to go to neighborhood schools that are in 

overwhelming low and moderate-income places. But 

you'd be surprised how many communities have really 

the majority of students on reduced lunch. And 

that really gives a relatively straightforward 

approach to this.

And the -- to take off on what Mark just 

said, the students who actually shone as bankers 

were not always the best students. And so we 

emphasize giving a wide range of students the 

opportunity to do something very hands-on, very 

tactile, very engaging that the academically best 

student may not benefit as much from in some ways.

MEMBER BUSSE: I want to thank you for 
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the report. I read this on the airplane.

(Laughter.)

MS. GORDON: How fabulous.

MEMBER BUSSE: And I thought it was 

fabulous. And it's a tremendous success in many 

ways and especially -- so congratulations. I just 

thought it was outstanding. It was well-written, 

too. Thank you very much for that.

One thing I noticed in this was I'm 

pretty sure you talked about the mobile banking, 

high school students and all of that. I'll just 

anecdotally share with you that when we talked to 

schools; and we do financial education, we even had 

some resistance on financial education because the 

teachers don't have the time or the ability to 

create curriculum. So we worked -- and you 

mentioned this in the report about working with 

non-profits. That was our plan, by the way. And 

so then you have to have a champion. We had to find 

a champion. 

I mean, all the things you highlight 

here are the keys. But what we didn't do is what 
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you've done here, and that is create a catalyst for 

folks. But I think based on your report, as I read 

it, this is something we're very interested in 

doing now. I can see the collaboration that took 

place. You don't have to make the same mistakes 

anymore.

(Laughter.)

MEMBER BUSSE: You can go out there and 

do this and work with people who've done it 

successfully and maybe work your way around all the 

objections you had before and -- so thank you for 

that. 

Mobile banking at high schools, was 

that the catalyst or an entryway, or how did -- did 

that help you in any way in growing the program or --

MR. REYNOLDS: So a couple banks offer 

mobile accounts. They reported it helped retain 

students after they graduated from high school. 

They also reported students appreciate having some 

of the options, so it helped them -- you could say 

help them sell accounts, help them sell and retain 

accounts. 
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MEMBER BUSSE: And high school, too, for 

their application --

(Laughter.)

MS. GORDON: Right. Right, I can see 

the different kind of branch that might entail.

MEMBER BUSSE: Thank you for that. 

And then if you're going to start up and you want 

to start up a program like this, after reading the 

report you had some suggestions about where, but 

is there one thing that you would point to that's 

the most helpful in having somebody internally 

that's the champion in your bank work with somebody 

in the organization? Is there somebody you would 

recommend they talk to?

MS. GORDON: I think it's important for 

them to talk to somebody they know probably first. 

That was really a very common approach. But the 

more senior the leadership, the better. I mean, 

even though one teacher can be a champion, it is 

better to start with the principal or even at the 

superintendent or county-wide basis. Some of 

these banks grew from one school across the entire 
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system, but others have sort of made it a 

system-wide approach. And hopefully this tool 

allows people to walk into an institution more 

easily. And there's a 20-page version we have, the 

sort of much reduced version that we envision as 

a handout, really, walking into a school saying we 

want to do something that looks like this and we 

want somebody to really commit to working with us, 

and then get it down on paper eventually. But it 

does take a lot of discussion. There's this 

hesitancy to maybe be favorites and how to navigate 

that is talked about.

MEMBER BUSSE: Thank you.

MEMBER HARTINGS: Just a specific 

question on a non-custodial account. Do you know 

how to handle the CIP?

MR. REYNOLDS: So the Youth Savings 

Guidance answers the question. So for CIP 

purposes it's the bank's customer. And if a bank 

is offering an account to a minor, then the minor 

is the bank's customer. And the Youth Savings 

Guidance gives an example -- reminds us that CIP 
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is a risk-based rule and gives examples of 

documentary and non-documentary methods.

MEMBER HARTINGS: So you may have to go 

back into your CIP policy and maybe amend it to make 

sure that the youth accounts are covered underneath 

that, because many of us have more stringent ID 

requirements.

MR. PEARCE: And one of the other 

things just to note is obviously the age in which 

you can open a non-custodial account is a state law. 

And we worked with the Conference of State Bank 

Supervisors that actually -- each of the states put 

forward information regarding the requirements for 

their state. And so they've issued that. And we

have that information available as well so that you 

can be able to tailor it to the state that you're 

operating in.

MS. GORDON: And many banks tailored 

the account to the kinds of students they were 

seeing. I mean, they started out with one version 

and they saw what people really needed in the 

school. And they realized that non-custodial was 
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important. These children had their own money. 

In some cases they were responsible for something 

like child support. So you can get quite complex. 

They did not want having their custodial account. 

They were already essentially independent. So 

there's a lot of variability, obviously very 

different for different grade levels, different 

locations. 

MEMBER BEARD: How do the mechanics 

work when -- you said that an actual branch. they 

lease space from the school and then -- how does 

that work?

MR. REYNOLDS: In some cases, yes, a 

bank would enter into an agreement, an MOU or other 

agreement with the school and essentially lease 

space in the bank or branch.

MEMBER BEARD: And have a full-time 

person that staffs that during the school?

MR. REYNOLDS: Full or part-time. And 

then range -- so some are actually really -- during 

the school week there's always a bank employee 

there. Others may just be open certain times of 
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the week. So I think kind of the lesson learned 

is the wide range of variability that banks have 

used and had success with in engaging young people 

and their families.

MEMBER BEARD: You kind of touched on 

the favoritism idea. It seems like at some point 

if this catches on you're going to have more banks 

wanting to do it in schools. Is that -- I mean --

MS. GORDON: Haven't reached that yet.

(Laughter.)

MR. REYNOLDS: It would be a nice 

problem to have.

MS. GORDON: That would be okay. But 

I think that it's reassuring the school that the 

bank is not using this really as a commercial 

venture.

MEMBER BEARD: Yes.

MS. GORDON: You're not going to heavy 

sell these kids or their parents.

(Laughter.)

MS. GORDON: And that they're -- you'll 

be respectful of the primary educational purpose. 
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And I think that's important to schools.

MR. REYNOLDS: And there's opportunity 

for collaboration. Like there's one school 

district where there's a small handful of banks 

that are working together to provide savings 

opportunities to students in that district, so 

different banks have different schools.

MS. GORDON: And then there is the 

trust account approach where the school is the 

trustee that also has a different relationship. 

So that's a whole -- that was used in places where 

the school really wanted to have more control. 

So there are all these options that 

really allow flexibility as people negotiate. And 

usually, like many things, there is no

one-size-fits-all.

MEMBER BUSSE: That's where they had to 

close out all the accounts, generally.

MS. GORDON: Yes, yes. So that's 

the -- transition is always an issue, and obviously 

the mobile banking was one solution to that. 

CHAIRMAN GRUENBERG: Yes, if I can ask, 
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for a bank that's interested in initiating a 

project like this, in addition to the materials we 

have online, do we have people either here in 

Washington or in the regions that a banker could 

call if they want assistance or advice how to set 

up a project like this? If I want to talk to 

another bank that has done it?

MS. GORDON: Absolutely. We can match 

make. We've even been talking about having many 

seminars where the bankers that have done it talk 

to new groups of bankers. So, yes, there's a 

contact us online. I mean, hit this button and 

send us an email. But we may in fact put you in 

touch with another bank or we may put you in touch 

with our regional teams since we have people in the 

regions working on this and fully involved who 

might convene something locally. So we're looking 

at all kinds of options. Any suggestions are 

welcome.

MR. PEARCE: Thank you.

MS. RYAN: Okay. Thanks, Mark, Janet 

and Luke. Okay. That does it for our regular 
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agenda.

CHAIRMAN GRUENBERG: Well, listen, 

thank you all. Each of these meetings I must say 

is a learning experience for me. I will count this 

meeting in that list. 

And I know you all don't feel like it's 

an inflection point, but I got to tell you we're 

going to be paying close attention. I think we 

have a change in interest rate environment. We are 

now into the seventh year of a recovery period. It 

seems to me that this the stage in the cycle where, 

as examiners, we want to pay close attention and 

work closely with our institutions because we don't 

know when the shifting in the cycle is going to 

occur, but we do know it will occur. And seems to 

me this is an important time for us to be paying 

close attention.

And in my conversations with you all and 

the comments you made in terms of underwriting 

and -- seems to me we value among other things for 

us to stay in close touch with you and to continue 

our engagement, that this committee has quite a bit 
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of value to us. So thank you all and we'll see you 

the next time.

(Whereupon, the above-entitled matter 

went off the record at 2:38 p.m.)