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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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WEDNESDAY,

NOVEMBER 3, 2016

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The Advisory Committee convened at 9:00 a.m. 

in the Federal Deposit Insurance Corporation Board 

Room, 550 17th Street, N.W., Room 6010, Washington, 

D.C., Martin J. Gruenberg, Chairman, presiding.

PRESENT:

MARTIN J. GRUENBERG, Chairman, FDIC

RICHARD T. BEARD, President & CEO, People's Utah 

Bancorp, American Fork, Utah

ADRIANA M. BOEKA, President & CEO, Americas 

United Bank, Glendale, California

ROGER BUSSE, President & CEO, Pacific Continental 

Bank, Eugene, Oregon

ASIF DAKRI, Vice Chairman & CEO, Wallis State 

Bank, Houston, Texas

CHRISTOPHER W. EMMONS, President & CEO, Gorham 

Savings Bank, Gorham, Maine

DAVID J. HANRAHAN SR., President & CEO, Capital 

Bank of New Jersey, Vineland, New Jersey

JACK A. HARTINGS, President & CEO, The Peoples 

Bank Corp., Coldwater, Ohio

CHANDLER J. HOWARD, President & CEO, Liberty 

Bank, Middletown, Connecticut
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DANNY J. KELLY, President & CEO, The Hometown 

Bank of Alabama, Oneonta, Alabama

ARVIND A. MENON, President & CEO, Meadows Bank, 

Las Vegas, Nevada

TIFFANY BAER PAINE, President & CEO, Security 

Bank USA, Bemidji, Minnesota

MARY ANN SCULLY, Chairman, President, & CEO, 

Howard Bank, Ellicott City, Maryland

GWEN M. THOMPSON, President & CEO, Clover 

Community Bank, Clover, South Carolina 

JOHN M. TOLOMER, President & CEO, The Westchester 

Bank, White Plains, New York

JOSEPH W. TURNER, President & CEO, Great 

Southern Bank, Springfield, Missouri
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CONTENTS

Introductory Remarks

Martin J. Gruenberg, Chairman ................. 5

Federal Deposit Insurance Corporation

Community Banking Initiative Update

Diane Ellis, Director ........................ 11

Division of Insurance and Research

Jared Fronk, Financial Economist ............. 13

Division of Insurance and Research

Doreen R. Eberley, Director .................. 30

Division of Risk Management Supervision

Mark Pearce, Director ........................ 36

Division of Depositor and Consumer Protection

Readout on De Novo Meetings and Initiative to

Develop Next Generation of Bankers

Doreen R. Eberley, Director .................. 52

Division of Risk Management Supervision

James C. Watkins, Senior Deputy Director ..... 53

Division of Risk Management Supervision

Update on FDIC Assessment Rates

Diane Ellis, Director ........................ 87

Division of Insurance and Research

Matthew Green, Associate Director ............ 95

Division of Insurance and Research

Consumer Compliance Policy Issues

Mark Pearce, Director ....................... 111

Division of Depositor and Consumer Protection

Janet Gordon, Associate Director ............ 115

Division of Depositor and Consumer Protection

Luke Brown, Associate Director .............. 123

Division of Depositor and Consumer Protection
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CONTENTS

Risk Management Supervision Policy Issues

Doreen R. Eberley, Director ................. 140

Division of Risk Management Supervision

Rae-Ann Miller, Associate Director .......... 140

Division of Risk Management Supervision

Shannon M. Beattie, Section Chief ........... 150

Division of Risk Management Supervision

Roundtable Discussion with

Committee Members ........................... 173

Closing Remarks

Martin J. Gruenberg, Chairman ............... 227

Federal Deposit Insurance Corporation 

Adjourn ..................................... 227
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1 P-R-O-C-E-E-D-I-N-G-S

2 (9:00 a.m.)

3 CHAIRMAN GRUENBERG: I would like now 

4 to call this meeting to order. We will begin by 

5 thanking you all for being here. I confess I came 

6 to the reception last night a bit late, and 

7 everybody had left in order to get back to watch 

8 the ball game. I actually stayed up and watched 

9 the game to the end last night. I'm a little 

10 bleary-eyed, but it was worth it. It was really 

11 pretty remarkable.

12 I'm looking forward to today, I think 

13 it's a good agenda. And I wanted to get started 

14 on time and, briefly, recap. But, before I do, I'd 

15 like to, we have a number of new members of the 

16 committee joining us for the first time today. So, 

17 in particular, I'd like to welcome if I may quickly 

18 acknowledge them.

19 Richard Beard, the president and CEO of 

20 People's Utah Bancorp in American Fork, Utah. 

21 Adriana Boeka, the president and CEO of America 

22 United Bank in Glendale, California. I'm taking 
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1 a chance with the pronunciation with a couple of 

2 these names. Asif Dakri, the vice chairman and CEO 

3 of Wallis State Bank, Houston, Texas. David 

4 Hanrahan, president and CEO of Capital Bank of New 

5 Jersey in Vineland, New Jersey. Chandler Howard, 

6 president and CEO of Liberty Bank in Middletown, 

7 Connecticut. Danny Kelly, president and CEO of 

8 Hometown Bank of Alabama in Oneonta, Alabama, and 

9 Tiffany Baer Paine, president and CEO of Security 

10 Bank in Bemidji, Minnesota.

11 Joseph Turner, president and CEO of 

12 Great Southern Bank of Springfield, Missouri. 

13 Welcome.

14 This committee has really been, if I may 

15 say, fortunate in the quality of membership we've 

16 been able to attract. And it's really been, from 

17 our standpoint, a very great value to the FDIC. 

18 Now I'm going to give you a brief 

19 overview of today's agenda. In the initial 

20 session this morning, he will give us a brief update 

21 on the FDIC's community banking initiative. 

22 Doreen Eberley the director of our Division of Risk 
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1 Management Supervision, and Mark Pearce the 

2 Director of our Division of Depositor and Consumer 

3 Protection, Diane Ellis, who is the director of our 

4 Division of Insurance and Research, and Jared 

5 Fronk, a financial economist in our Insurance and 

6 Research Division will provide a brief update. 

7 We'll get right into the initiative.

8 Five senior staff in the Division of 

9 Risk Management Supervision will provide 

10 background on some outreach meetings that the FDIC 

11 had has recently posted to assist groups interested 

12 in forming de novo institutions. I know this has 

13 been a lot of particular interest. So far, the 

14 FDIC has hosted two outreach sessions, one in San 

15 Francisco and another in New York, and we're 

16 planning to host a third session in Atlanta later 

17 this month. And we are planning additional de novo 

18 outreach meetings in other parts of the country 

19 next year.

20 I should also mention that, last week, 

21 the FDIC hosted a roundtable discussion with 

22 representatives of colleges and universities, we 
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1 actually hosted this down in our Dallas regional 

2 office, which represented leaders of colleges and 

3 universities that have undergraduate and graduate 

4 banking programs designed to train the next 

5 generation of community bankers.

6 There is room for collaboration 

7 between banks and academic institutions to educate 

8 and train. And this generation of community 

9 bankers will really want to pursue this and 

10 explore the potential for enhancing the 

11 relationships that the existing programs have with 

12 their banking communities and potentially identify 

13 institutions of higher education in other states 

14 and localities that might be interested in 

15 establishing programs like this to provide a source 

16 of support in development of young people with an 

17 interest in community banking.

18 Following a break at 10:30, we're going 

19 to have an update on the current status of the 

20 Deposit Insurance Fund, an FDIC assessment rate 

21 which we assume is of a matter of some interest to 

22 you. We actually have a little bit of good news 
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1 in that regard, so in particular we don't want to 

2 miss the opportunity to share that with you.

3 And, after the session on assessments, 

4 we'll discuss some recent developments in consumer 

5 protection and compliance, and Mark Pearce will 

6 lead that discussion.

7 After the break for lunch, we'll have 

8 a discussion on recent developments in risk 

9 management supervision policy, including the 

10 recent issue on third-party lending guidance and 

11 interagency community bank call report proposal 

12 and an update on the regulatory review process 

13 being conducted pursuant to EGRPRA, the Economic 

14 Growth and Regulatory Paperwork Reduction Act.

15 And we'll conclude the day by -- we 

16 thought we would try this -- with an open roundtable 

17 for however community members to raise and discuss 

18 some of the issues on your mind that you might to 

19 resurface and raise with us and bring to our 

20 attention.

21 I should mention, just as a reminder, 

22 that this meeting is open to the public we are 
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1 webcasting the meeting so keep that in mind when 

2 engage in our conversations during the course of 

3 the day. And, with that, I will turn the first 

4 session over to Barbara Ryan.

5 MS. RYAN: Thank you, Chairman 

6 Gruenberg, and good morning, everyone, and welcome 

7 to our new members.

8 So, as Chairman Gruenberg indicated, we 

9 have a full day today and a lot of interesting 

10 topics. We thought we would begin this morning by 

11 providing the committee with a quick update on some 

12 of the developments in our Community Banking 

13 Initiative.

14 First, Diane Ellis, director of our 

15 Division of Insurance and Research, and Jared 

16 Fronk, who is a financial economist in that 

17 division, are going to give a preview of a paper 

18 that has not yet been completed but that they are 

19 finalizing. And it's on core profitability at 

20 community banks.

21 And then, following that, Doreen 

22 Eberley, the director of our Division of Risk 
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1 Management Supervision, and Mark Pearce, director 

2 of our Division of Depositor and Consumer 

3 Protection, are going to update you on some of the 

4 other initiatives underway as part of the Community 

5 Bank Initiative. 

6 So I'll turn it over to Diane and Jared.

7 MS. ELLIS: Thanks, Barbara. For 

8 those of you who are new members, I thought I might 

9 just start by explaining the role the Division of 

10 Insurance and Research has in our Community Bank 

11 Initiative. Over the last several years, 

12 conducting research on topics relevant to 

13 community banks has been one of our priorities that 

14 really started in 2012 with a pretty comprehensive 

15 study of community bank industry. And, since 

16 then, over the years, we've done sort of more

17 focused research on particular topics of interest, 

18 all to sort of better understand the trends 

19 affecting community banks, some of the 

20 opportunities and challenges, and so forth.

21 So we have found that coming to this 

22 group, particularly before research has been 
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1 released, is particularly helpful to us, to give 

2 you all a preliminary look at some of our research, 

3 get your feedback, questions, and so on. So I 

4 would encourage you to ask questions or -- and, if 

5 you have ideas for further research topics, we're 

6 sort of thinking about our agenda for 2017 right 

7 now. So we would be interested in your ideas, any 

8 questions you all might have.

9 So today, as Barbara said, I brought 

10 Jared Fronk with me. He's been doing some research 

11 on core profitability at community banks that we 

12 hope you find of interest. He's going to give you 

13 a really high level look at the research. There 

14 are some slides, I think, on the left-hand side of 

15 your -- yeah, it looks like this. 

16 Again, it's very high level. 

17 Underlying his analysis is a lot of -- there's a 

18 technical model and so forth. Jared is not going 

19 to leave that out of his presentation but is capable 

20 of answering any questions you all might have. So, 

21 again, I'll turn it over to Jared now for a brief 

22 overview of his research.
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1 MR. FRONK: Thanks, Diane. So we'll 

2 just jump right in. We've been looking at the core 

3 profitability of community banks, and we're 

4 looking at the time period from 1985 to 2015. We'd 

5 love to include 2016, but it takes about six to nine

6 months' lag to get the data, so that won't be out 

7 for a long time.

8 The research question boils down to 

9 what is the state of the community banking 

10 profitability industry-wide community banks, 

11 their core profitability. And what we mean by that 

12 is, once we strip out all of the economic factors, 

13 all of the macroeconomic things that are happening 

14 to banks that they have no control over, how would 

15 they inherently do? What's their intrinsic 

16 ability to make profits?

17 So what that consists of, on the 

18 economic side, we're looking at four separate 

19 variables: state level unemployment, realizing 

20 that community banks are heavily involved in their 

21 communities, and that's where a lot of their action 

22 takes place. We're looking at state level GDP 
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1 growth, or GSP growth. We're looking at the 

2 spread, and we're looking at interest rates.

3 So those are the macroeconomic factors 

4 we're trying to analyze. We're going to strip them 

5 away from profitability in the industry and get a 

6 look at what's left over, which we're going to core 

7 profitability or structural profitability.

8 Now we don't analyze what that consists 

9 of. That's going to be, basically, what's left 

10 over after you get rid of all of the other things. 

11 So that would consist of things like regulation, 

12 business practices, loan composition, portfolios, 

13 entry and exit, non-bank competitors. All of 

14 those factors are all going to be lumped in together 

15 into what's left over. Does that make sense?

16 All right. So let's start with this 

17 first slide, this first slide with a graph on it. 

18 What you're looking at is pretax ROA. We're 

19 decomposing it into those four economic shocks. 

20 And a shock is something -- a difference from a 

21 norm. So, if you have a really productive year 

22 with high economic growth, that's a positive shock. 
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1 If you have, for instance, a crazy recession in 

2 2008-2009, that's a negative shock.

3 We're going to look at unemployment 

4 rate, which you'll see is this dark blue, purplish 

5 color, the interest rate, which is the lighter blue 

6 color, the spread, which is gold, and gross state 

7 product growth, which is going to be this green. 

8 The solid black line is pretax ROA as an average 

9 of all community banks. And those shaded blue 

10 lines are recessions.

11 The things I want to point I want to 

12 point out here, first off is unemployment. You'll 

13 see it pretty much dominates the page. It is a big 

14 boost from the -- in the 1990s and early 2000s. 

15 And, once the recession hits, it becomes a huge 

16 drag. And I don't think anyone would be surprised 

17 to hear that.

18 One of the things that is a little 

19 surprising, though, is GSP growth seems to not 

20 matter that much. And probably the best reason is 

21 simply that, since growth of -- our economic growth 

22 is tied very closely to unemployment, or employment 
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1 growth, unemployment is kind of swamping the other 

2 variable. So they're both important. Especially 

3 during the Great Recession, GDP growth was a big 

4 factor independent of unemployment but, separate 

5 from that, usually not a major deal.

6 The other interesting thing I want to 

7 point out is spread. You'll notice it kind of 

8 moves up and down all the time, as we've seen as 

9 the spread has flattened and steepened, or the EO 

10 curve has flattened and steepened over the years. 

11 The important part to point out here is that it 

12 seems to always come down just before the 

13 recession. So at least it's a good indicator of 

14 we're going into that.

15 I guess it's comforting seeing in 2015 

16 it's still a very positive number so we're -- at 

17 least according to this, we shouldn't expect a 

18 recession any time soon, unless there's been a lot 

19 of talk of low for long as that being the major issue 

20 of interest rates. And you actually see that, for 

21 most of the time, the interest rate -- this light 

22 blue -- it's not a big deal until you get to the 
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1 recession. And then the thickness of that light 

2 blue line gets bigger, and gets bigger over time. 

3 So the longer interest rates have been low, the more 

4 damage it's done.

5 Any questions on that?

6 MEMBER TOLOMER: Yeah.

7 MR. FRONK: Yes.

8 MEMBER TOLOMER: Well, why do you use 

9 pretax borrowing?

10 MR. FRONK: Some banks -- I'm trying to 

11 think. So I worked with -- you'll have to forgive 

12 me, I’ve only been working here a year, I don't know 

13 all the terminology yet. We're trying to make this 

14 the same for all the banks, 90 percent maybe.

15 MEMBER SCULLY: How do you define 

16 "spread"? Is it just the end or --

17 MR. FRONK: So the spread is the 

18 10-year to 1-year treasury rate. I hear that it's 

19 also pretty common to use 10-year to 2-year. I'm 

20 going off of what the literature tends to do. I 

21 did check it with 10-year to 2-year, and there's 

22 no difference.
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1 MEMBER HANRAHAN: So do we understand 

2 it's tracking recovery spreads being a positive 

3 contributor to ROA for the last six years, seven 

4 years?

5 MR. FRONK: Yeah. Effectively, it's a 

6 little surprising, but that's how it comes out in 

7 the map. So I think, basically, what's happening 

8 is, because interest rates are so low, any 

9 incremental change in that spread actually ends up 

10 being a very positive thing. Interest rates are 

11 a drag. Interest rates are the drag, but the 

12 spread itself is positive.

13 MEMBER HANRAHAN: I think things are 

14 going a little further on the EO curve and taking 

15 advantage of that as well.

16 MR. FRONK: All right. If you'll join 

17 me on the next slide, I will get down to results 

18 on core ROA. First off, headline, it's been 

19 averaging over this entire period about 98 basis 

20 points. So that is the -- if you just look at this 

21 31-year period, the average core is 98. So that's 

22 on you strip out all of those economic effects, what 
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1 you'll see here is this violet color. That's the 

2 net economic shock once you've put all of those 

3 economic shocks together.

4 The difference between this light blue 

5 line, which is the core ROA, and the solid black 

6 line, which is our observed community bank average 

7 pretax ROA, is just this violet bar. So all we did 

8 is strip out that economic shock. And then the 

9 dotted line is simply the average. If you assume 

10 that it has been a constant over this time, that's 

11 what you get. We tried to out different 

12 assumptions of trends and things like that. It's 

13 not a huge difference. It's actually pretty flat 

14 regardless of how you approach it.

15 So one of the interesting things to 

16 point out is how much of the variation from core 

17 ROA is due to economic factors. And so, when you 

18 look at it for the -- sorry, I'm losing my points. 

19 Everything is on this slide. Okay. There we go.

20 So, on the -- from 1985 to about 1990, 

21 economic factors do very little to change the 

22 deviation from core ROA, which stands to reason. 
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1 That was a crisis that was specific to the financial 

2 industry and not associated with an economic crisis 

3 in the wider economy.

4 From 1991 to the most recent crisis, 

5 economic factors actually explain about 76 percent 

6 of the variation in core -- or in observed ROA. And 

7 that was a very high period. Over that time, we 

8 had an average boost of about nine basis points. 

9 So you actually had a lot of economic factors coming 

10 in to boost -- observe profits and things.

11 And, since the most recent recession, 

12 economic factors explain about 80 percent of the 

13 variation. So we're saying that a large 

14 percentage of the observed profits that are seen 

15 are explained simply by the economy at large, and 

16 it's indifferent to anything that the individual 

17 bank could have been doing.

18 All right. Another thing to point out 

19 is the trend in core over these periods. So, in 

20 the very beginning, we get about a -- from 1985 to 

21 1991, core is trending upward at about four basis 

22 points a year. From 1991 to 2007, it's trending 
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1 downwards. The best explanation for that is 

2 simply, because those were economic high times, you 

3 didn't have to be a particularly profitable or 

4 efficient bank to make it.

5 So, as you had more and more banks 

6 joining who may have not been as efficient as they 

7 should have been, the average efficiency or 

8 profitability of the industry will be falling. So 

9 that's simply a compositional effect. Once you 

10 hit the Great Recession, a lot of those banks who 

11 are less profitable or higher risk were the ones 

12 who failed or dropped out or were purchased by other 

13 banks, which, on net, brought the average 

14 profitability of the industry back up.

15 So the core profitability of the 

16 industry has actually been rising since 2008 at a 

17 5.5 basis point per year rate. So we're definitely 

18 on an upward trend, which is a good thing to hear.

19 The last thing I want to point out that 

20 you may have questions about, looking at this light 

21 blue line, is we seem to be going upward from 2008 

22 up until about 2014 -- or 2013 when suddenly it jogs 
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1 back down. You'll see that right here. My best 

2 explanation for that is, if you've heard of the --

3 people talk about the jobless recovery, and I think 

4 it's largely an artifact of the unemployment rate. 

5 We've had a lot of talk about how the headline 

6 unemployment rate may not be the best indicator of 

7 how the labor market is actually doing these days.

8 There's a lot of talk about 

9 participation rates and underemployment, so people 

10 who are technically employed but not making or 

11 doing the jobs that they would like to be doing. 

12 So I suspect that there's a serious issue where

13 unemployment, even though it's come way down, isn't 

14 actually translating into as much increased wealth 

15 for our community banking customers as it typically 

16 had in previous periods. So that's showing up as 

17 -- this low unemployment as a big boost to be making 

18 profits in the economic model. I suspect, in 

19 reality, it's not nearly as big a boost as it's 

20 saying here.

21 So the last page, and then I'll answer 

22 any other questions you have. I just want to 
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1 review these key conclusions, first off, over the 

2 entire course of the study, about half of the 

3 deviation or the variants in observed ROA can be 

4 explained by economic factors, which means that 

5 half of it is not explained by economic factors, 

6 things such as competition from non-bank actors, 

7 competition among community banks, entry and exit, 

8 regulation, all of those other things that go into 

9 it explain the other half of what's going on.

10 But, in this last period, it was 

11 only -- all right, 80 percent is covered by 

12 economic factors, so only about 20 percent remains 

13 to be explained by the structural changes.

14 The effects of the recession have been 

15 severe. They're the most severe of any group of 

16 years in this study, mostly not surprising, and 

17 they've been persistent. Core profitability was 

18 on the decline for most of this sample until you 

19 hit the recession, and those changes in how banks 

20 are operating in the composition of banks has 

21 actually led to a rise in the core profitability 

22 trend.
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1 And that's it. Those are my points. 

2 Thanks. I guess any questions? Yes?

3 MEMBER HOWARD: Just one question. 

4 Were you able to look at mutual banks exclusive of 

5 the SOC institutions?

6 MR. FRONK: I don't think we have, but 

7 I can. It's very simple to do.

8 MEMBER HOWARD: It would be 

9 interesting to look at mutual bank performance as 

10 it relates to the other group of community banks 

11 because of the structure.

12 MR. FRONK: Thank you now --

13 MEMBER HARTINGS: Jared, did you also 

14 correlate the capital levels at banks, because 

15 you're using ROA to create that factor. Certainly 

16 capital is going to drive ROA up for a bank so, if 

17 you looked at a bank 30 years ago versus a community 

18 bank today. Did you correlate that at all?

19 MR. FRONK: So one of the things that 

20 we do, we use panel data, which allows me to include 

21 bank fixed effects which, as long as a bank's 

22 capital structure hasn't changed massively over 
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1 its time. If it has, then that won't be accounted 

2 for. But, if it's consistent over years, any 

3 inherent characteristics of each bank that are not 

4 changing significantly over this 31-year period 

5 will be taken care of. So they will be netted out 

6 of the regression automatically.

7 So I'm not sure if that solves the 

8 problem right up or if it's something I need to 

9 control for in the future.

10 MEMBER HARTINGS: It would be 

11 interesting to lay your slides against the capital 

12 level at banks 30 years ago and currently because, 

13 again, that's going to drive ROA, the ROA ratio up 

14 at that point in time.

15 MS. ELLIS: So I think -- you're saying 

16 maybe do the same analysis but bucket it by banks 

17 and different capital -- different capital levels?

18 MEMBER HARTINGS: I think I'd just look 

19 at industry-wide first, and then you can, you know, 

20 decide if you want to look at individual, you know, 

21 subchapter S, mutuals, C corps. It would be 

22 interesting to see what our industry has done on 
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1 a capital level, if -- I believe we have more robust 

2 capital. We have higher capital ratios. I mean, 

3 we've seen that.

4 But it would be interesting with your 

5 slide to see how that has a variance on ROA. So 

6 an ROA today at a higher capital level is different 

7 than an ROA 30 years ago, you know, 8 percent 

8 capital and 12 percent capital.

9 MEMBER HANRAHAN: I think ROA is -- it 

10 would be interesting to look at the data also. ROA 

11 is handy to look across banks. The FDIC has been 

12 rightly concerned about the declining number of 

13 banks in the country, and I believe that -- I mean, 

14 this is the point, is, if you hold ROA constant but 

15 you have to hold more capital, drives down ROA and 

16 that reduces return for stockholders and makes 

17 banks that are normally too upset. So it would be 

18 interesting to look at ROE.

19 MR. FRONK: Yeah. When we started 

20 this, we were doing quarterly data. As you might 

21 guess, that's really noisy data. And we looked at 

22 ROE, and it was just a mess, is what it boiled down 
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1 to. But I haven't looked at it since we switched 

2 to the annual level data. So I'll take a look at 

3 that. Thank you.

4 MEMBER DAKRI: The point here where you 

5 said the profitability from 1990 to 2008 was 

6 declining, the trend shows it declining, and now 

7 we're showing the trend going back up. I think you 

8 had mentioned that part of the reason for the trend 

9 going up is the elimination of those banks that were

10 not run as well as they should have been. Is there 

11 a way to segregate that and to say, you know, if 

12 we eliminate those banks from this equation, how 

13 much is this profitability actually rising?

14 I mean, we're just getting rid of the 

15 weakest link if you will. So, without balancing 

16 the equation from 1990 to 2008, is it flat-lined 

17 or what happens?

18 MR. FRONK: So one of the things that 

19 I did do as a robustness check was to look at the 

20 sample excluding banks that failed because I 

21 think that's fair to say, hey, we're all still in 

22 it. How are we doing? 
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1 First, you still get a rise. Overall, 

2 it's flatter. It's not the 5.5 basis point. I 

3 can't recall exactly what it is, but I can get back 

4 to you if you like. It still rises.

5 The other major result is, since you've 

6 excluded all of the banks that didn't do well and 

7 had low numbers, you end up getting much, much 

8 higher numbers. So, instead of having an average 

9 of .98, you can an average of like 1.2 something. 

10 Sorry, I can't remember the exact number. It's a 

11 much higher number.

12 So, if you exclude all of the banks that 

13 failed or were bought or purchased or, for various 

14 reasons, left the sample, of course, you get much 

15 higher numbers because you pick the winners ex 

16 post.

17 But we'll be happy to send you those 

18 results and let you know exactly what happened to 

19 everyone, I guess, the results of what happens if 

20 you look at only banks that are survivors in loss 

21 years.

22 MS. RYAN: Okay. All right. Well, I 
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1 guess we're back to Doreen and Mark.

2 MS. EBERLEY: Okay. Good morning, and 

3 I'll offer my welcome, extend my welcome to our new 

4 members as well. Happy to have you here. I'll 

5 give you a little bit of an overview of how the 

6 Division of Risk Management Supervision has 

7 approached the community bank initiative, and then 

8 I'll talk about the activities that we've conducted 

9 since the last meeting in July.

10 So our approach has been to make sure 

11 that we're carrying out our supervision program in 

12 a way that adds value to the industry and minimizes 

13 burden without sacrificing safety and soundness. 

14 So those are our overall goals. So we have, since 

15 2012, taken a number of looks at various 

16 activities. We've focused on where can we 

17 streamline the examination process. One example 

18 there was really taking a hard look at our 

19 pre-examination requests lists and making sure 

20 that they were targeted to institutions. And we 

21 put in place a new system to help examiners make 

22 sure that the request lists were targeted.
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1 We focused on transparency. An 

2 example there is making sure that we talked to the 

3 bankers after the exam about how we used the 

4 information we requested, and really having a 

5 conversation even before the exam to talk about how 

6 the information was used to risk focus the 

7 examination, and then how we used all of the 

8 information we requested before the examination.

9 And then a third area has been focused 

10 on providing technical assistance. We've got a 

11 technical assistance video program. It consists 

12 of director's college videos, which is a summary 

13 of the director's colleges that we deliver around 

14 the country every year.

15 We have targeted topical videos, so 

16 these are more in-depth videos that are designed 

17 for senior management, and really go in-depth on 

18 issues and interests. So the Bank Secrecy Act, 

19 interest rate risk, how to do evaluations and 

20 appraisals, when do you need one versus the other, 

21 topics like that. And then we also have our cyber 

22 challenge video series, which are videos that are 
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1 designed for bank management to practice their 

2 response to actual kinds of cyber events that have 

3 occurred at institutions.

4 In addition to that, we have also 

5 focused on providing resources to institutions. 

6 We created our director's resource center on our 

7 web page. You can find that under the Community 

8 Bank Initiative. It also has its own link. And, 

9 on that page, you'll find all of the resources that 

10 we have developed the Community Bank Initiative. 

11 And on of the, I think, very hand things there is 

12 a listing of our financial institution letters 

13 sorted by topic. So, if you're curious if we've 

14 got guidance on a particular topic, you can go check 

15 there and see what's out there.

16 So that's a little overview of what 

17 we've been doing for the longer period of time. 

18 Specific to the last several months, we did mail 

19 out another resource, our Community Bank Resource 

20 Kit. If anybody didn't get one and wants one, let 

21 me know, and I'll bring some up at a break. But 

22 we mailed those out, Mark and I, finished that up 
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1 around Labor Day.

2 We've gotten many requests for extra 

3 copies, and we've been honoring those and sending 

4 those out. And we've also been making copies 

5 available at our director's colleges, and they've 

6 proven very popular with the directors that attend 

7 those events in person.

8 And what we've decided to do to keep 

9 this current is that we have a lot of information, 

10 topical information, supervisory insight journal 

11 articles and other pamphlets on, you know, 

12 resources that we have available. As we add more 

13 articles that are of strong interest that we think 

14 should be part of the kit or new resources, we'll 

15 add those.

16 We'll do that about once a year. So, 

17 since we first put this together in April of last 

18 year, we'll be looking to update it again in April 

19 of next year and add more. We won't be taking 

20 content out, but adding some more content to it. 

21 So, if you have any feedback about things you think 

22 we should put in the kit, that would be great to 
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1 hear from you.

2 In terms of technical assistance 

3 videos, we've established an executive steering 

4 committee to review our existing portfolio of 

5 videos on a regular basis and make sure that they're 

6 current. If there's anything we need to update, 

7 we want to make sure that we do that. And they're 

8 also advising Mark and I on content for new videos, 

9 so topics for new videos.

10 And that's another place where you can 

11 help us as well. So any ideas that you have about 

12 topics that we should be considering for next year, 

13 we're working on that right. The one topic that 

14 we have in the hopper already is managing 

15 concentrations. And so anything else that you 

16 think we should add we'd be happy to hear.

17 We also conducted a number of 

18 director's colleges since the last meeting. We 

19 had a number in April and September. And, again, 

20 we're in the planning process for next year for our 

21 core director's college modules. So, if there are 

22 specific topics that you think would be beneficial 
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1 for us to add, that would be great to hear from you. 

2 And we conducted a mutual bank forum on 

3 August 4th. We did that jointly with the OCC. 

4 That was a great day of discussion with mutual 

5 bankers about the ways that they are addressing the 

6 specific challenges that they face. 

7 And then we have some follow-up 

8 activities to our community banking conference 

9 that we held in April. So, in addition to the 

10 couple that the chairman mentioned about the de 

11 novo roundtables and the meetings with the 

12 universities, those were ideas that flowed out of 

13 the conference in April.

14 We did issue a Supervisory Insights 

15 Journal article about the deposit insurance 

16 application process, and are working on a handbook 

17 for proposed organizers of de novo institutions, 

18 to guide them through the application process. 

19 And we are on target for issuing that for public 

20 comment before the end of the year.

21 So that's a quick wrap-up of the 

22 activities we've got going.
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1 MR. PEARCE: And I'll pick it up from 

2 there. Good morning, everyone. As Doreen 

3 indicated, she kind of gave you the overview of our 

4 Community Bank Initiative over the last several 

5 years and communicated some of the updates that 

6 we've been making and how we're going to continue 

7 to make the different materials current and 

8 up-to-date. This really is sort of an evergreen 

9 initiative. It's not through take one thing and 

10 do it and then never come back to it. It's 

11 something that we want to keep refreshing. And, 

12 in that spirit, I want to update you on a couple 

13 of things specific to the Division of Depositor and 

14 Consumer Protection.

15 The first of those relates to our 

16 pre-exam planning process. As Doreen mentioned in 

17 her review, both on the risk management side and 

18 on the consumer protection side, we took a look at 

19 our pre-exam planning process two or three years 

20 ago to really look at opportunities to make that 

21 process more efficient and effective while not 

22 altering our supervisory standards.
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1 And so, for the consumer compliance 

2 piece of that, what we really were able to do is 

3 improve our risk focus and do more data collection 

4 offsite at the beginning of the examination 

5 process, so that, when our examiners arrived at the 

6 bank for the onsite portion, they would have a 

7 deeper knowledge of the individual bank, and that 

8 would really help us risk-focus our examination and 

9 be more efficient and onsite.

10 Since we've implemented that change or 

11 enhanced -- we've always done pre-exam planning and 

12 tried to do that, but we've really built a structure 

13 to do a little bit more of that at the front end 

14 than we had been in the past. We've gotten really 

15 positive feedback from bankers regarding the 

16 improvements and enhancements we made in that 

17 process, in particular the sense that, when 

18 examiners arrive onsite, they really do have a 

19 deeper understanding of the bank and the different 

20 products and programs that are offered, and that 

21 the onsite portion has gone more efficiently and 

22 effectively as the examiners have had a greater 
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1 handle on the risk at the very beginning of the 

2 examination.

3 The one piece of feedback we've gotten 

4 from some bankers is that, in the shift of gathering 

5 more information offsite in advance of the onsite 

6 portion of the exam, that we ask a lot of questions 

7 and we look for a lot of documentation in advance 

8 really to enable our examiners to have a full 

9 understanding of the bank and any changes that may 

10 have happened.

11 And so, earlier this year, we put 

12 together a team to take a look at our pre-exam 

13 planning process to see if there were ways -- first 

14 of all, we wanted to sort of validate that it was 

15 accomplishing what we intended to accomplish by 

16 improving the process. But also we wanted to take 

17 a look to see, are there ways that we could refine 

18 it further. And the good news from my point of view 

19 is that it really did confirm what our expectations 

20 were, that it really has made some improvements in 

21 the examination process. 

22 And the team was also able to identify 
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1 some recommendations that we think, on balance, 

2 will help us refine the pre-examination process, 

3 reduce the documentation and information up-front. 

4 Essentially, what our team has recommended is 

5 creating a two-step process at the beginning of the 

6 pre-exam planning so that we'll gather some 

7 questions and information on the front end, you 

8 know, to analyze that. Then refine and come back 

9 with maybe a second request that's more tailored. 

10 That way, we don't have to have a significant amount 

11 of documents that were collected that may not be 

12 relevant to a particular examination.

13 So that's a recommendation from our 

14 team. We're sort of refining exactly what that 

15 would look like, but we're hopeful to implement 

16 that early next year. So that's the first thing 

17 we're doing to keep updating our community banking 

18 efforts.

19 The second relates to the technical 

20 assistance video. And this is a minor update. 

21 Back when we launched the technical assistance 

22 video program, we produced a video on CFPB's 
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1 ability to repay roll in qualified mortgages, 

2 specifically tailored to community banks and 

3 community bankers. And CFPB has made updates to 

4 its rules. It was time to revisit that video.

5 And so, in August of this year, we 

6 revised that video to incorporate in particular 

7 some of the changes that were affecting community 

8 banks such as the change in the definition of a 

9 rural institution so that -- which is a pretty 

10 significant change because it enables banks that 

11 are offering balloon mortgages to be able to 

12 continue to qualify those as qualified mortgages.

13 So we updated that video and released 

14 it on our website. As Doreen mentioned, we welcome 

15 feedback on other videos or -- you know, the videos 

16 that we have out there, if you have any feedback 

17 on those or you have suggestions for new videos, 

18 we certainly will entertain recommendations from 

19 any of you on that.

20 MS. RYAN: Comments?

21 MEMBER BEARD: Yeah. Could I ask a 

22 question? Maybe it goes more to the research area.
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1 I've noticed over the years there's 

2 more and more emphasis on pushing things to the 

3 board. And, for community banks, smaller 

4 community banks, there's often not a good 

5 separation between board and management or the 

6 boards of both. Have you considered or do you have 

7 something that's studied that? And my concern is 

8 that particularly younger examiners tend to push 

9 everything to the board level. It's always -- the 

10 fallback is always the board ought to be involved 

11 in it.

12 And I think it may be, in my view, is 

13 doing some damage to corporate governance, as to 

14 the roles of the two respective parties. Have you 

15 looked into anything like that?

16 MS. EBERLEY: Not research, but one of 

17 the documents in our Community Bank Resource Kit 

18 was a standalone version or issue of the 

19 Supervisory Insights Journal devoted to corporate 

20 governance for community banks. And that is one 

21 of the topics that we discussed, is the difference 

22 between management and the board and whose role is 
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1 what.

2 We also -- it expands on our Pocket 

3 Guide for Directors, which talks about the 

4 responsibility of directors, that we first issued 

5 in the eighties. The principles there have not 

6 changed at all, and they still remain relevant. We 

7 updated the pocket guide, but we've got those two 

8 resources out.

9 But it is something that we discuss with 

10 our staff and talk about the differences. And the 

11 ways that you should see that in examination 

12 findings is the difference between the matters 

13 requiring board attention page or the matters that 

14 are directed to the board of directors that need 

15 the board of directors' attention to focus on and 

16 correct. Those are issues that, if not corrected, 

17 can have consequences for the institution in terms 

18 of future earnings or future capital or future 

19 viability even. So we really want the board 

20 focused on those activities.

21 And then, in July of this year, our 

22 board of directors issued a statement on 
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1 supervisory recommendations. And so those are the 

2 other recommendations within the report of 

3 examination that are focused on management, what 

4 management needs to do.

5 What we said in that statement, our 

6 board of directors said and we are following, is 

7 that any recommendations that we're making from a 

8 supervisory standpoint that we're tracking and 

9 holding you accountable for will be in writing in 

10 a report of examination or formal correspondence 

11 from the FDIC. And they'll be in the form of a 

12 supervisory recommendation in the report or matter 

13 requiring board attention.

14 MEMBER BEARD: And it may be more of an 

15 educational thing because the right or wrong view 

16 of the regulators that we're very powerful, I mean, 

17 that we have boards that maybe overreact to that 

18 in the sense of taking that away from management 

19 and creating internal issues because of that.

20 MS. EBERLEY: Okay. I will just say we 

21 have regular examiner trainings so, if you have 

22 specific thoughts about how we could incorporate 
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1 that into our training curriculum -- we're actually 

2 just getting ready to start another cycle, but that 

3 is something we can focus on.

4 MR. PEARCE: Yeah. And Doreen just 

5 made the point that I was going to make, is that, 

6 over the last year, two in particular, I think we 

7 have sharpened our focus on how we make 

8 recommendations or how we communicate findings to 

9 the institution and what the appropriate level for 

10 attention related to those things is. So there's 

11 obviously always more we can do with training and 

12 maintaining that. But that's something we have 

13 been working on.

14 MEMBER HOWARD: I just have to give you 

15 some feedback on the approach that you're taking 

16 with gathering more information early on in the 

17 exam process, the whole exam pre-planning, and I 

18 think the result being that we have a more targeted 

19 exam focused on, you know, significant risks. And 

20 the experience we've had and some of the feedback 

21 that I've gotten from several of the bankers in my 

22 area is that that process has been very, very 
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1 effective.

2 And one of the ways that it plays out 

3 that's positive for both -- ultimately, for the 

4 sums of the institution is that, during the exam, 

5 it allows for a lot more dialogue around the much 

6 more critical issues that an institution is facing. 

7 And so I would -- you know, I just give you that 

8 feedback, that the work that you're doing around 

9 getting more targeted and, you know, getting more 

10 information up-front about an institution so that 

11 the examiners have more knowledge about that 

12 particular institution and its risks, they're much 

13 more prepared when they come in to complete the 

14 exam. And I think we get a better -- you know, a 

15 better exam as a result of that.

16 MR. PEARCE: I appreciate that 

17 feedback and, certainly, as Doreen mentioned in her 

18 overview of our community banking program, those 

19 kinds of conversations between the examiner and the 

20 banker has a real value that we think the 

21 examination process has. And so having more space 

22 for that communication focused on the key critical 
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1 issues is something we're really striving to do. 

2 So thanks for that feedback.

3 MEMBER TOLOMER: I might add something 

4 to that. We just went through our first compliance 

5 exam as an intermediate bank, and I think it's 

6 healthy to get all of the information to you sooner 

7 in the process so that you can study it and, when 

8 you came in, you were well-prepared. There was a 

9 good exchange of "what about this," "how did this 

10 work." And I reserve my rights because I don't 

11 have the final report, but the anticipation based 

12 on our, you know, communication and the close-out 

13 meetings were very favorable.

14 And I think also dovetails to what 

15 you've done in safety and soundness. And I 

16 think -- I'll speak for myself, but I think the 

17 banking industry in general feels as we all want 

18 the same thing. We're giving you the information. 

19 You didn't lose it. You didn't ask for copies. 

20 You did your work. You came out. You asked. You 

21 were receptive to the give and take of what was 

22 discussed. 
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1 And that's all we can ask. And I think 

2 that's fair. And I think it's a vast improvement 

3 over, you know, several years ago. So, you know, 

4 kudos.

5 MR. PEARCE: I appreciate that.

6 MEMBER BAER PAINE: I would like to say 

7 that -- Mark, you and I talked last night, and I 

8 need to watch the videos. And I really do think 

9 they are a good tool. The packet was great that 

10 you sent out. I would suggest that maybe you don't 

11 physically mail them out but have us go out and 

12 download -- I know you want to push the information 

13 and possibly sign people up. 

14 There also was -- maybe I'm speaking out 

15 of turn, but a lot of us do our training virtually, 

16 so we have systems that go through and then they 

17 also track when people have done their training, 

18 so there's an audit that goes back to that to ensure 

19 that they are reading the information that they're 

20 pushing out, and they have to accept that.

21 So it's just another level for us, 

22 instead of scanning everything in and distributing 
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1 it to everybody or asking you to send extra copies, 

2 just an option for us to download all the 

3 information.

4 MEMBER EMMONS: Mark, I'm curious, 

5 some of our most efficient exams have come when 

6 we've had a repeat of examination teams, so that 

7 there's a continuity. They know the organization. 

8 They know perhaps some of the critical areas in the 

9 previous exams, et cetera. And I'm just curious 

10 about your philosophy or the FDIC's philosophy as 

11 it relates to bringing in new firms or new teams 

12 to do the exam, or opting to bring in folks that 

13 have been in the prior exams, and do you make those 

14 decisions?

15 MR. PEARCE: Sure. You know, those 

16 decisions on the consumer compliance side are, you 

17 know, really made at the field level, that 

18 supervisors, supervisory examiners are putting 

19 together teams. You know, there's an element of 

20 that that's sort of resource-based, you know, where 

21 are the people we have that are available to do the 

22 work that have the expertise.
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1 You know, I do think there's some health 

2 in having, you know, not the same examiner, you 

3 know, team, you know, complete team on every exam 

4 for a period of time, but having people who have 

5 different experiences come in and participate in 

6 the examination. So part of those decisions that 

7 our field supervisors are making are sort of 

8 blending that combination of experience and we 

9 always are -- you know, as I think most of the folks 

10 in this room are, we're always training, you know, 

11 new examiners or people with different skills, and 

12 so sort of blending those teams. Those are the 

13 kinds of factors that lead to the decisions about 

14 who's on a particular exam team.

15 MEMBER HARTINGS: Mark, did you look at 

16 the -- or your team looked at the pre-questions and 

17 the qualifications, and did you look into FDIC 

18 Connect in the sense of maybe a better way to 

19 organize the information, maybe a best practices? 

20 Because sometimes an area of frustration -- and you 

21 ask, you know, 5,000 banks to send you information 

22 through FDIC Connect, and we all do it slightly 
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1 different. And is there a better way to organize 

2 that, that it's easier for the examination force 

3 to look at things? Did you look at any of that when 

4 you were doing your review?

5 MR. PEARCE: Not specifically for the 

6 pre-exam process, although I do think that we've 

7 gotten feedback over time around FDIC Connect, and 

8 some of the concerns that bankers have raised to 

9 us involve the amount of time it may take to upload 

10 documentation. And we do have a few -- not a few, 

11 at least one or two different initiatives that we 

12 think, in the long run, will enable us to gather 

13 electronic information more efficiently. And so 

14 we're still working on sort of ways to make that 

15 technology work to support the examination 

16 process, because I do think that's been a little 

17 bit of a pain point for some examiners.

18 MEMBER HARTINGS: I think it's good for 

19 the banker, good for the examiner. I mean, I think 

20 we're just looking for -- and I hate to say a 

21 standard but either buckets to drop it in or just 

22 so it's cleaner for you and cleaner for us to send 
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1 it up that way.

2 MS. RYAN: Thanks. Great suggestions 

3 and feedback. We appreciate that. So, at this 

4 point, I'd like to thank Diane, Doreen, Mark, and 

5 Jared. And we move into our next session. Doreen 

6 is going to stay with us, and Jim Watkins is going 

7 to join her. He is senior deputy director in our 

8 Division of Risk Management Supervision. 

9 And they're going to continue our kind 

10 of discussion about the community banking 

11 initiative by telling you about the recent outreach 

12 meetings that we've been having on de novo banks 

13 and the discussion with representatives from 

14 colleges and universities that took place last week 

15 in Dallas. So I'll turn it over now to Doreen and 

16 Jim.

17 MS. EBERLEY: All right. Thank you. 

18 So we did want to spend some additional time this 

19 morning talking about the two important outreach 

20 initiatives that came out of our community banking 

21 conference earlier this year. And so the first is 

22 a series of roundtable events with proposed 
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1 organizers of de novo institutions, and then other 

2 interested parties about the process of applying 

3 for deposit insurance.

4 And then the second, as the chairman 

5 mentioned, was the roundtable meeting with 

6 universities and colleges offering banking 

7 degrees, to further explore ways to partner with 

8 those schools -- to partner those schools with 

9 community banks, rather, that are in need of new 

10 bankers. So how do we put those two together?

11 And we had a great conversation at the 

12 community banking conference about one school that 

13 was engaged in an initiative and had partnered with 

14 the banking department in the state.

15 So we'll start with an overview of the 

16 de novo roundtables, and then we'll have some 

17 discussion about that. And then we'll do the same 

18 for the roundtable with the schools. So I'll turn 

19 it over to Jim to give us an overview of the de novo 

20 events.

21 MR. WATKINS: Well, thank you, Doreen. 

22 And, in your package, there's kind of a sheet that 
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1 we have that summarizes that the schedule of events 

2 for the rest of the year, which the next one is going 

3 to be held in Atlanta at the end of this month. And 

4 the first event we held was on September 28th in 

5 San Francisco, and then that was followed up with 

6 an event in New York on October 13th.

7 And both of those events included about 

8 40 industry participants, either groups of 

9 potential community bank applicants or, in some 

10 cases, consulting firms, law firms, and other 

11 interested parties.

12 During those events, we expressed our 

13 views that community financial institutions are 

14 the very core of the U.S. financial system, and that 

15 they are the vehicle through which a large segment 

16 of consumers, small businesses, and communities 

17 gain access to credit and to banking services. In 

18 post-crisis period, it has been uniquely 

19 challenging for community banks. Yet we remain 

20 optimistic with respect to the future of community 

21 banking and its essential function in our financial 

22 system.
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1 With a long history of community 

2 banking, new entrants to the sector have played a 

3 role in preserving the vitality of the industry. 

4 Along with supporting community banks operating in 

5 today's environment, the FDIC is supportive of 

6 the formation of new financial institutions and 

7 welcomes applications for deposit insurance.

8 We believe that de novo institutions 

9 fill important gaps in their communities and local 

10 banking markets. They provide credit and services 

11 to communities that are maybe overlooked by larger 

12 institutions. Historically, the rate at which new 

13 charters have been added to the industry has been 

14 highly cyclical, with new institutions highly 

15 correlated to periods of economic expansion and 

16 strong financial performance of the banking 

17 industry as a whole.

18 FDIC researchers have also found that 

19 newly-insured banks can be more susceptible to 

20 failure under adverse economic conditions, with a 

21 failure rate that can be twice that of established 

22 institutions. And that was experienced in the 
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1 most recent crisis. These findings underscore the 

2 importance of promoting the formation of new banks 

3 and establishing an effective application process 

4 and supervisory program that will ensure new 

5 banks adopt appropriate risk management practices 

6 and strategies and ensure that their prospects for 

7 long-term success are favorable.

8 We expect chartering activities to pick 

9 up as economic conditions continue to improve and 

10 normalize today, and we have seen some pockets of 

11 activity and increased interest in areas with 

12 favorable economic activity or in geographies that 

13 have experienced industry exits and an interest in 

14 forming de novo institution.

15 Again, the FDIC welcomes applications 

16 for deposit insurance and recognizes that 

17 applications require our staff, FDIC staff, to be 

18 knowledgeable and available to process and analyze 

19 proposals as the industry submits them. To 

20 facilitate this, each FDIC regional office has 

21 designated subject matter experts or application 

22 committees to serve as points of contact for 
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1 deposit insurance applications. They serve as an 

2 important industry resource to address the FDIC's 

3 processes and respond to any specific proposals. 

4 These FDIC experts describe the de novo application 

5 process at our outreach session.

6 It is a challenging endeavor to 

7 establish a community bank and identify and 

8 recruiting competent and experienced leadership so 

9 that they can provide input and guide the 

10 development of a sound business plan. It takes 

11 time. It takes work. It takes resources, and it 

12 takes a lot of energy.

13 Additionally, we recognize that the 

14 capital-raising efforts can be challenging and 

15 difficult as well. Nonetheless, the FDIC to 

16 ensure that the institutions created in this 

17 post-crisis era are in the position to succeed. 

18 The outreach agenda includes topics 

19 that have been outlined in the FDIC's statement of 

20 policy on applications for deposit insurance. A 

21 statement of policy references the statutory 

22 factors that the FDIC must favorably resolve in 
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1 order to approve applications. The agenda for 

2 these sessions covers these topics and discussions 

3 relating to the application process and addresses 

4 specific filing requirements of the application, 

5 the review steps, and the points of contact for each 

6 agency.

7 Discussion of the business plan, its 

8 development, and some statutory factors we 

9 consider when reviewing the business plan, 

10 including capital and earnings are also 

11 extensively discussed at the outreach events.

12 Over lunch, we hear from local bankers 

13 who have a lot of experience in forming and 

14 establishing -- some at this meeting here. And 

15 those have been very favorable discussions that 

16 Doreen will touch on.

17 Again, the FDIC is committed to working 

18 with and providing support to any group with an 

19 interest in starting a de novo bank, and we will 

20 be issuing a deposit insurance handbook to help 

21 guide proponents and organizers through the 

22 application process. The handbook is being 
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1 updated to draw on some of the feedback we are 

2 obtaining at these outreach sessions, and there's 

3 ample room for new bank entrants with sound funding 

4 and well-conceived business plans to serve their 

5 local market.

6 It is essential that these new entrants 

7 have a clear and identified path to approval, and 

8 we believe the outreach events help to achieve 

9 that.

10 I'm now going to turn it back to Doreen.

11 MS. EBERLEY: And I will say the 

12 outreach events were very well received, the two 

13 that we've held so far. We had robust discussion 

14 right from the very first moment. You know, we had 

15 prepared lots of pauses in the program to have 

16 discussion, and we didn't need to do that. The 

17 discussion, it just happened on its own. And it 

18 really was great.

19 I did want to recognize John Tolomer for 

20 giving us what was just a fabulous idea. So coming 

21 out of the community banking conference in April, 

22 and we talked about the de novo roundtable idea, 
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1 John made the suggestion that we have the panel of 

2 successful de novo bankers to talk about what did 

3 they learn through the process. What did they wish 

4 they had known at the time, you know, that they know 

5 now? What advice would they give to organizing 

6 groups?

7 And that really was -- has been the hit 

8 of the first two sessions. So John participated 

9 in the first two. David joined in the session in 

10 New York. And the discussions were really great.

11 One of the things that I really enjoyed 

12 hearing at the first sessions, one of the questions 

13 that was posed to the panel was, you know, knowing 

14 what you know now and in the current environment, 

15 would you do this again? And everybody said yes. 

16 One guy had to ask his wife, because he had told 

17 her he wouldn't. So he said that he would be 

18 interested in doing it again.

19 And, you know, when pressed why in the 

20 face of the interest rate environment and the 

21 challenges that community banks are facing, that 

22 same individual said, you know, because every day 
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1 I drive down the street, and I can point to small 

2 businesses that are there and that have grown and 

3 have provided jobs to my community because of me, 

4 because of my bank. And I just thought that was 

5 such a resounding confirmation of the impact of 

6 community banks and the positivity that we hear as 

7 we talk to banking groups and the interest that new 

8 groups have in forming.

9 I will tell you that we did take a list 

10 of all of the questions that have come up during 

11 the sessions. We are making sure that we are 

12 incorporating answers to those questions in our 

13 handbook. And we are seeing some increased de novo 

14 activity. We have had organizing groups at both 

15 sessions thus far. We expect the same at our 

16 session in Atlanta at the end of the month.

17 And, since the last meeting of the 

18 advisory committee, we have received three true de 

19 novo applications that have been filed, and there's 

20 been a couple of other -- deposit insurance 

21 applications that maybe aren't traditional de 

22 novos but are a deposit insurance filing 
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1 nonetheless. And we do have a number of prefiling 

2 meetings that are happening around the country that 

3 our regional directors are telling us about. So 

4 interest is up. We're starting to see some 

5 activity, and very positive about that.

6 So, John or David, do you want to add 

7 anything about your review on how events went?

8 MEMBER TOLOMER: Well, you go first 

9 there.

10 MEMBER HANRAHAN: I think it was a 

11 great event. I'm glad to be asked. I think my 

12 most powerful anecdotes were examples of what not 

13 to do, you know, mistakes I've made. But it was 

14 well done.

15 With regard to the capital question 

16 that came up at the event, I've heard over the years 

17 a lot of cries from our industry about, you know, 

18 tell us the number. What's the number for capital? 

19 I thought your answer was perfect, especially as 

20 we also cry for tailored regulation.

21 The answer that you gave -- and forgive 

22 me if I don't summarize it correctly -- was you show 
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1 us a credible business plan that maintains a Tier 

2 I average ratio of eight percent and that you are 

3 profitable at, and that's the right capital level. 

4 That's the perfect answer to give to an applicant, 

5 and I think it was a very good effect.

6 MS. EBERLEY: Okay. Thanks.

7 MEMBER TOLOMER: I thought they were 

8 excellent, and I thought there was a nice exchange 

9 both in San Francisco and New York regarding 

10 thoughts and would we do it again. And I think 

11 there might be something that I missed an 

12 opportunity with Diane Ellis to maybe research is, 

13 I think sometimes when de novos have a problem, it's 

14 because of pressure. And it could be investment 

15 pressure, hey, I thought we were going to make 

16 money, or where's my dividend. And they kind of 

17 lose sight of what they invested in.

18 And it might be interesting to see 

19 historically how many banks at three or five years 

20 or seven years, for good reasons, merged as opposed 

21 to having to be merged. And that might be helpful 

22 for future de novos to be able to ward off, hey, 
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1 before you invest in this bank, you have to 

2 understand, this is not a short-term deal. And you 

3 need to be sure that the CEO, either he or she, is 

4 strong enough to be able to communicate to that. 

5 So, as they take the capital and then 

6 all of a sudden everyone says, yeah, I gave you the 

7 money, and why aren't you profitable six months 

8 later? And that's not what the business plan says.

9 So I think that might be something to 

10 be helpful for future de novos.

11 MEMBER SCULLY: I think that's a great 

12 idea because I think managing your investor 

13 expectations from the very beginning -- I remember 

14 saying to people, don't put this in the income 

15 portion of your portfolio. Put it in the growth 

16 portion of your portfolio and expect a long-term. 

17 And there are many times in the last 12 years where 

18 I've had to bring out those slides and show people.

19 MS. EBERLEY: That's a great point. 

20 And I think it speaks a little bit to -- we had a 

21 pretty robust discussion at both events about the 

22 qualifications of the CEO, the proposed CEO, and 
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1 needing to have that kind of prior C-level 

2 experience dealing with these kinds of issues. It 

3 has to be somebody who can deal with the board of 

4 directors effectively, somebody that can deal with 

5 investors effectively, and really having had some 

6 kind of experience at that level.

7 MEMBER SCULLY: And I'm sure it affects 

8 -- I know it affects your process, but I think there 

9 are people going into it -- for example, I talk to 

10 people who have said, I want to start a bank, and 

11 so on and so forth. And, when you ask them who's 

12 going to run it, it's somebody who's never been a 

13 banker.

14 MS. EBERLEY: Right.

15 MEMBER SCULLY: And they go into it 

16 thinking that's okay. So managing your 

17 expectations as well.

18 MS. EBERLEY: Yeah. We're going to 

19 cover that pretty robustly in the handbook, because 

20 it's key. You know, management is the bottom line, 

21 most important piece of the process.

22 MEMBER TURNER: I'd just like to say, 
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1 I congratulate you on your efforts. It's a 

2 difficult environment, and the fact that you're 

3 generating interest is a testament to what you're 

4 doing.

5 This might be beyond the scope of your 

6 presentation, but it seems that the FDIC has done 

7 a good job in analyzing the past process and 

8 determining, you know, what criteria really made 

9 banks more apt to fail and more of a risk to the 

10 insurance fund, and then pricing their insurance 

11 based on that activity. 

12 Jim mentioned that de novos are 

13 about -- they're twice as apt to fail. Is that 

14 factored into their deposit insurance processing?

15 MS. EBERLEY: Diane in the room?

16 MEMBER THOMPSON: Diane is not here.

17 MS. EBERLEY: I don't know if 

18 there's --

19 MR. WATKINS: There isn't a premium for 

20 de novos.

21 MS. EBERLEY: A premium for de novos, 

22 right?
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1 MR. WATKINS: No.

2 MS. EBERLEY: There isn't?

3 MR. WATKINS: Makes you want to keep a 

4 good record.

5 MEMBER THOMPSON: This is a curiosity. 

6 What part of the country are those brave souls are 

7 those three coming from?

8 MS. EBERLEY: California and 

9 Tennessee.

10 MEMBER BEARD: Very interesting.

11 MS. EBERLEY: And the interest -- we've 

12 had prefiling meetings in Texas, Florida, Georgia 

13 -- oh, Georgia, a filing. Connecticut, around the 

14 country, so --

15 MEMBER BEARD: Has there been any study 

16 done on the slide of equity from the banking 

17 institutions because of a perception that the 

18 profit isn't there the way it used to be?

19 MS. EBERLEY: Not a study, but I'll 

20 tell you, anecdotally, just looking at the call

21 report data, a lot of capital came into the banking 

22 industry even during and post-crisis. And so it 
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1 may not have been coming in in the form of new de 

2 novos, but it was certainly coming in in the form 

3 of supporting the institutions that existed, some 

4 through changes of control with new capital coming 

5 with a new owner, some from investors purchasing 

6 troubled institutions and going for a change of 

7 control.

8 So we've seen less of that as the number 

9 of troubled institutions comes down. There's not 

10 as much inventory, if you will, for investors to 

11 look at. And then I think that's why we're 

12 starting to see an uptick in the de novo activity.

13 MR. WATKINS: I think the other thing 

14 we're observing is that the stock market -- the 

15 price of equities in relation to book value has 

16 improved for institution -- U.S. financial 

17 institutions. At one time, it was trading much 

18 less than book value, and now it's exceeding book 

19 value. And so certain investors would suggest 

20 that it was more attractive to invest in existing 

21 banks than forming a bank when you can buy it at 

22 less than book value. So that dynamic is kind of 
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1 changing, and that may be one of the reasons why 

2 we're seeing a little more interest in forming a 

3 de novo.

4 MEMBER TOLOMER: I think that's a 

5 really very strong point because, if you have the 

6 option of investing and kind of controlling that, 

7 an existing bank is much easier than starting the 

8 whole process and, you know, now that that's not 

9 available -- or as available, then I think you'll 

10 see -- continue to see it.

11 And I think people will recognize that, 

12 you know, it's a great industry. And, as we 

13 continue as an industry to make more money and 

14 certainly, in community banking, all of the reports 

15 that come out, it will attract more people.

16 MS. EBERLEY: Okay. Can we talk about 

17 the event with the schools?

18 MR. WATKINS: Sure. And let me start 

19 by saying that we spend a considerable amount of 

20 time at the FDIC having conversations with 

21 community bankers and trade associations, talking 

22 about some of the challenges that they are facing. 
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1 And one of the most significant challenges that 

2 keeps being raised is the development of the next 

3 generation of community bankers.

4 To set the stage for our discussion, 

5 I'll start by sharing with you some of the 

6 commentary we heard at the April Community Bank 

7 Initiative conference about this challenge. 

8 Bankers spoke about the issue as a talent crisis, 

9 if you will. Someone attributed it to the 

10 tarnished banking reputation springing out from 

11 the overhang of the crisis and partly relating to 

12 the lack of current regional bank training programs 

13 that some of the larger regional banks would have 

14 been offering in the past.

15 We also noted that there were fewer 

16 schools and colleges and universities that are 

17 offering community banking program and community 

18 banking degrees. Bankers express a desire to hire 

19 new graduates and to attract new talent, partly to 

20 attract customers and to ensure that their 

21 institution would be prepared for the future.

22 Those that have been able to bring in 
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1 some college grads were very positive about their 

2 new hires, describing the new group of employees 

3 as smart, as hungry, and caring about their jobs 

4 and wanting to do a good job and support their 

5 communities.

6 Another responded that community 

7 bankers really need to tell their own story, tell 

8 their community banking story and how it helps to 

9 bring jobs to the community and serve the local 

10 market. And that would help to attract students 

11 to consider community banking as a career.

12 As Doreen mentioned, on October 27th, 

13 we hosted a meeting in Dallas, and we called it the 

14 Developing Tomorrow's Community Bankers, a 

15 discussion between educators and the industry. 

16 Our chairman was at the meeting and kicked it off. 

17 And, at the meeting, we had both representatives 

18 from the banking community and the academic 

19 communities.

20 They're ready to start a dialogue about 

21 how they might partner in a mutually beneficial way 

22 to develop the next generation of community 
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1 bankers. The purpose of the dialogue was to 

2 explore community banking educational programs and 

3 to identify and discuss challenges and best 

4 practices of those programs in the experience of 

5 the participants.

6 The college and university professors 

7 described their programs and some of their school's 

8 course content as well. The trade associations 

9 expressed the need for new bankers and the 

10 opportunities for new college graduates to serve 

11 in banking, as long as they have an interest in 

12 banking.

13 The groups gathered that they 

14 represented 10 colleges and universities from the 

15 states of Arkansas, Indiana, Mississippi, New 

16 Mexico, South Carolina, South Dakota, and Texas. 

17 Also attending were representatives from the 

18 American Bankers Association, Independent 

19 Community Bankers of America, and Commissioner 

20 Charles Cooper with the State of Texas was 

21 representing the state, of course, and also 

22 representing the Conference of State Bank 
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1 supervisor.

2 I would describe the meeting as being 

3 very productive and interesting. The schools 

4 expressed a strong interest in partnering 

5 opportunities, internship opportunities and 

6 discussions to help attract students to banking. 

7 There was a really strong desire to explore 

8 additional steps that they could possibly take as 

9 well.

10 For example, one of the suggestions 

11 might be to develop perhaps a directory of schools 

12 and colleges that might be offering programs, 

13 establish some contact points. Some of the 

14 schools discussed having advisory panels for the 

15 schools themselves with community bankers, and 

16 that's a good way to understand the needs of 

17 community bankers and attract students as well.

18 So I think I will stop there and ask if 

19 there's any -- if you have any additional thoughts 

20 or comments on that, or something else you might 

21 want to suggest.

22 MEMBER SCULLY: What about some of the 
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1 metrics? How many people are going through these 

2 programs right now? I mean, just the magnitude.

3 MR. WATKINS: So it depends on the 

4 school. So we just had maybe a sample of the 

5 schools that we identified. And, you know, in some 

6 cases, there could be groups of 30 to 60 students 

7 interested. But there is a higher demand for those 

8 students than there were students available. In 

9 other words, some of the universities were 

10 suggesting that they could attract more students 

11 to fill the demand.

12 We were also told -- the college 

13 professors indicated that there's kind of a funding 

14 issue at a number of colleges and programs. 

15 They've had budget cutbacks and are always looking 

16 for ways to partner as well.

17 MEMBER BEARD: Well, I commend you to 

18 focus on that. We were involved in this award that 

19 the Federal Reserve and the CSBS gave. They 

20 studied community banks and how they came through 

21 the recession. And the University of Utah did the 

22 study, and we received an award for that.
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1 But the thing I learned from it was that 

2 it's not at the top of the mind to the university 

3 students to think banking. They think of lawyers, 

4 doctors, mechanical engineers. And that is just 

5 fascinating, this team that the university put 

6 together. A number of them -- I remember one young 

7 lady who expressed -- she said, I never even thought 

8 of banking beyond being sort of a teller. And now 

9 I realize that there's a whole industry there from 

10 this study that we went through.

11 So I think we could do a lot better job 

12 maybe all the way through banking to let young 

13 people know this is an honorable way to make a 

14 living. It's supporting the communities. And, 

15 if you have an interest, the banks are very 

16 interested in internships and trying to bring young 

17 people into this. I’d be very supportive of that.

18 MEMBER HARTINGS: Did you study any of 

19 the interaction between the banking schools that 

20 we have that are around the country and the actual 

21 degree? I mean, were they represented as well at 

22 this conference?
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1 MR. WATKINS: So you're talking like a 

2 graduate banking program?

3 MEMBER HARTINGS: Yes. Yes.

4 MR. WATKINS: Some example, the ABA 

5 helped us to sponsor one of those programs itself, 

6 so they were represented in that regard. We do 

7 include the graduate banking programs in this 

8 particular session. They generally help to 

9 educate and provide training for individuals that 

10 are already in banking.

11 MEMBER HARTINGS: But there's also a 

12 numbers of schools. I know the Barrett Banking 

13 School is more of an intermediate. And I just 

14 wondered if they looked at what courses might be 

15 to the advantage of curriculum of college study 

16 that would be an important course.

17 And then does FDIC make any of their 

18 instructors available? You know, I think about 

19 the training that you do for your examiners, and 

20 you have a wonderful program that you -- I'm sure 

21 great instructors in those programs. Do you make 

22 those available at all -- to universities on a, you 
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1 know, as-needed or adjunct basis? I'm not sure how 

2 you would make them available. 

3 But I just -- it's interesting to kind 

4 of have that. And, you know, that's a part of being 

5 in banking, is understanding that side of it. And 

6 to be able to bring out experience, that would be 

7 great if you could share that somehow.

8 MR. WATKINS: I think that's a great 

9 question. I'd be curious to know if others feel 

10 we should -- if that's something we should offer 

11 up to some of the colleges, is to provide some 

12 expertise. We for the graduate -- We're very 

13 active in that. And we do a lot of outreach. But 

14 that's something we should consider.

15 MEMBER BEARD: We do have at the 

16 University of Utah, Brighton Dallas East, I don't 

17 know if you know that name, but he's one of these 

18 people. That's where he teaches, of course, 

19 there, and it's been successful in stimulating some 

20 of what we're talking about.

21 MEMBER THOMPSON: Where do --

22 MR. WATKINS: I'm sorry.
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1 MEMBER THOMPSON: No, go ahead.

2 MR. WATKINS: Go ahead. Please.

3 MEMBER THOMPSON: Where do you see this 

4 program continuing to go, and is there anything as 

5 community bankers that we need to be doing to help 

6 promote this further?

7 MS. EBERLEY: I think one of the 

8 interesting questions that came up during the 

9 event, and I certainly may want to expand on this, 

10 is that, you know, would there be benefit to 

11 facilitating regional meetings like this to that 

12 end, and seeing how local universities and local 

13 bankers or state banking associations could 

14 partner.

15 CHAIRMAN GRUENBERG: This is really an 

16 initial engagement for us as a group of academic 

17 institutions that are offering banking programs. 

18 Essentially it's for us to begin the process of 

19 getting informed about what's available, how these 

20 programs are structured, are the students that 

21 participate and what the possibilities are going 

22 forward.
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1 So I think that literally this meeting 

2 was last week, so we're talking a little time here. 

3 And I think we're going to sit there and try to think 

4 through, I know we can move from here. And I do 

5 think there is a lot of potential here.

6 And it seems to respond to a need that 

7 certainly I hear frequently from bankers, the need 

8 to attract talented young people with an interest 

9 in banking. And these programs are a vehicle for 

10 developing students and, to the extent bankers have 

11 opportunities to offer, there's obviously a 

12 complementary interest there they would like to 

13 build on.

14 So I think we want to get to know these 

15 programs a bit better through the sense of what they 

16 offer, the students they attract, their 

17 relationships with their banking communities 

18 already, and what are the possibilities for us to 

19 expand, you know, things to think about. Are there 

20 opportunities to expand the working relationships 

21 at the existing programs they have with their 

22 banking communities? How well-informed are 
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1 bankers about the programs?

2 There right now is not a national 

3 directory of all of the colleges and universities 

4 and business schools that offer banking programs. 

5 There is that information gap, in effect, that we 

6 think the FDIC may be able to fill. And, you know, 

7 there's not a rule that says a community bank has 

8 to attract people just from the local school. 

9 There are programs around the country graduating 

10 students with an interest in community banking. 

11 Every banker should have access to that information 

12 and potentially draw on students graduating from 

13 those programs.

14 And also identifying schools in 

15 cities and communities that are not currently 

16 offering the program but for which there will be 

17 a local interest.

18 So this strikes us as having 

19 significant potential. And, to the extent you all 

20 have any thoughts on this, you would be very much 

21 welcome to the things we could do with the local 

22 banking groups of things we could give to 
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1 facilitate.

2 So we're starting out here, but this 

3 seems to respond to a general need and issue, and 

4 I sense there's some potential here. And so I feel 

5 really positive about the meeting last week, and 

6 this is something that we will focus on going 

7 forward.

8 MEMBER TOLOMER: I like all the effort. 

9 I think it's spot on, and I think the -- you know, 

10 we don't care if we hire somebody local or -- with 

11 credentials, these type of credentials, or 

12 somewhere else across the country. That's fine.

13 And I think also, while the schools have 

14 always promoted the Wall Street investment 

15 banking, those jobs are shrinking, and community 

16 banking is thriving. And there's more jobs. And 

17 there's nothing wrong with being involved in a 

18 community bank. And so I think there may be a job 

19 here for us to help the schools understand. 

20 And I heard a horror story recently 

21 where somebody graduated and did not take a job on 

22 Wall Street, but went to work for a community bank. 
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1 And the school was aghast at how that person made 

2 that choice to go work for a community bank, and 

3 got pressure to make a phone call, saying, you're 

4 not going to go to the investment banking firm, 

5 you're going to go work for a small bank?

6 So, you know, I think we certainly have 

7 ambassadors at this table that would be more than 

8 willing to do any PR or any introductions, but I 

9 think it's a great idea. And I think it will help 

10 build, you know, community banking. We're not all 

11 bad guys, you know. We're involved in the 

12 communities. And so I applaud the effort.

13 MEMBER SCULLY: And we even have young 

14 people working for us who think banking is a great 

15 career, who might be willing to talk in that way.

16 CHAIRMAN GRUENBERG: I think the 

17 education started with the schools and it would be 

18 the same from the banker's perspective with the 

19 schools would be pretty important. I think 

20 community banks have a very positive story to tell 

21 about the opportunities and benefits of working for 

22 a community bank.
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1 And this was an issue that came up, I 

2 think, at the meeting last week with the 

3 institutions, with the academic institutions, 

4 where opportunities are limited. And there 

5 actually may have been more opportunities 

6 available with community banks. And the students 

7 needs to be made aware of it.

8 The first thing on the minds of students 

9 today graduating are finding positions. And, if 

10 community banks are the source of opportunity, and 

11 offering jobs with real career prospects, there's 

12 a match there. So it really struck me as something 

13 we can work on.

14 MEMBER MENON: I think we really need 

15 to invest in the fact that the schools are having 

16 budget problems. They don't have the funding to 

17 go to a new program if they don't already have it. 

18 Maybe it would be beneficial if somebody were to 

19 put together some sort of where do you go to get 

20 a grant or something of that sort, so that the 

21 universities can raise the financial resources to 

22 be able to fund the new program.
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1 And whether it's a public or private 

2 partnership or whatever it is, that would be 

3 helpful, I think, to the schools.

4 MS. BOEKA: But more targeted to 

5 increasing the number of students because that's 

6 what I heard. And you can do that early on, 

7 probably high school, before they embark into 

8 college, trying to sell up this side of the business 

9 in competition with the investment banking.

10 But, if we don't increase young 

11 people's, at the high school level, to have an 

12 attraction to banking, then it is very hard to 

13 compete once they're there at college, to think 

14 that they're going to go to that firm and make all 

15 of this money buying and selling.

16 So probably start a little bit earlier 

17 and say, I haven't done it with only 30 people in 

18 an organization. But that would be where I would 

19 go start a conversion.

20 MEMBER BAER PAINE: To your point, 

21 Adriana, have you talked to any of the state 

22 commissioners, you know, specifically that 
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1 demographic is very interested in financial 

2 literacy. And so, if you start that financial 

3 literacy, could you indicate at a younger age, and 

4 high school age, I mean, that does pique interest 

5 in and maybe a combination of educating our young 

6 and piquing interest in possible next generation 

7 leaders.

8 CHAIRMAN GRUENBERG: And I think the 

9 state commissioners have a role to play here. 

10 Charles Cooper from Texas is currently the chairman 

11 of CSBS, so we would want to include them in this 

12 effort, because there's a common interest on both 

13 sides here, I think.

14 MEMBER DAKRI: Well, I think this is a 

15 huge issue for every community bank out there, 

16 attracting the talent that's needed. I mean, I 

17 assume most of us here, we have all of the people 

18 in the banks are eventually going to retire, and 

19 how do you replace that talent? How do you get the 

20 new blood into the bank to let you be more aware 

21 of what is going on in today's society.

22 And I think one of the interesting 
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1 things we have here is basically marketing. How 

2 do you market a community bank, not only to the 

3 generations that are going through college, but to 

4 the colleges themselves? While Wallis State Bank 

5 might not be a household name anywhere outside of 

6 Dallas or Houston, FDIC is. People understand who 

7 the FDIC is.

8 So I think a partnership between the 

9 FDIC and the community banks and the universities 

10 is important because your name recognition is much 

11 greater than ours.

12 CHAIRMAN GRUENBERG: I think this is 

13 very much consistent with our mission, so that I 

14 think we are very open to the many ways to cooperate 

15 and be supportive here.

16 MS. RYAN: Before we take a break, I did 

17 want to come back to a question that came up about 

18 community bank assessment rates. And Diane is 

19 here, so it makes sense, while we can return to that 

20 question and give Diane an opportunity. Do you 

21 need to --

22 MS. ELLIS: I understand it was a 
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1 question about how we assess de novos.

2 MS. RYAN: Right, and are they assessed 

3 differently --

4 MS. ELLIS: Yes.

5 MS. RYAN: -- looking at the higher 

6 failure rate?

7 MS. ELLIS: Right. Yeah. De novos --

8 the bottom line is de novos are assessed at a flat 

9 rate. Right now, I believe it's nine basis points. 

10 It's the top of our risk category one. When we put 

11 our -- presses a transition, which we're going to 

12 explain to you in 20 minutes here with the next 

13 session, that'll drop to about seven basis points.

14 And the reason is that, for community 

15 banks, for small banks, our assessment system is 

16 based upon a model that uses financial – call 

17 report information, financial information, to 

18 project the probability of failure. And de novo 

19 banks, as you might suspect, just don't look like 

20 other banks. You know, the balance sheets and 

21 income statements aren't the same as a 

22 well-established bank. And it's really virtually 
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1 impossible to model the performance of a de novo 

2 bank.

3 So, since we put this system in place, 

4 you know, 2007, de novo banks have always just been 

5 charged a flat rate because we couldn't think of 

6 any better to do it.

7 MEMBER HARTINGS: What's the time 

8 frame of that flat -- so, if I'm a de novo that 

9 starts up to --

10 MS. ELLIS: Five years.

11 MEMBER HARTINGS: Five years.

12 MS. ELLIS: Five years.

13 MEMBER HARTINGS: Five years.

14 MS. ELLIS: Right. Yeah.

15 MEMBER HARTINGS: Has it always been 

16 five years?

17 MS. ELLIS: Yes, it's always been five 

18 years. Was there another question about research 

19 on de novos?

20 MS. RYAN: Oh, there was a question.

21 MS. ELLIS: Yes, yes.

22 MS. RYAN: Some questions came up.
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1 MEMBER TOLOMER: What I was thinking, 

2 we were talking about the formation of de novo, and 

3 I thought one of the things that would help the 

4 organizing group is to understand how -- because, 

5 you know, people have different perspectives, and 

6 I think Mary Ann was very blunt in her presentation 

7 saying, if you need this money, if you're looking 

8 for income or you're looking for anything to happen 

9 fast, forget it. I know I did that as well.

10 But yet people have this idea that, oh, 

11 you know, in three years we will double our money, 

12 we'll get two times book, three times. And I was 

13 wondering if there was any research to be able to 

14 arm organizing groups with investors to say -- have 

15 de novo where five transactions in year five, for 

16 positive reasons, not banks being taken over, but 

17 where there are, you know, people selling for 

18 premiums in a short period of time.

19 So a new de novo bank saying year five, 

20 year six, how many have, quote, "flipped." I mean, 

21 I suspect the answer is going to be pretty low, but 

22 I would be interested -- it would be an interesting 
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1 fact.

2 MS. ELLIS: Yes. We have done some 

3 research on de novos. I don't know that it gets 

4 specifically at that question, but -- or we have 

5 an economist or who released a working paper within 

6 the last year on the performance and viability of 

7 de novo banks. So it was more looking at how did 

8 they mature, which ones survived, which ones 

9 failed.

10 I mean, sort of at a bottom line, it 

11 might not be surprising -- be surprised at the 

12 high-level conclusion that de novos fail at a 

13 higher rate than other banks. So, but I don't know 

14 that we -- we didn't really get into, you know, the 

15 ones that sell or merge, you know, how does that 

16 work. 

17 But it would be perhaps an interesting 

18 area of further research, and she is doing some 

19 ongoing research in the area of de novos, so it 

20 might 

21 MEMBER TOLOMER: It might just be 

22 something that --
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1 MS. ELLIS: Yes. I might ask her if 

2 she wants to take a look at that as an area for --

3 (Simultaneous speaking.)

4 MS. ELLIS: We are looking at 

5 consolidation. Now we have just an -- internally, 

6 every quarter we are kind of looking at the trends 

7 in consolidation. And like for the -- it was sort 

8 of at a pretty high rate, but then the second 

9 quarter it slowed down a little bit. But the 

10 premiums -- at the same time, premiums on 

11 transactions that did occur, you know, dropped 

12 quite a bit.

13 MEMBER SCULLY: Can we look at it by 

14 vintage? Because that might sound --

15 MS. ELLIS: Do you mean "vintage" like 

16 the age of the bank or --

17 MR. WATKINS: So some of those 

18 transactions would be private sales, though, of 

19 non-publicly traded companies. And then so we 

20 would have call report information and data that 

21 the banks file. But as far as the premium on, you 

22 know, sale, that -- that wouldn't show up in a call 
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1 report filing. That would be from the sales, and 

2 if it's private we wouldn't necessarily know unless 

3 it was announced publicly.

4 MS. ELLIS: But that's -- I see where 

5 you're headed. That's an interesting area.

6 MEMBER TOLOMER: You weren't here. 

7 The backdrop was I -- I suspect that as de novos 

8 fail it is related a lot to pressure, and the 

9 pressure can come from your models not working; 

10 what's your contingency? It could come from your 

11 investor pool saying, "Hey, where is my dividend? 

12 Hey, what is going on here? I thought this was 

13 going to be three and out or five and out." Because 

14 they have a dream, they have a perspective, whether 

15 it's right or wrong. 

16 So at least before they invest their 

17 money, the organizing group can say, "Look, that's 

18 the dream. Here are the facts. This is good, hard 

19 data." So if this is what you're thinking about, 

20 this is not the place to be, this is a good 

21 long-term, be part of the community and build your 

22 business and help us build a business. Our 
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1 shareholders have been fabulous for --

2 MR. WATKINS: I think I would suggest 

3 for investors, if they are looking at banks, they 

4 should say, are they sticking to their business 

5 plan they identified when they did their offering? 

6 Or are they deviating from the business plan, and 

7 are they doing it with high growth and unstable 

8 funding basis? And I think that's where you would 

9 see a lot of the issues that -- for banks that ended 

10 up failing.

11 MS. RYAN: Okay. So it's time to take 

12 a break. So we'll reconvene again at about 10:45.

13 (Whereupon, the foregoing matter went off the 

14 record at 10:31 a.m. and resumed at 10:55 a.m.)

15 MS. RYAN: Okay. Welcome back, 

16 everyone. Our next session is designed to provide 

17 all of us with an update on FDIC assessment rates. 

18 And as I'm sure you're aware, the reserve ratio of 

19 the FDIC's deposit insurance fund is going -- is 

20 now above 1.15. So I'm going to let Diane Ellis, 

21 who you already know, and Matt Green from the 

22 Division of Insurance and Research, are going to 
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1 explain to you what this means for your assessment 

2 rates.

3 MS. ELLIS: All right. So this 

4 morning I brought -- had Jared Fronk with me to talk 

5 about the research side of the Division of 

6 Insurance and Research, so this time I've brought 

7 Matt Green with me to talk about the insurance side 

8 of the Division of Insurance and Research. And 

9 Matt is going to just spend a few minutes here 

10 talking about why crossing this 1.15 percent 

11 threshold was important and what changes that is 

12 going to bring about.

13 MR. GREEN: Thanks, Diane. The 

14 deposit insurance fund balance stood at $77.9 

15 billion on June 30. That's an increase of $2.8 

16 billion from one quarter earlier. The reserve 

17 ratio, which is the fund balance as a percent of 

18 estimated insured deposits, rose to 1.17 percent 

19 at June 30th from 1.13 percent at March 31st.

20 Under our regulations, three major 

21 changes in positive terms assessments begin the 

22 quarter after the reserve ratio first reaches 1.15 
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1 percent. Therefore, the changes actually took 

2 effect beginning in the third quarter, and they 

3 will see these changes in their quarterly -- third 

4 quarter invoices which they will receive in 

5 December.

6 First, overall initial assessment 

7 rates for all institutions have declined from a 

8 range of five to 35 basis points to a range of three 

9 to 30 basis points. Second, because the law 

10 requires banks that have total assets of $10 

11 billion or more to bear the cost of the increase 

12 in reserve ratio from 1.15 percent to 1.35 percent, 

13 large banks are now subject to temporary assessment 

14 surcharges. At this time, we are projecting that 

15 the surcharge will last eight quarters and will 

16 total approximately $10 billion.

17 Additionally, small banks will 

18 eventually receive assessment credits for the 

19 portion of their assessments that contributes to 

20 the increase in the reserve ratio to 1.35 percent. 

21 We are projecting total credits of approximately 

22 $1 billion, and the FDIC will apply these credits 
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1 to reduce the assessments of small banks when the 

2 reserve ratio is at or above 1.38 percent.

3 The third change is that a revised 

4 method to determine risk-based assessment rates 

5 for banks with less than $10 billion in assets also 

6 went into effect in the third quarter. This 

7 revised method was developed using data from the 

8 recent crisis, post-crisis years, and earlier 

9 periods in order to better reflect risks to the 

10 insurance fund.

11 Under the revised method, total 

12 assessment revenue collected from small banks is 

13 approximately the same as it would have been under 

14 the prior risk-based pricing method. So as a 

15 result of these assessment changes, most community 

16 banks will see reductions in their deposit 

17 insurance assessments. We are estimating that 

18 assessments will decline for 93 percent of 

19 institutions that have less than $10 billion in 

20 assets. In aggregate, quarterly assessments paid 

21 by small banks are expected to decline by about 

22 one-third.
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1 Banks are not going to be required to 

2 report any additional data because of these 

3 assessment changes, and they can estimate their 

4 assessment rates using the FDIC's online 

5 calculator. We also have an assessments helpline 

6 that many of you are aware of that we've had for 

7 several years to answer any questions about these 

8 changes. 

9 And with that, I would certainly open 

10 it up just to questions.

11 MEMBER HOWARD: So I just have a 

12 clarification question. Ninety-three percent of 

13 the small banks should see a decrease, but did I 

14 understand correctly that the amount of premiums 

15 that will be paid into the fund by small banks will 

16 increase?

17 MR. GREEN: No. No. The amount of 

18 premiums that were paid into the funds by small 

19 banks will decline, and we're estimating by 

20 approximately one-third, a 33 percent reduction. 

21 That change, combined with the change in the 

22 risk-based pricing method that we -- we went out 
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1 for -- we had a regulatory process with last year 

2 and earlier this year -- will result in 93 percent 

3 of small banks paying lower than seven percent with 

4 an increase.

5 MEMBER HANRAHAN: Matt, could you 

6 please elaborate on the credits, what they will 

7 ultimately get back for the -- the difference 

8 between 1.15 and 1.35? Is that being -- it's as 

9 if all of the premiums will be credited back, or 

10 a part, and if -- if part, what part? How is that 

11 going to be calculated?

12 MR. GREEN: Okay. It's a part. It's 

13 the part that contributes to the growth in the 

14 insurance fund. I can -- every bank's premiums 

15 also have to cover the losses, expenses, regular 

16 growth and insured deposits, even to maintain a 

17 reserve ratio at 1.15 percent.

18 So we're going to be crediting back the 

19 portion that -- it contributes to the increase, 

20 which we can calculate. I don't know if you want 

21 an example or not. I can --

22 MEMBER HANRAHAN: If you are prepared 
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1 to give an estimate of what part that might be, that 

2 would be --

3 MR. GREEN: Sure. So let's say right 

4 now that -- these are always subject to 

5 uncertainty -- that we will reach 1.35 percent in 

6 2018. At that -- let's say we -- at that quarter 

7 where we reach that goal, the minimum target for 

8 the reserve ratio, we will calculate .2 percent of 

9 insured deposits, which is the difference between 

10 1.15 percent and 1.35 percent.

11 And let's say that amount is 

12 approximately $15 billion. Well, then, look at 

13 that $15 billion and say, well, we know that a 

14 portion of that comes from the surcharges paid by 

15 large banks. We're estimating that would be about 

16 $10 billion, leaving $5 billion coming from the 

17 regular assessments of all banks that contributed 

18 to the increase in the reserve ratio.

19 Of that $5 billion, a portion of that 

20 comes from small banks. Currently, that number 

21 would be about 20 percent, so that's about $1 

22 billion, which is consistent with our current 
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1 estimate.

2 MEMBER HANRAHAN: So as a fraction of 

3 what I'll pay over the next couple of years. Are 

4 you prepared to say what that might be? But 150 

5 grand over the next two years, in terms --

6 MR. GREEN: It is -- it is -- I think 

7 it's under -- it's maybe between a third and a half, 

8 but I'm not positive about that. I'm thinking it's 

9 somewhere -- it's somewhere around four or five 

10 basis points, something like that.

11 MS. ELLIS: So, obviously, the 

12 big -- the big wildcard here, we aren't going to 

13 know for sure until after the fact. The big 

14 wildcard is insured deposit growth. If insured 

15 deposit growth is really rapid, people -- we're 

16 going to need a greater portion of regular premiums 

17 to cover that. Or if we have -- we're not 

18 projecting much in the way of failures over the 

19 coming -- but if something happens, there is a big 

20 failure, more regular premiums are going to be 

21 needed to cover that.

22 Conversely, if insured deposits grow 
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1 slow or, you know, we have, you know, even fewer

2 failures, then more -- more of the regular premiums 

3 would be returned in the form of a credit, so --

4 MEMBER HOWARD: Can you explain the 

5 revised methodology for -- I think it's for small 

6 banks.

7 MS. ELLIS: Sure. Yes, yes. And, 

8 actually, we came to this group a couple of meetings 

9 ago, but you -- for the new people on our committee, 

10 it's -- the new assessment system is -- sort of 

11 looks and feels like the old assessment system in 

12 the sense that it's a set of financial ratios and 

13 CAMELS rating that are used to calculate an 

14 assessment rate. So it doesn't -- it doesn't feel 

15 like a dramatic departure from that.

16 But underlying the choice of those 

17 ratios and the weights placed on them, there is a 

18 change in the model currently. The old system was 

19 put in place in 2007, so -- and, really, the 

20 analysis was done in 2006, so pre-crisis, and it 

21 was -- because we had gone through such a long 

22 period of time without any failures, we were 
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1 reluctant at that time to do a failure projection 

2 model. 

3 We instead did a CAMELS downgrade 

4 model, because we had more recent information. 

5 And we looked one year ahead at what the likelihood 

6 of a one or two rated institution was being 

7 downgraded to a three or worse, and used that as 

8 a proxy for failure.

9 So, but post-crisis, we wanted to 

10 update our system to take advantage of the new 

11 information or lessons data we had from the crisis, 

12 and at that -- and so we changed to a failure 

13 projection model, since we have all of this recent 

14 data. But we didn't use data from just this 

15 crisis, we went all the way back to previous crises 

16 as well. So it's a very long period of time, but 

17 failure data and it looks three years ahead.

18 So based upon our experience and all the 

19 data we have, what is the likelihood that a 

20 community bank is going to fail within -- over a 

21 three-year time horizon. So that underlying model 

22 is different but, again, it produces a set of 
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1 financial ratios and CAMELS ratings and -- that we 

2 use and, you know, it drives the choice of the 

3 ratios and then the weight we place on those ratios.

4 MEMBER HANRAHAN: These are really 

5 good changes. In particular, I want to say 

6 thank-you for treating reciprocal broker deposits 

7 differently under the new formula. That's a 

8 subject that I and many others have argued for how 

9 those really aren't going to behave, don't believe 

10 like true broker deposits, and apparently you 

11 recognize that and treated them that way. So thank 

12 you.

13 MS. ELLIS: Yes, thanks. There's 

14 really no change in the treatment of those -- from

15 the old model versus -- the old system versus the 

16 new system.

17 MEMBER HARTINGS: Could you just 

18 expand on the credit question again? Will you also 

19 take into consideration where that growth of 

20 deposits would be in a fund? So if it -- growth 

21 of deposits is -- you talked about from 1.15 to 

22 1.35, got to factor that in there. But if that's 
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1 done, growth is primarily by those banks above $10 

2 billion, will that affect that credit formula as 

3 well?

4 MR. GREEN: No. It's -- we just will 

5 look at -- once we reach that 1.35 percent minimum 

6 target, the rule would say that we would look at 

7 estimated insured total insured deposits in the 

8 banking system at the time, regardless of where the 

9 growth came from. 

10 And then we'd calculate .2 percent of 

11 that, which is the difference between 1.15 and 

12 1.35. And that is the -- that represents the 

13 dollar amount responsible -- you know, that brought 

14 us from 1.15 to 1.35, of which we know surcharges 

15 cover part of that and assessments by large banks 

16 and community banks cover the rest, and we would 

17 do that calculation that way.

18 And that's where we -- we calculate that 

19 approximately. At this point, our best estimate 

20 is about $1 billion would be the contribution of 

21 community banks to increasing the reserve ratio of 

22 1.15 to 1.35 percent, which Congress requires us 
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1 to offset.

2 MEMBER HARTINGS: With that same 

3 process, thought process -- and maybe I'm not 

4 understanding that -- if we wanted to keep it at 

5 1.15, and all of the growth, you know, over the next 

6 two years was by a bank over $10 billion, it would 

7 be somewhat their responsibility if there was no 

8 losses. And that's what I'm saying is, shouldn't 

9 that be factored in there somehow?

10 MR. GREEN: Well, I guess it's no 

11 different than the current system in that sense 

12 that insured deposit growth from wherever it comes 

13 from is the responsibility of the entire banking 

14 system when attempting to maintain even a constant 

15 reserve ratio. So it's not -- we don't necessarily 

16 look at, well, this quarter, mid-sized banks or 

17 community banks grew faster, insured deposits rose 

18 faster than others, and it does go back and forth, 

19 but --

20 MEMBER HARTINGS: But the only 

21 difference is it's regulated that those larger 

22 institutions above 10 billion do pay that 20 basis 
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1 points, so that does make it somewhat different 

2 than what we look at today. So --

3 MR. GREEN: Right.

4 MEMBER HARTINGS: Okay. Thank you.

5 MR. GREEN: Okay.

6 MEMBER TURNER: I also appreciate the 

7 work you've done. You know, I think our premium 

8 will decline slightly. My question is, you know, 

9 there are certain kinds of lending that seem to 

10 be -- maybe "disfavored" is too strong a word, but 

11 that, you know, affect negatively your insurance 

12 premium, one of them being construction 

13 development lending.

14 And I agree certainly during the last 

15 recession that was definitely more risky, but at 

16 least in my own experience, and we bought five banks 

17 from you guys as they failed, and looked at a number 

18 of others, and it was a very -- kind of a specific 

19 center of construction development lending, land 

20 development, where it was extremely risky, maybe 

21 speculative constructive, was very risky, you 

22 know, a properly structured project, office 
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1 building, retail, long-term care apartment, 

2 whatever, with acceptable equity levels, at least 

3 anecdotally didn't seem to be any more risky than 

4 other sorts of lending.

5 Have you thought about sort of trying 

6 to collect that data so you can really zero in on 

7 what seem to be more risky?

8 MS. ELLIS: Sure. Yes. And you've 

9 hit upon -- in terms of the -- I sort of describe 

10 the overall conceptual change in the approach, but 

11 you've hit upon the one ratio that is probably the 

12 biggest departure, the biggest change from the old 

13 system, and that is -- we call it a loan mix index, 

14 and it's essentially a concentration measure.

15 And it does -- it is based upon our data 

16 which show, you know, which lending types, which 

17 concentration of lending types, resulted in the 

18 highest number of failures, the greatest number of 

19 loss. And it is -- construction certainly stands 

20 out compared to the -- C&I is next, but it is sort 

21 of a distant second, and it is based upon not only 

22 this crisis but the previous one as well. In the 
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1 '80s and '90s, you know, heavily concentrated C&D 

2 lenders failed at a much higher rate.

3 In terms of the question -- we often 

4 get -- in notice and comment rulemaking, we often 

5 get comments saying, "Why don't you incorporate 

6 underwriting," which is kind of what you're saying. 

7 And, obviously, we don't collect data which 

8 directly speak to underwriting. I mean, we are 

9 including certain ratios that maybe indirectly get 

10 at it -- past dues, chargeoffs, profitability. 

11 You know, to be any more granular would require an 

12 additional data collection, which we didn't think 

13 there was much appetite. We didn't think there was 

14 much appetite for that. So we were trying to deal 

15 with the data that we had. 

16 MEMBER TURNER: I guess what I'm saying 

17 is maybe a little bit different than underwriting. 

18 It is really project tied. I mean, I see a 

19 difference between a land development loan or a 

20 speculative construction loan versus our customer 

21 wants to build a new headquarters and is willing 

22 to put acceptable levels of equity in it, or we have 
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1 a customer that wants to build a long-term care 

2 facility and is willing to put acceptable levels 

3 of equity.

4 I mean, my guess is those didn't present 

5 any greater levels of default in the last crisis 

6 or the one before that than other kinds of lending. 

7 I may be wrong, and I just -- you know, I don't know 

8 if you guys have the data to determine that, or 

9 maybe you don't.

10 MS. ELLIS: No, really -- no, what 

11 you're saying intuitively makes sense. I mean, I 

12 wouldn't be surprised if that were the case. We 

13 don't have the data, and maybe someday when the 

14 industry is -- when the data -- when collecting and 

15 reporting the data is maybe a little easier --

16 MEMBER TURNER: Right.

17 MS. ELLIS: -- we'll be able to capture 

18 things like that.

19 MS. RYAN: Anything else? Okay. If 

20 not, thanks, Diane and Matt.

21 So now we're going to turn to consumer 

22 compliance issues, and among various things to be 
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1 discussed will be affordable mortgage lending 

2 guide, flood insurance issues, consumer compliance 

3 rating systems, and the Military Lending Act. And 

4 so to discuss these issues joining us are Mark 

5 Pearce, Director of the Division of Depositor and 

6 Consumer Protection, and we have Luke Brown and 

7 Janet Gordon, who are associate directors in that 

8 same division.

9 So at this stage I will turn the mic over 

10 to Mark.

11 MR. PEARCE: Thanks, Barbara. Thanks 

12 for having me back. Before turning over to Janet 

13 and Luke to talk about some of the things we have 

14 been doing in our Division of Depositor and 

15 Consumer Protection, or other regulatory matters 

16 that may be of interest, I was struck by the 

17 conversation earlier talking about recruiting and 

18 training the next generation of community bankers 

19 and the suggestion by a number of you of going down 

20 earlier and reaching people earlier with financial 

21 capability, financial literacy, and getting them 

22 into the banking system.
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1 And I wanted to at least note 

2 last -- last Friday?

3 MS. GORDON: It was indeed.

4 MR. PEARCE: Last Friday we had a youth 

5 savings symposium. We had been running a pilot 

6 project for a couple of years where we -- bringing 

7 together bankers and schools together to help 

8 educate young people about financial matters and 

9 also pairing them up with actual accounts in 

10 insured depository institutions.

11 And I think -- as you were talking, one 

12 of the things that really just struck me about our 

13 youth savings pilot and our symposium were the 

14 stories we had of young people. In some cases, 

15 they have been involved in operating a bank branch, 

16 a student-run bank branch, you know, individuals 

17 in the school. And that process has not only been 

18 helpful in promoting financial education and 

19 literacy, it has not only been helpful in helping 

20 them establish a banking relationship, but it has 

21 also led them to demonstrate interest in the 

22 banking sector. 
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1 And so we actually had some really nice 

2 stories of -- of at least a couple of individuals 

3 who had really no interest or awareness of banking 

4 at all, got involved through, you know, the 

5 opportunity to serve in one of these student-run 

6 branches, and then have pursued since then a career 

7 in the banking industry.

8 So your point is right on tap and I think 

9 really resonates with our experience with the youth 

10 savings program that we have been operating.

11 That is actually a pretty nice segue to 

12 turn it over to Janet Gordon. Janet is the 

13 Associate Director of our Community Affairs 

14 Program, and her area of responsibility includes 

15 the youth savings program I just mentioned, but 

16 also a number of other areas that we have been 

17 working on to try to connect populations, 

18 consumers, small businesses, communities, to the 

19 insured financial institution sector, so believing 

20 that promoting public confidence depends in part 

21 on how well the insured financial -- insured 

22 depository institutions serve the broadest 
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1 possible set of our population's financial needs.

2 And so Janet is here to talk about the 

3 one effort that we have been working on related to 

4 helping community bankers in particular serve 

5 mortgage credit needs of members of their 

6 community. So I will turn it over to Janet in a 

7 minute, and then we have Luke Brown here, who is 

8 the Associate Director of our Policy Group, to talk 

9 about some of the regulatory -- recent regulatory 

10 changes that may be of interest to you.

11 So, with that, I will turn it over to 

12 Janet.

13 MS. GORDON: Great. Thanks, Mark. 

14 It is great to be here. I haven't been here before. 

15 And as Mark explained, I manage the community 

16 affairs staff, including staff in our regional 

17 offices.

18 Today I am introducing this committee 

19 to the affordable mortgage lending guide, an FDIC 

20 publication, and the affordable mortgage lending 

21 center, which is an online resource. So you all 

22 have the brochure in your packet.
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1 These resources showcase affordable 

2 lending programs in three parts. Part 1 covers 

3 federal and government-sponsored enterprise 

4 programs, and those programs are listed on the 

5 brochure. And that publication and the guide and 

6 the online resource was released on September 15th, 

7 in conjunction with a roundtable we held in St. 

8 Louis, Missouri.

9 Part 2 covers state Housing Finance 

10 Agency programs. And if all goes well, that should 

11 be released today or tomorrow, and it looks like 

12 this with a map of the states. And, of course, with 

13 technology, online you click on a state and you get 

14 the right programs for that state. So we hope 

15 to -- we hope all that clicking works.

16 And, finally, at the end of the year, 

17 we will publish a guide on the Federal Home Loan 

18 Bank programs. So it will really cover the 

19 waterfront. And the links to access these 

20 resources are at FDIC.gov/mortgage lending.

21 So these tools are really designed, as 

22 Mark said, to be resources for community banks and 
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1 others who want an authoritative overview of 

2 affordable mortgage lending programs, and they 

3 also provide straightforward information on how 

4 banks in particular can access the programs, 

5 whether as an originator, a correspondent, or a 

6 direct seller. So it's unbiased in terms of how 

7 you get into the business, and really encourages 

8 people to explore however they can the way of 

9 accessing these programs that is right for them. 

10 We know it's not one size fits all.

11 So I'd like to just give you a few more 

12 minutes about why we did the guide, its origin and 

13 purpose, the scope, and then talk to you a little 

14 bit more about our plans for outreach and maybe 

15 there are some ways we can work together with one 

16 or all of you to expand knowledge and awareness.

17 So in the beginning, we know that the 

18 chairman and DCP leaders talk a lot about FDIC's 

19 commitment to economic inclusion, and that is most 

20 of what the community affairs group does. We try 

21 and get -- promote the widespread availability and 

22 effective use of safe, affordable, and sustainable 
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1 products from insured depository institutions in 

2 communities, so, really, try and connect banks and 

3 communities.

4 We recognize that mortgage lending is 

5 one product that can certainly be a significant 

6 gateway, and it's a gateway to mainstream banking. 

7 It is also often an important part about how 

8 community banks get connected to customers for very 

9 long-term relationships. It's nothing longer 

10 than a 30-year mortgage, keep selling people 

11 different things, right? That statement is not 

12 fair. And it also gives you a lot of community 

13 visibility.

14 So about two years ago we met with a 

15 series of outreach events with community bankers. 

16 We went to Las Vegas and Chicago for roundtables, 

17 and then we also met individually to understand how 

18 bankers were really using these programs and 

19 products in what we will call the new environment, 

20 right? Post of the new regs, post the crisis, 

21 things are just starting to pick up.

22 And we heard from bankers that there are 
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1 still a number of barriers to affordable lending. 

2 I mean, for one, supply of affordable housing is 

3 still a problem, still coming -- in some places 

4 still a problem. We also heard from lenders that 

5 the complexity and number of affordable mortgage 

6 programs can be a barrier, and that it might 

7 sometimes make it difficult even to know where to 

8 start to make those business relationships happen.

9 And then others told us that they are 

10 doing a great job. They have no problem getting 

11 access, and they gave us some sort of best practices 

12 ideas. And they also suggested we collect and 

13 organize this information, so that's what the 

14 guides were designed to do, and we did it the modern 

15 way, mostly online.

16 The coverage is pretty comprehensive. 

17 The guide and the center cover guarantee, loan 

18 purchase programs, tax credit, subsidy programs, 

19 even different kinds of home ownership education 

20 requirements, and covers federal GSE, and 

21 actually, as of today, the state programs.

22 So, and you'll find the requirements of 
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1 each program as well as, as I said, how bankers 

2 particularly access them, and it discusses 

3 technical information about borrower and loan 

4 criteria. So we know that this is current today, 

5 but we will have to maintain it over time as well, 

6 because nothing changes faster than the housing 

7 market.

8 In the community banker conversation

9 sections of the guide, so we had these 

10 conversations and we actually put summaries of them 

11 in the guide, we specifically focused on how the 

12 banks were using the programs. And in Part 1 we 

13 have a lender who talks really about how 

14 significant the VA program is in his market -- of 

15 course, in some markets, there is a particular 

16 concentration of veterans -- and how his 

17 relationship with a partner investor allows even 

18 his very small institution to originate into the 

19 market.

20 And in Part 2 a Kentucky banker talks

21 about using the mortgage tax credit certificate, 

22 which is a program that is not all that well-known 
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1 but which state housing finance agencies manage, 

2 and his comment was that it really promotes 

3 affordability for low and moderate income buyers 

4 and is actually worth the time to fill out two extra 

5 forms. And we all know that these programs 

6 generally have a few extra forms.

7 (Laughter.)

8 MS. GORDON: But his feeling was that, 

9 you know, it really expanded his market enough to 

10 justify that. And the Part 2 guide with the state 

11 housing financing agencies, which is hot off the 

12 press, and if you want actual copies of the guides, 

13 they are going to be outside, but we understand that 

14 you might prefer to point and click.

15 So it really does focus on the full 

16 range of state programs. And our understanding 

17 from both the states and the federal home loan banks 

18 is that even if bankers are engaged they may not 

19 always use the full range of programs, or they may 

20 not even have a good menu, and what we learned is 

21 that there is not even one place where all of the 

22 state programs are on one website. And now there 
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1 is, and we are happy to do that.

2 So our efforts continue to encourage 

3 knowledge-sharing about affordable lending. We 

4 have team members who have organized or presented 

5 at about 18 affordable housing roundtables or 

6 events this year, whether sponsored by us and our 

7 fellow regulators or sponsored by state housing 

8 organizations.

9 We have been trying to get the word out, 

10 and we have reached out to ABA and ICBA to engage, 

11 and they put us in their newsletters. And we're 

12 thinking about how to work together to sponsor 

13 workshops.

14 But we are very interested in your 

15 feedback on the center site, and you can click to 

16 provide it, or you can email us. And you can also 

17 sign up for our updates, you can become a 

18 subscriber, and you can feel free to contact me 

19 directly or any of our regional team members -- and 

20 the regional addresses are on the back -- to 

21 recommend if you think we should present somewhere, 

22 if we should convene bankers and any of your 
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1 favorite or not-so-favorite federal program 

2 leaders.

3 We have managed to get, you know, FHA, 

4 VA, and USDA to the same event. And, really, they 

5 have been increasingly improving their 

6 presentations to us. I think they are beginning 

7 to see how even better to connect to community 

8 banks, and that's one of our goals as well, to sort 

9 of bring them to the table with more appetite for 

10 certain community banks.

11 And we really hope that the programs in 

12 the guide represent an untapped potential that can 

13 be used to improve and strengthen the pathways for 

14 home ownership for creditworthy borrowers who have 

15 affordability problems, and also hopefully 

16 represent business opportunities for community 

17 banks.

18 So we are interested in any ideas you 

19 have. A website is always a moving target, and we 

20 would like to improve it and strengthen it.

21 MR. PEARCE: Thanks, Janet. Luke, do 

22 you want to provide an update on some of the 
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1 consumer compliance issues?

2 MR. BROWN: Sure. Good morning, 

3 everybody. I am going to walk you through several 

4 consumer compliance topics, including one focused 

5 on flood insurance, a proposal that we recently 

6 issued, a ratings guidance update, and a summary 

7 of our MLA implementation work.

8 On Monday of this week, the FDIC and 

9 several other agencies announced a joint notice of 

10 proposed rulemaking related to flood insurance. 

11 You might have seen that come out. The proposal 

12 would specifically require that lenders accept 

13 flood insurance policies that meet the definition 

14 of private flood insurance under the 

15 Biggert-Waters Act.

16 The proposal is open for public 

17 comment. It has not yet been published in the 

18 Federal Register. We expect that to be published 

19 soon, but it will be open for 60 days after the 

20 publication of it in the Federal Register.

21 By way of background, the federal flood 

22 insurance statutes may federally subsidize flood 
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1 insurance available to certain owners of property. 

2 The laws also require regulated lending 

3 institutions to ensure that flood insurance is 

4 purchased in connection with loans secured by such 

5 properties located in areas having special flood 

6 hazards.

7 The agencies believe that the 

8 congressional intent of Biggert-Waters was to spur 

9 a private flood insurance market. Under 

10 Biggert-Waters, lenders must accept in 

11 satisfaction of the mandatory purchase requirement 

12 policies issued by private insurers to satisfy the 

13 requirements of the Act.

14 In October of 2013, the agencies 

15 previously issued a proposal addressing flood 

16 issues focused on private but also focused on 

17 several other topics related to Biggert-Waters. 

18 Based on the response that we received, we thought 

19 it was best to reissue a proposal, which is what 

20 we did on Monday, to solicit additional comment.

21 One of the key issues, actually, that 

22 was raised through that 2013 process was related 
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1 to concerns about how you verify that the private 

2 policy actually meets all of the requirements and 

3 the challenges around the verification. Public 

4 commenters noted that few lenders have the capacity 

5 to determine whether private flood insurance 

6 policies meet all the requirements.

7 After consideration of the comments, 

8 the agencies included in the new proposal a 

9 compliance aid, and it's a special provision that 

10 assists consumers and lenders in determining 

11 whether and how a policy actually meets the private 

12 flood insurance requirements. The compliance aid 

13 would allow an insurance company to self-identify 

14 that its policy complies with private flood 

15 insurance requirements and then the lender would 

16 be required to accept that policy pursuant to 

17 Biggert-Waters.

18 Private flood insurance policies are 

19 often lengthy, and they are complicated, and they 

20 require a certain amount of due diligence from 

21 banks, and so that is important to remember. In 

22 developing the proposal, the agencies worked to 
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1 mitigate such challenges.

2 The agencies believe that the 

3 compliance aid would assist a lender in reviewing 

4 flood insurance policy for compliance purposes. 

5 So, for example, the compliance aid would include 

6 an insurance company's written summary 

7 demonstrating how the policy meets the private 

8 flood insurance requirements. And essentially 

9 the insurance company would have to tie the 

10 requirements to specific provisions in the policy, 

11 which we think will be helpful for particularly 

12 community banks.

13 In addition to addressing private flood 

14 insurance policies that a lender must accept 

15 pursuant to Biggert-Waters, the proposal also

16 expressly permits a lender to exercise discretion 

17 to accept other flood insurance policies issued by 

18 private insurers. The discretionary exception 

19 provisions would provide lenders with flexibility 

20 to accept certain policies while also having in 

21 place certain safeguards to make sure that both the 

22 property and the owner are protected going forward.
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1 One final portion of the proposal 

2 focuses on mutual aid societies. The proposal 

3 includes an exception that would allow, on a 

4 case-by-case basis, a lender to accept coverage 

5 provided by a mutual aid society such as an Amish 

6 Aid Plan. These plans are sometimes offered to 

7 members of religious communities who do not 

8 purchase insurance from traditional insurance 

9 companies.

10 That is a topic that came up through 

11 public comments. It is not something that we see 

12 very often, but the agencies thought it needed to 

13 be addressed because there would be questions going 

14 forward whether, for example, Amish aid policies 

15 would be consistent with the requirements of 

16 Biggert-Waters, so an exception was created in the 

17 proposal.

18 I now want to update you on our work on 

19 the interagency consumer compliance ratings. For 

20 those of you that were at the July meeting, you 

21 might recall that in May the agency issued a new 

22 proposal focused on revising consumer compliance 
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1 ratings. That proposal was issued in recognition 

2 of the significant changes that have been made in 

3 both supervision as well as the banking industry 

4 since we adopted the original ratings back in 1980. 

5 So we thought it was important to focus on that.

6 The rating system, of course, is used 

7 by examiners to evaluate banks' adherence to the 

8 consumer compliance laws and regulations. Based 

9 on their review, of course, they assign a rating 

10 to each financial institution.

11 The revisions proposed in May would 

12 more fully align our rating system with the way we 

13 actually examine today. And as those ratings are 

14 being developed, there is no new expectation of 

15 higher responsibilities for institutions. 

16 Since the public comment period ended 

17 last July, we have been really working in earnest 

18 to get the proposal completed by the end of the 

19 year. I think some good work has been done. We 

20 are really close to releasing it, and I'm confident 

21 you will see it soon. But I just wanted to give 

22 you an update on where we are on that.
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1 And, finally, I wanted to also talk a 

2 little bit about our work on the Military Lending 

3 Act. We have been doing some implementation work. 

4 We know that that is a new rule that just became 

5 effective in October, and so we wanted to make sure 

6 that we were providing some technical assistance 

7 and information wherever we could.

8 And, of course, the rule was issued by 

9 DoD in July of 2015, and it expanded financial 

10 protections provided to service members and their 

11 family. It also addresses a wider range of credit 

12 products that fell outside of the scope of the 

13 preexisting rule, the rule to finance consumer 

14 credit consistent with credit that is subject to 

15 truth in lending requirements, so much broader than 

16 the previous definition.

17 The MLA caps military annual percentage 

18 rates on covered transactions at 36 percent. 

19 There are other requirements. But also, 

20 importantly, there is a safe harbor, and so under 

21 the rule it grants lenders a safe harbor for the 

22 purpose of verifying eligibility of service 
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1 members and their family.

2 The safe harbor applies if a bank uses 

3 either or both of the following two verification 

4 methods, one that is administered through 

5 DoD -- you might be familiar with their MLA data 

6 baseline -- or/and consumer reports from a 

7 nationwide credit reporting agency.

8 And, again, related to the work that we 

9 have been doing, on October 17th of 2016, we issued 

10 a financial institution letter, FIL-65-2016, 

11 announcing the release of interagency MLA 

12 examination procedures, which obviously we worked 

13 on collectively with the agency as to ensure that 

14 we are working consistently as we examine our 

15 institutions.

16 FDIC examiners will use these 

17 procedures to evaluate banks' compliance with the 

18 rule. Also, the procedures hopefully will be of 

19 assistance to institutions that want to have a 

20 better sense of the kind of things that our 

21 examiners will be looking at as they are in your 

22 bank. So those things -- those are out in the 
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1 public realm and in our compliance manual, which 

2 also is on our website.

3 And also, in these materials, we noted 

4 that during early examinations examiners will 

5 evaluate banks' compliance management systems and 

6 overall efforts to come into compliance. 

7 Examiners will consider banks' implementation 

8 plans, including actions taken to update policies, 

9 procedures, and processes, its training of 

10 appropriate staff, and its handling of early 

11 implementation challenges. 

12 You know, our examiners understand that 

13 this is a new rule. There are some complications 

14 around verification and other issues, and they will 

15 be mindful of that as they exam for MLA going 

16 forward.

17 In closing, I just wanted to mention we 

18 have a number of resources that we are making 

19 available between now and the end of the year, in 

20 cooperation with other agencies, so we've got some 

21 webinars scheduled. One is being held next week. 

22 It is focused on overdraft topics, overdraft 
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1 requirements, and best practices. 

2 And we issued a FIL announcing it. The 

3 FIL was on October 17th, but also in 66-2016. So 

4 if you have compliance officers that want to hear 

5 from the agencies on overdrafts, please tune in to 

6 the November 9th webinar next week.

7 We also have scheduled a webinar for 

8 November 29th focused on NCRA Qs and As that the 

9 agency issued last summer. I think it was July 

10 that we issued them. And also, on December 1st at 

11 3:00 p.m., there will be an interagency webinar 

12 focused on the MLA requirements.

13 In terms of the CRA and the MLA 

14 webinars, which will be taking place, we haven't 

15 publicly announced those yet, but a FIL will be 

16 issued soon with the date and time and particulars 

17 on those.

18 So with that, that's my summary on the 

19 things that are going on in the policy area.

20 MR. PEARCE: Great. So we welcome any 

21 feedback on either the work that we're doing on the 

22 affordable mortgage lending guide and efforts to 
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1 support community banks and serving their 

2 customers in that area, or any questions related 

3 to the consumer compliance update. As usual, 

4 there is plenty going on there. If you have any 

5 questions related to that, happy to entertain them.

6 MEMBER HOWARD: I just have a 

7 clarification question for Luke. The Military 

8 Lending Act, the statement of applicability to 

9 institutions under a billion, is there a difference 

10 between the requirements for institutions over a 

11 billion?

12 MR. BROWN: No, not that I'm aware of.

13 MR. PEARCE: So you re probably 

14 referring to when -- as part of our community 

15 banking initiative of several years back, when we 

16 issue -- in the financial institution letter, we 

17 put a specific statement as to whether it applies 

18 to institutions below $1 billion in assets, so in 

19 case there are some differences we are able to 

20 articulate them there.

21 MEMBER HOWARD: So there are no 

22 differences.
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1 MEMBER HARTINGS: I had a question on 

2 flood insurance. Like many banks, we have very few 

3 flood policies. So if someone comes to us and 

4 they've got a private insurer, where is the best 

5 place to go for that resource, the information you 

6 were talking about, the checklist? Because we may 

7 have one a year or one every other year. Where 

8 would we go as a community banker?

9 MR. BROWN: Well, first of all, it's a 

10 proposal, which we just issued, and hopefully it 

11 becomes final and then it will be in place. So if 

12 it becomes final, as we articulated, there -- the 

13 rule itself has very specific information. And so 

14 the way it is set up, the insurance company would 

15 be responsible for including basically on top of 

16 the policy a statement that says, "Here are the 

17 statutory requirements, here are the main 

18 components of this policy, and here is how they are 

19 all consistent." And then the bank will take that 

20 information and they can rely on it and know that 

21 it complies.

22 But, also, I think the -- I'm forgetting 
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1 the name of the national flood insurance 

2 association. I think that they probably would be 

3 a helpful resource to you all as part of this 

4 process. But, again, this is a proposal, and we 

5 think this particular proposal actually will be 

6 very helpful in terms of the kind of concerns you 

7 are raising, because private insurance policies 

8 can be different depending on what they are 

9 covering, obviously.

10 MR. PEARCE: And just to follow up a 

11 little bit, you know, this a little bit of an 

12 unusual statute in that it requires banks under 

13 certain circumstances to accept a private flood 

14 insurance policy if it meets the definition. 

15 Meeting the definition is not something that was 

16 intuitively obvious to folks that are not in the 

17 insurance industry. 

18 And so we worked with other agencies and 

19 spent a lot of time to try to develop a process by 

20 which it would be simpler for a community banker 

21 in particular to be able to identify on the very 

22 beginning, the cover sheet of the policy, hey, here 
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1 are the requirements under the statute, and here 

2 is the provision in the insurance policy that you 

3 can look to that will say, yes, this meets that one, 

4 this meets that one. So you would have more 

5 comfort taking those policies in that situation.

6 MEMBER HOWARD: Okay. That's great. 

7 Thank you.

8 MEMBER DAKRI: Just to follow up on 

9 that, the certifications that are from the 

10 insurance issuer, we would be -- are we going to 

11 be able to verify --

12 MR. BROWN: That's a good question. 

13 It's a presumption, but it's not a safe harbor, 

14 because ultimately the bank is responsible. But 

15 based on the way the statute is written, it can't 

16 be a safe harbor, but we tried to put a process in 

17 place to protect the bank. But we do believe that 

18 since the bank would be relying on the insurance 

19 company, the bank could have an action against the 

20 insurance company if it wasn't consistent.

21 I'm trying to make it as easy as 

22 possible within the parameters of the statute that 
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1 we have to work with.

2 MEMBER THOMPSON: Mark, the technical 

3 videos are always so good. Is there any plans for 

4 one on MLA?

5 MR. PEARCE: Well, there might be now.

6 (Laughter.)

7 MR. BROWN: Actually, we have been 

8 talking about our agenda for 2017 and what would 

9 be a good topic to cover. Quite frankly, also, one 

10 thing that we consider as we develop our videos is 

11 if there are other resources out there. MLA is 

12 unique in that it's Dodd-Frank. Sometimes we look 

13 to the CFPB to see what resource there are out 

14 there. If it makes sense, certainly we will 

15 seriously consider it.

16 MR. PEARCE: Yes. You know, as Doreen 

17 mentioned earlier in our community banking update, 

18 we have a committee which Luke services on that is 

19 reviewing the videos as we try to come up with our 

20 agenda for next year. And MLA has been one that 

21 I know has been bandied around a little bit, and 

22 we'll see whether that one makes the cut or not.
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1 MS. RYAN: Well, any other comments? 

2 If not, thank you, Janet, Mark, and Luke. 

3 So we're going to break for lunch now.

4 CHAIRMAN GRUENBERG: We are ahead of 

5 schedule. That's great.

6 MS. RYAN: And so I think we'll 

7 reconvene around 1:00, 1:15-ish. Thanks.

8 (Whereupon, the above-entitled matter 

9 went off the record at 11:41 a.m. and resumed at 

10 1:15 p.m.)

11 MS. EBERLEY: All right. I think 

12 we're ready to kick off our next session.

13 We are going to be covering some 

14 developments in the risk management policy area, 

15 and presenting this afternoon will be Rae-Ann 

16 Miller, who is the Associate Director for Policy 

17 here in Washington, and Shannon Beattie, who is a 

18 Section Chief in our Accounting and Disclosure 

19 Unit.

20 So, Rae-Ann, I will turn it over to you 

21 to kick us off.

22 MS. MILLER: Thanks very much. I'm 
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1 going to talk first about some guidance we issued 

2 over the summer on proposed third party lending 

3 guidance. We issued this for public comment back 

4 in July of this year under Financial Institution 

5 Letter 50-2016. And we welcomed comments on all 

6 aspects of the proposal but asked 10 specific 

7 questions in that release, focusing on scope of the 

8 guidance, the risks we enumerated in there, risk 

9 management programs, and supervisory and 

10 examination considerations.

11 So the proposed guidance provides 

12 information on third party lending and supplements 

13 the longstanding safety and soundness in consumer 

14 compliance principles that were addressed in the 

15 guidance for managing third party risk. That was 

16 issued in 2008 under Financial Institution Letter 

17 44-2008. I do remember that one, by memory, which 

18 I referred to as the 2008 guidance.

19 And also with the 2008 guidance the 

20 proposed guidance indicates that a bank's board and 

21 senior management are ultimately responsible for 

22 managing third party arrangements as if the 
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1 activity were handled within the bank. The 

2 proposed guidance goes on to point out that 

3 managing and controlling risks can be challenging 

4 when origination volumes are significant or there 

5 are numerous third party relationships involved.

6 The proposed guidance defines third 

7 party lending as, and I'm going to quote, "a lending 

8 arrangement that relies on a third party to perform 

9 a significant aspect of the lending process." And 

10 we talk about three different ways that a third 

11 party arrangement might be covered by the guidance.

12 And the first is originating loans 

13 through third parties. And, for example, here we 

14 mean arrangements where institutions partner with 

15 an entity that lacks the necessary licenses or 

16 charter to lend on its own behalf in various states. 

17 Then we talk about originating loans through third 

18 party lenders jointly with third party lenders, and 

19 what we mean there are -- for example, are agent 

20 relationships in which the institution authorizes 

21 the agent to originate loans on its behalf in some 

22 situations. You may have many hundreds or 
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1 thousands of these agents.

2 And the third way is using platforms 

3 developed by third parties, and the example here 

4 would be so-called white label lending products in 

5 which the third party provides sort of an 

6 end-to-end platform and service for the 

7 institution. 

8 The proposed guidance does not single 

9 out any particular type of third party lending 

10 arrangement. But regardless of the particular 

11 type of third party lending relationship, 

12 institutions that rely on a third party to perform 

13 a significant aspect of the lending process are 

14 expected to have a robust risk management framework 

15 in place to address the associated risks.

16 The 2008 guidance provides what was a 

17 general framework for implementation of effective 

18 third party risk management process, and it was 

19 principles-based and also covered third party 

20 lending arrangements. But the proposed guidance 

21 supplements and expands on those principles by 

22 establishing more specific expectations on how 
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1 those principles should be applied in third party 

2 lending activities. 

3 Now, there are several examples of 

4 that, but I will give one. The 2008 example, the 

5 proposed guidance addresses potential risks and 

6 expectations for establishing a risk management 

7 process, but the proposed guidance goes into a lot 

8 more specificity as those processes relate to 

9 lending.

10 So the proposed guidance also addresses 

11 supervisory considerations related to third party 

12 relationships, which are consistent with 

13 outstanding safety and soundness principles such 

14 as Appendix A to Part 364 of the FDIC rules and 

15 regulations. And that addresses, among other 

16 things, internal controls and information systems 

17 and loan documentation credit underwriting asset 

18 quality and earnings. And, again, it is not just 

19 consistent with Part 364, but also the existing 

20 guidance from 2008.

21 The proposed guidance also talks about 

22 that, like any third party relationship, 
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1 partnering with third party lenders does not 

2 relieve the institution from adherence to safe and 

3 sound banking practices, and compliance with 

4 applicable laws and regulations, and those include 

5 consumer protection and fair lending requirements, 

6 it includes Bank Secrecy Act and anti-money 

7 laundering requirements, and as well as 

8 requirements to safeguard customer information.

9 Consistent with existing practices, 

10 the proposed guidance also indicates that 

11 institutions engaging in significant lending 

12 activities through third parties will generally 

13 receive increased supervisory attention. The 

14 proposed guidance states that arrangements will be 

15 considered significant if, for example, they have 

16 a material impact on revenues, 

17 earnings -- revenues, expenses, or capital, 

18 involve large lending volumes in relation to the 

19 bank's balance sheet, or involve multiple third 

20 parties, or present material risk of consumer harm.

21 The comment period just closed last 

22 week on October 27th. So far we have received 28 
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1 comment letters. I've got a call that I have one 

2 more coming. We're in the process of reviewing 

3 those letters, and certainly we will consider all 

4 of those issues as we move to finalize the guidance. 

5 We have those letters publicly posted on our 

6 website for those who are interested.

7 Doreen, save questions for the end, or 

8 do you want to -- 

9 MS. EBERLEY: Sure. Is that okay? 

10 MS. MILLER: Okay. I'll do a quick 

11 EGRPRA update. So I'm going to provide you with 

12 a quick EGRPRA update. And for those of you who 

13 haven't heard before, EGRPRA -- it's called the 

14 Economic Growth and Military Paperwork Reduction 

15 Act of 1996 -- requires that the banking agencies 

16 and the FFIEC review their regulations at least 

17 once every 10 years. And the purpose is to 

18 identify outdated or unnecessary regulations and 

19 to consider how to reduce regulatory burden on 

20 insured depository institutions, while at the same 

21 time ensuring their safety and soundless and that 

22 of the financial system.
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1 The agencies are also required to 

2 categorize and publish the regulations for 

3 requirement and to submit a report to Congress that 

4 summarizes any significant issues that are raised 

5 by the commenters, and the relative merits of those 

6 issues.

7 So the agency has received over 250 

8 written comments from the four Federal Register 

9 notices that we did, and we have numerous comments 

10 from the -- over 1,000 participants in our outreach 

11 sessions. And we did six and I recognize some 

12 faces and talked to a bunch of you during that.

13 There are six areas that received the 

14 most comment in that process, and those were the 

15 examination cycle, issues around appraisals and 

16 evaluations, call reports, comments on Bank 

17 Secrecy Act and anti-money laundering laws, the 

18 Community Reinvestment Act, and issues around 

19 capital.

20 So we continue to review those comments 

21 on all of the areas, but I wanted to touch on a few 

22 where we have already taken some action. So with 
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1 regard to the examination cycle following 

2 legislation earlier this year, the FDIC issued an 

3 interim final rule to make the 18-month examination 

4 cycle available to more community banks by

5 increasingly eligible threshold for well-rated and 

6 well-managed institutions from 500 million in 

7 total assets up to one billion.

8 The FDIC board approved a final rule 

9 adopting this change on October 19th. With 

10 respect to appraisals and evaluations, so directly 

11 responding to issues raised by a group of 

12 commenters, particularly those in the rural 

13 outreach sessions, the agencies issued an 

14 interagency advisory on use of evaluations in real 

15 estate-related transactions, and that was in March 

16 of 2006 through FIL 16-2016. 

17 This advisory talks about existing 

18 supervisory expectations, guidance, and industry 

19 practice for using evaluations instead of 

20 appraisals when that is appropriate and authorized 

21 under the regulations.

22 And with respect to call reports, I am 
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1 going to turn it over to Shannon in just a second, 

2 and she is going to talk more specifically about 

3 the call report efforts. We got a number of 

4 comments on BSA, particularly relating to the 

5 statutory thresholds that are contained within 

6 those regulations, their statutory thresholds. 

7 And we have shared those comments with the 

8 financial crimes enforcement network who are the 

9 purveyors of those regulations.

10 So -- and capital. And capital. To 

11 assist bankers in complying with the revised 

12 capital rules, the FDIC-conducted outreach and 

13 technical assistance, and that was designed 

14 to -- specifically for community banks. We 

15 published a community bank guide, released an 

16 informational video, and conducted a number of 

17 face-to-face banker information sessions in each 

18 of the six regions to discuss the revised rules most 

19 applicable to community banks.

20 And, also, under the major areas, it was 

21 also our intention to continue to look for ways to 

22 reduce or eliminate outdated or unnecessary 
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1 requirements. One of the themes was, wherever 

2 there is paper, maybe we can reduce some paper. 

3 Since the committee last convened, the FDIC 

4 announced a program just last week that will allow 

5 insured institutions to voluntarily file audit 

6 reports that are required under Part 363 

7 electronically through the FDIC Connect system, 

8 and we communicated that through FIL 71-2016.

9 So, as I mentioned earlier, we received 

10 a number of comments. We are still reviewing those

11 and still looking for ways where we can take action. 

12 So we're getting ready to conclude the EGRPRA 

13 process very soon, and my expectation is, you know, 

14 we will issue our report shortly thereafter. 

15 And I'm going to turn it over to Shannon 

16 now to talk a little bit more about the call report 

17 efforts.

18 MS. BEATTIE: Thank you. Good 

19 afternoon. I'm going to talk a little bit about 

20 the call report with specific emphasis on the call 

21 report for small institutions. And so in your 

22 materials you do have the press release from the 
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1 FFIEC dated August of this year.

2 So the FDIC and the other banking 

3 agencies continue to move forward with the FFIEC's 

4 community bank call report burden reduction 

5 initiative. Previously, Chief Accountant Robert 

6 Storch has spoken to the advisory committee about 

7 the five action areas that comprise this

8 initiative, and I am going to focus on our more 

9 recent milestones.

10 So the FFIEC did reach a significant 

11 milestone in this initiative in August when it 

12 announced the issuance and invited comment on the 

13 proposal for the new streamlined call report for 

14 small -- eligible small institutions, and those are 

15 institutions with domestic offices only and less 

16 than $1 billion in total assets.

17 These eligible small institutions 

18 represent about 88 percent of all insured 

19 institutions. The proposed new report, which is 

20 designated as the FFIEC 051, is intended to ease 

21 reporting requirements and reduce reporting burden 

22 for small institutions. The overall proposal also 
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1 includes certain proposed burden reduction 

2 revisions to the other two existing call report 

3 forms. That would be FFIEC 031 for institutions 

4 with domestic and foreign offices, and the FFIEC 

5 041, which is for institutions with domestic 

6 offices only.

7 The new FFIEC 051 call report, and the 

8 revisions to the other two existing call reports, 

9 are proposed to be implemented as of March 31, 2017, 

10 that report date.

11 The existing 041 report served as the 

12 starting point for developing the proposed 051 

13 report for the smaller institutions. The changes 

14 have been made to the 041 call report to create the 

15 051 call report, which reduces the length of the 

16 call report and removes a significant number of the 

17 data items currently included in the 041 call 

18 report.

19 These changes also include the addition 

20 of a supplemental schedule containing indicator 

21 questions on certain complex and specialized 

22 activities such as derivatives, the use of the fair 
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1 value option, and the servicing, securitization, 

2 and sale activities. The supplemental schedule 

3 provides a basis for removing all or part of six 

4 schedules and other data items that currently exist 

5 in the 041 report.

6 Other changes made to the 041 call 

7 report to arrive at the 051 call report reflect the 

8 elimination of other data items and the reduction 

9 in the frequency of data collection for data items 

10 that were identified during the regulatory reviews 

11 of the existing call report, and these were 

12 determined to be no longer necessary for collection 

13 from small eligible -- eligible small 

14 institutions.

15 The proposed 051 also removes all of the 

16 data items for which a $1 billion asset size 

17 reporting threshold existed. In addition to the 

18 efforts already made, the agencies plan to prepare 

19 a separate shorter call report instruction booklet 

20 for the FFIEC 051 report.

21 The proposal also notes that eligible 

22 small institutions would have the option to file 
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1 the 041 call report rather than the 051 to allow 

2 timing for transition. So, as I mentioned, the 051 

3 is expected to be -- well, it was proposed to be 

4 effective for March 31, 2017, but institutions 

5 could opt to continue to use the 041 as long as they 

6 needed to.

7 For a small institution otherwise 

8 eligible to file the 051, the institution's primary 

9 federal regulatory agency, jointly with any state 

10 chartering authority, may require the institution 

11 to file the 041 instead based on supervisory needs, 

12 which would consider criteria including, but not 

13 limited to, whether the eligible institution is 

14 significantly engaged in complex, specialized, or 

15 high-risk activities.

16 The agency anticipates requiring 

17 individual small institutions to file the 041 

18 report in only a limited number of cases. And to 

19 ensure this outcome, policy guidance will need to 

20 be developed to ensure a fair and consistent 

21 process for identifying institutions that should 

22 file the 041 rather than the 051.
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1 As noted in the Federal Register notice 

2 for the proposal, the FFIEC and the agencies are 

3 committed to exploring whether the eligibility to 

4 file the 051 can be expanded to additional 

5 institutions beyond those with domestic offices 

6 only, and less than $1 billion in total assets.

7 The deadline for submitting comments on 

8 the proposal was October 14th of this year, 2016. 

9 The FFIEC and the other banking agencies are 

10 currently reviewing the comments received and 

11 determining how to proceed with the proposal.

12 There are also additional efforts to 

13 reduce the call report burden for small 

14 institutions that remain to be taken under the

15 FFIEC's community bank call report burden 

16 reduction initiative. Supporting these efforts 

17 are the ongoing survey of call report data users 

18 from the member agencies, from the FFIEC member 

19 entities that use the call report.

20 Based on the result of these surveys, 

21 the agencies are identifying additional call 

22 report data items that are considered for 
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1 elimination, less frequent collection, or a new or 

2 upwardly revised threshold limit. The results 

3 from these remaining surveys will be incorporated 

4 into call report proposals that are planned to be 

5 published for comment in 2017, and the call report 

6 revisions from these proposals would have a 

7 targeted effective date of March 31, 2018.

8 And that concludes my prepared remarks.

9 MS. EBERLEY: Okay. So we will open it 

10 up for discussion. I might start by saying the 

11 surveys, we have really taken a different approach 

12 with this than traditionally. Whenever a new item 

13 is added to the call report, there is a very robust 

14 vetting process. And through the surveys, we are 

15 actually using that same vetting process for every 

16 single existing line item. So going to the data 

17 users and defending the need for the data line by 

18 line, schedule by schedule.

19 So that effort will continue on and 

20 would be expected to result in additional 

21 eliminations next year, as Shannon said.

22 MEMBER HOWARD: So there was -- as a 
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1 result of the FASB ruling for banks that have equity 

2 portfolios, I think it is 2019 or 2021 when it goes 

3 into effect where you have to run changes in the 

4 portfolio through your income statement versus 

5 your balance sheet through capital.

6 There was some discussion about having 

7 that -- the results of those changes in that 

8 portfolio communicated in the call report kind of 

9 at a place in the call report where it would help 

10 a reader to understand the changes in the income 

11 statement. Has there been any progress on that? 

12 Is that included in what is being proposed?

13 MS. BEATTIE: That issue -- and that 

14 deals specifically with equity securities.

15 MEMBER HOWARD: Right.

16 MS. BEATTIE: And I am aware of that 

17 feedback that we have received for the --

18 MS. EBERLEY: And it is still in the 

19 queue. So the way that the task force on reports 

20 that works on the call reports has positioned its 

21 workflow was to get the reduced content call report 

22 form out first, then go through the rest of the line 
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1 items. And given the fact that we have still got 

2 some time before that ruling goes into effect, that 

3 is a little further along in the workflow, but that 

4 is on the list of changes to be made and we had made 

5 a commitment to do that.

6 MEMBER HARTINGS: Just -- and I applaud 

7 your efforts to reduce that call report burden. 

8 Just from high-level numbers of pages, you know, 

9 the old call report was about 80 pages, and 380 

10 pages of instructions. What does the 051 call 

11 report look like, in number of pages and number of 

12 pages of instructions?

13 MS. BEATTIE: So the 051 call report 

14 will reduce from the 81 pages down to 65 pages, and 

15 we are in the process of reducing the call report 

16 instruction book. So I don't have page numbers to 

17 give you on that right now, but certainly those 

18 instructions related to the schedules that have 

19 been removed will comprise a good portion of the 

20 instructions that are removed.

21 MEMBER HARTINGS: Super. Thank you.

22 MEMBER BAER PAINE: Just a comment, and 
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1 I know that you're still working on the process, 

2 but everybody that I have talked to that is taking 

3 a look at the changes feel like it is going to be 

4 a net zero time savings effect, some of which 

5 obviously, if they're between that 50 and 300, in 

6 that zone, just a suggestion, when you're looking 

7 at things and you say, "We need to gather this 

8 information quarterly," while we're going to go 

9 semi-annually, unless it's annually it's not too 

10 much of a time savings, and so we will maybe 

11 consider that.

12 And then you're replacing one number 

13 with four questions, you're actually adding some 

14 more, so -- in some specific questions, you know, 

15 yes, noes, are easier. It's not a number, but it 

16 was just one number to begin with. So just on some 

17 of those things, and maybe when you're visiting, 

18 feel free to call any of us at any time and see how 

19 easy it is to compile some of the information, and 

20 other information I'm sure you do that already.

21 MS. MILLER: Well, we actually did that 

22 as part of this process. We sat with nine 
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1 institutions and actually watched them prepare the 

2 call report. I mean, not like standing over their 

3 shoulder, but I'm sure spoke with them during a 

4 couple of days, and Bob Storch, our Chief 

5 Accountant, participated in that.

6 All call report changes are put out for 

7 comment. We did get a lot of comments on this one, 

8 but in past years very few people ever commented 

9 on call report changes. So it's really helpful to 

10 hear your comments. And as Shannon mentioned, 

11 this is not the last of the changes, and we will 

12 put the future ones out for comment as well, so, 

13 you know, really appreciate the comments and want 

14 to have you as part of this process.

15 MEMBER HOWARD: You mentioned that 

16 under consideration would be the 051 for banks 

17 larger than $1 billion. Do you have a sense of a 

18 time frame and are you looking at like maybe larger 

19 than $5 billion or?

20 MS. EBERLEY: And, I don't have a 

21 response for that at that point.

22 MEMBER HOWARD: Well, 4.5.
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1 MEMBER DAKRI: Going into the group 

2 updates, you had been sharing that, say, Ms. Adams, 

3 for example, USA is really a FinCEN in issue.

4 So, is that basically FDIC's kind of 

5 like, well, we'll get on the FinCEN everyone's 

6 supposed to do, is that where we stand on that in 

7 terms of CTRs and things of that nature?

8 MS. EBERLEY: So, statutorily, we're 

9 required to --

10 MEMBER DAKRI: Is there any ration?

11 MS. EBERLEY: Absolutely, all the 

12 time.

13 And, as a matter of fact, last year, we 

14 have FinCEN come to the committee, it might have 

15 been April of this year, but I think it was last 

16 fall. FinCEN came and did a presentation about the 

17 use of the data and it was very informative, 

18 including pointing out that three of our members 

19 of our Advisory Committee had filed a SAR or a CTR 

20 that had led to law enforcement action.

21 Three of the members, they didn't say 

22 who, they said they had to protect the identity of 
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1 the institutions. But, that the information is 

2 absolutely used and fruitful in terms of stopping 

3 terrorist financing and money laundering.

4 We have encouraged them to spread the 

5 word more widely, you know, and really do some 

6 publication of that. It was a very compelling 

7 presentation that we had. And, I'd encourage you 

8 to go back and take a look at it. It's still 

9 available on the webcast.

10 But we did share the comments with them 

11 and hope that we'll have some response.

12 MEMBER BEARD: I agree, you ought to 

13 publish that because there's, at least in our neck 

14 of the woods, a feeling that it's done, but who 

15 knows what happens to and is it of any value.

16 MEMBER HOWARD: I can just comment. 

17 I'm not in Utah, I'm Connecticut and we have 

18 probably a pretty aggressive program in filing the 

19 SARs. The locally enforcing office that receives 

20 information from the SARs that's communicated to 

21 us on a few occasions, how helpful it has been in 

22 their efforts to fight terrorism.
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1 And, to initially, had a perspective 

2 that, gee, it seemed like all of these filings were, 

3 you know, all of these SARs are being filed and 

4 there didn't seem to be much happening with it.

5 My sense is that it takes a long time 

6 to build these, you know, these cases with lots of 

7 information from lots of sources.

8 But, the, you know, the money source is 

9 a critical piece of it.

10 CHAIRMAN GRUENBERG: Doreen, can I 

11 ask, with the recent situation, in a previous 

12 meeting, and since we have some in here who are 

13 members of the committee.

14 Yesterday, I met with banking groups, 

15 questions about the new CECL standards coming 

16 through frequently, I thought maybe we'd spend just 

17 a minute on that and see if there might be any 

18 questions.

19 MS. EBERLEY: Sure.

20 We did conduct this as part of our 

21 ongoing initiatives for community banking, a 

22 webinar with the Independent Community Bankers 
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1 Association back in August, I believe.

2 And, we reached out to the American 

3 Bankers Association to conduct a webinar with them 

4 as well.

5 And, the agencies have on an 

6 interagency basis issued a first piece of guidance 

7 kind of outlining what the requirements are.

8 The work is ongoing with the agencies. 

9 Shannon, I don't know if you can provide more detail 

10 about where we are in the process and what might 

11 be next?

12 MS. BEATTIE: Sure.

13 So, the next effort that the agencies 

14 are coordinating with, and so that would be the 

15 Federal Banking regulatory agencies are 

16 coordinating with some Frequently Asked Questions 

17 that we hope to publish before the end of the year.

18 MS. EBERLEY: But, are there any 

19 specific comments or things you want us to be 

20 thinking about as we're doing this or questions 

21 that you would want answered?

22 MEMBER HARTINGS: You know, I think a 
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1 lot of us are looking at the information we're going 

2 to need to gather. You know, most of us are -- we'd 

3 be late adopters as 2020 of '21, whenever that is.

4 But, we want to get prepared for that. 

5 So, any of that -- any information you can put out 

6 that would be statistical information we're going 

7 to have gather to start building systems.

8 And, then, do you also coordinate that 

9 with our major core providers out there? Because, 

10 of course, they're probably going to have build 

11 something to create some of that information.

12 Have you communicated with them at all?

13 MS. BEATTIE: On an interagency basis, 

14 we have met with some of the service providers to 

15 get an idea of what services they would offer and 

16 what data points they would be looking for.

17 MEMBER HARTINGS; And, have any ideas 

18 that they say that's possible? There's -- is this 

19 an ongoing dialogue with that? Or, that's a major 

20 hurdle that they're going to have gather that 

21 information? Or, bankers are going to have to 

22 supply to them in a different manner, I guess?
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1 MS. BEATTIE: The conversations are in 

2 the early stages of digesting the standard and what 

3 the potential requirements are.

4 I think one conclusion coming out of 

5 that is, because institutions can chose what model 

6 is appropriate for their individual loan 

7 portfolios, that it's going to depend on what type 

8 of model will be used and that will drive what data 

9 is needed.

10 So, I think one way of putting it was, 

11 it's going to be an iterative process as an 

12 institution decides what model they're going to use 

13 for a particular portfolio, that's going to drive 

14 what data points are needed. And, probably some 

15 back and forth to figure out what's going to be the 

16 appropriate models to be using.

17 MS. MILLER: And, to your point, Jack, 

18 you know, we're still digesting it, too, and what 

19 all needs to be done. And, so, coming up with a 

20 plan for that on an interagency basis and adjusting 

21 and doing things as we get feedback is going to be 

22 a huge, huge job.
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1 And, everybody's got a lot of 

2 questions, including us. So, we recognize that we 

3 need to get information out there as early as 

4 possible. That's what those calls were about. 

5 That's what the FAQs are about.

6 And, as we, you know, develop more 

7 guidance around, you know, what our expectations 

8 are, because that's what you guys need to know and 

9 that's what the core providers need to know, the, 

10 you know, those discussions start to heat up.

11 MEMBER HARTINGS: How does that work 

12 within our external auditors? Because, again, 

13 they're probably another piece of that that's going 

14 to be very important that everybody's on the same 

15 page.

16 MS. BEATTIE: Right. And, likewise, 

17 we've been reaching out to the audit firms as well 

18 to talk about some of the challenges and obstacles 

19 with the standard.

20 And, I think the conversation's going 

21 to include just the parties you've mentioned, the 

22 external service providers, the auditors, an even 
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1 within institutions, more than just the accounting 

2 staff, but the loan staff as well and IT staff.

3 MEMBER HARTINGS: Will you be 

4 providing a model?

5 MS. BEATTIE: There's no intention at 

6 this point.

7 MS. EBERLEY: Our guidance will, 

8 though, discuss the options that you have available 

9 which are basically the options you have available 

10 now.

11 And, you know, I think from what I've 

12 heard in outreach sessions, what would be helpful 

13 that we may be able to do is talk about what kinds 

14 of data you would need, depending on the model that 

15 you pick and have conversations with technology 

16 service providers about the availability of that 

17 data on a historical basis. Is it in their 

18 systems? You know, is it something that could be 

19 available to you?

20 MEMBER HARTINGS: And any help you can 

21 do, I mean, because it's kind of a discovery stage 

22 right now. We're trying to get to that point.
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1 MEMBER HANRAHAN: Doreen, do we know 

2 about the dangers at this point? That I'm reminded 

3 of other subjects FDIC has commented, you don't 

4 need the hierarchy stuff to necessarily to do --

5 So, if I run a pretty simple non-complex 

6 shop and I want to track losses by call report code 

7 or something like that, would the FDIC stand by that 

8 sort of comment on this subject that, if I can build 

9 an Excel spreadsheet that adequately tracks those 

10 data points, might that be sufficient?

11 MS. EBERLEY: Yes, the system is meant 

12 to be -- the proposal is meant to be scalable just 

13 as you are describing.

14 MEMBER HANRAHAN: Thank you.

15 MEMBER BOEKA: You know, there is a 

16 side in the industry here developing them to the 

17 limit. And, I kind of already count five groups 

18 that are viewing this as an income source, 

19 including the core providers also.

20 MS. EBERLEY: That will increase once 

21 --

22 MEMBER BOEKA: Do then give you that 
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1 out whatever it is, it'll be an extra charge. I 

2 mean that's what you've already said.

3 CHAIRMAN GRUENBERG: Clearly, we’ll do 

4 everything we can to provide technical assistance 

5 and support to implement the new rule and there are 

6 genuine expectations that this is something 

7 community institutions can handle.

8 And, elaborate new models and hopefully 

9 without reliance -- necessary reliance on outside

10 consultants.

11 But, I would suggest that going forward 

12 we have the -- devoting a lot of attention to this. 

13 And, as you go through the process of coming to 

14 terms with it for your own institution and how 

15 you're implementing it, I really do suggest you 

16 engage with us and your examiner on how you're 

17 approaching it so that, if we can -- if you can get 

18 a sense from us that you're on the right track, that 

19 may be a way for you to make informed judgments 

20 within, with additional assistance or not.

21 So, I think we would like to try to be 

22 helpful in that regard. And, there's certainly no 
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1 expectation in order to know what you should have 

2 utilize a third-party on there.

3 And, thank you.

4 MEMBER TURNER: Did the banking 

5 agencies coordinate with the Office of Chief 

6 Accountant at the SEC as well?

7 MS. EBERLEY: Yes.

8 MEMBER TURNER: That's good.

9 I think allowance, guidance, not just 

10 by the regulatory authority, but you ask you 

11 accountant, especially on the as FAS five 

12 allowance. I think it's extremely confusing.

13 I've found that nobody can really 

14 clearly state how your FAS five allowance should 

15 be calculated.

16 So, I think if you could step back and 

17 just, censure a clear succinct statement under 

18 CECL, here's what we're really talking about. I 

19 think that would be extremely helpful.

20 MEMBER DAKRI: Do you have any 

21 indication from your own -- kind of got a feeling 

22 which you think that that will be going up or down, 
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1 the allowances with the CECL coming out?

2 Is there a gut feeling from the FDIC 

3 saying we expect institutions to move down from 

4 where they are today, or is it going to make a 

5 deduction allowances? We're going to make 

6 allowances go up? Is there --

7 MS. EBERLEY: Yes, mathematically, you 

8 would expect it to go up. And, that's because 

9 you're going to be reserving for the life of the 

10 loan. And, under the current incurred loss model, 

11 you're looking at losses you expect to incur in the 

12 next 12 months.

13 So, unless your loan book is on a 

14 12-month, you know, duration, that's not what you 

15 would -- you would expect to see some increase.

16 MS. MILLER: Mathematically, but we 

17 haven't done those calculations. That's just 

18 conceptual.

19 MEMBER BOEKA: But, installing the 

20 COLR report, your rate is in the allowances.

21 MS. EBERLEY: A few minutes ahead of 

22 schedule.
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1 So, now, we're ready for a roundtable 

2 discussion. All right.

3 So, this will be the first time that 

4 we've held a session like this where we wanted to 

5 just open it up and I think it's a good time since 

6 we have new members.

7 Just, what kind of things would you like 

8 to talk about today or in future sessions? How 

9 might we be most helpful through this process?

10 MEMBER BEARD: Can I ask a question and 

11 I don't know quite how to ask this artfully, but 

12 with all of the bad publicity that the banks have 

13 been getting again because of this Wells situation, 

14 is there a sense from the FDIC of how the response 

15 from the regulated side is going to be?

16 In other words, are there new rules that 

17 are being thought about? New concerns that we need 

18 to be aware of at our level that might flow down 

19 from that kind of behavior and those things that 

20 seem to be happening out there in the world?

21 MS. EBERLEY: So, there's no plan at 

22 this point for new rules or new procedures. We 
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1 have not changed our guidance to our examiners.

2 We have incentive compensation 

3 guidance out already in the form of a Statement of 

4 Policy that's interagency that addresses the 

5 issues that have been talked about.

6 It addresses the need to balance risk 

7 versus reward. It addresses volume-based 

8 compensation.

9 So, those fundamentals have been built 

10 in to our exam program. So, no changes expected 

11 there.

12 I think it's fair to say that there are 

13 a number of members of the industry that are, you 

14 know, doing some introspective looking right now 

15 and looking at their practices and making sure that 

16 they don't have incentives that could lead to 

17 unintentional consequences.

18 And, there is some review work going on 

19 on an interagency basis to take a look at larger 

20 institutions.

21 MEMBER BEARD: Thank you.

22 MEMBER HARTINGS: Just a couple of 
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1 items. We talked about CECL. We talked about the 

2 call report. Yes, I think those items would make 

3 sense to have on our agenda the next couple of 

4 meetings simply because of that.

5 It's a real dynamic with a lot of 

6 changing and a lot of moving parts. You're adding 

7 pieces to that.

8 The other item that we didn't have up 

9 in this -- is not on our agenda this meeting is the 

10 CAT tool. And, it'd be interesting to know like 

11 if you have a sense of the acceptance and, oh, what 

12 do I want to say, how many have implemented it?

13 You know, like I know at our 

14 institution, we've implemented it. We've gone 

15 through the basic and I don't know all the 

16 categories, but we're into the second category and 

17 third category now answering all those questions.

18 Do you have sense of how the industry 

19 has adopted that on the CAT tool?

20 MS. EBERLEY: Anecdotally, so we're 

21 not counting, but anecdotally, I can tell you, and 

22 we do talk about this at the Federal Financial 
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1 Institution Examination Counsel test for some 

2 supervision meetings. So, that's the group that 

3 developed the cybersecurity assessment tool and 

4 will continue to update it over time.

5 And, anecdotally, it was, matter of 

6 fact, we talked about it this past week, what we're 

7 hearing is that it's been well received. We have 

8 gotten some comments about how it can be made more 

9 useful.

10 And, we're working on some slight 

11 changes that we think will be helpful to the 

12 industry for this year.

13 And, then, some time next year, we'll 

14 take a look and see, you know, maybe an update.

15 One of the things that we hear 

16 regularly, and we really do pay attention to is, 

17 you know, something stands still and not keep 

18 changing, you know. So, we want to be mindful of 

19 that and not change it too often. But, we also want 

20 to make sure that the tool remains useful in a 

21 really rapidly changing environment.

22 So, as threats change, as technologies 
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1 advance, we want to make sure that we keep the tool 

2 up to date.

3 So, you know, maybe every couple years 

4 or so we would update and that would be an 

5 opportunity for industry to give us some feedback 

6 as well.

7 We participated in a meeting that was 

8 sponsored by and hosted by the National Institute 

9 for Standards in Technology (NIST) and they allowed 

10 us to have a session during their meeting where we 

11 had a focus group, basically, with the industry.

12 And, so, we heard some comments that 

13 we'd heard before, got some additional feedback. 

14 But, again, by and large, the feedback was very 

15 positive.

16 One of the things that came out at our 

17 mutual banker forum back in August, I thought, was 

18 a great comment. There were discussion about 

19 using the tool to facilitate Board discussion and 

20 understanding of the institutions' technology 

21 department and the risks and, you know, how does 

22 it all work?
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1 But using the tool and walking through 

2 the inherent risk profile and the maturity levels 

3 and where the institution was and if there was 

4 aspiration to be somewhere else, you know, how 

5 would you get there?

6 But, actually using the tool to 

7 facilitate that discussion. I thought that was a 

8 great best practice that was shared.

9 MEMBER HOWARD: But, we're not sure the 

10 -- I think we were fairly early adopters of the tool 

11 and that, you know, the four-step process that's 

12 included in the entire assessment.

13 And, what we found is that, the more 

14 conversation, the better. And, this is probably 

15 one area where if things need to change, we would 

16 -- we, I think, all of us could benefit from having, 

17 you know, having that knowledge sooner rather than 

18 later because of the obvious level of risk.

19 But, it has been a great tool for us to 

20 have the discussion with our Board just to explain 

21 what it is. But, then, as you go through the 

22 discussion around the steps and the conversation 
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1 around where we believe we are as an institution, 

2 we found that to be very helpful.

3 We're kind of establishing why we are 

4 where we are and what it will take to get us to level 

5 two or beyond.

6 ME. EBERLEY: To your comment about 

7 just having the conversation and really being 

8 transparent about what needs to happen.

9 Earlier this year, I believe it was in 

10 July, we issued our new examination work program 

11 for information technology. We're calling it 

12 InTREx which is Information Technology Risk 

13 Examination.

14 And, we changed our approach so the work 

15 program is public. But, the piece of our approach 

16 that we changed is, we redesigned the work program 

17 around the four components of the information 

18 technology rating.

19 And, we're going to start disclosing 

20 those component ratings. That's something we had 

21 not done before. But, that'll make it, we think, 

22 you know, much more clear about where do we think, 
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1 if there's a concern, it'll be reflected in the 

2 rating. You'll know exactly which section to 

3 focus on.

4 You've got the work program of how the 

5 examiner is evaluating it. It ties, of course, to 

6 the FFIEC information technology handbook and the 

7 underlying booklets. So, it's all very well 

8 aligned.

9 We also flagged in the work program all 

10 those areas that align with the baseline standards 

11 in the cybersecurity assessment tool. So, you can 

12 see where that flows into an examination 

13 assessment.

14 The risk assessment is something you 

15 have to do. The tool is one thing to help you do 

16 it. But, try to just create a line between all of 

17 these things.

18 MEMBER HARTINGS: And, one of the 

19 questions goes back to Richard's question about 

20 Wells a little bit.

21 And maybe Mark can answer this or 

22 Doreen, I'm not sure.
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1 Do you see an issue in the community 

2 banking world, the abuse of cross sell or even the 

3 prevalence of a lot of incentive compensation to 

4 incentivize workers on the floor to cross sell to 

5 bring products to increase that for a major 

6 compensation benefit. Is that something that you 

7 actually see out there in a community banking 

8 examination?

9 MS. EBERLEY: Not a lot from the 

10 questions we've asked of our regional directors 

11 recently. And, like, what kind of activity would 

12 you be seeing? So, not a lot of that. I know 

13 that's as far as we've gotten in terms of looking 

14 into that any deeper, but that's the anecdotal.

15 MEMBER HARTINGS: Well, yes, the 

16 concern as a community banker is, you know, I don't 

17 want to pay the price for that because I don't, you 

18 know, that's not the way we do it in our shop and 

19 that's not the way we would do it in our shop.

20 So, I just -- from a regulator's 

21 observation, do observations considered to be a 

22 little bit more objective than, you know, calling 
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1 my bank or another bank.

2 So, anything that you can communicate 

3 on that side of it, I think, especially in a 

4 community banking world would be important to our 

5 regulators and our legislators, I'm sorry, 

6 legislators. I just think kind of keep that in 

7 mind, it's good for us, too.

8 CHAIRMAN GRUENBERG: I think it's fair 

9 to -- oh, did you want to -- I think it's fair to 

10 say that, you know, there will be follow-up and

11 attention to the issue that there have been 

12 previously the focus here is community banks.

13 We will be looking at larger 

14 institutions. There's been that there's not an 

15 initial thought that probably this is a community 

16 bank issue at the onset. Is that fair to say, 

17 Doreen?

18 MS. EBERLEY: Yes.

19 MR. PEARCE: And, the only place on the 

20 consumer side where we've looked a lot at 

21 compensation practices related to mortgage loan 

22 originator compensation, there's rules related to 
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1 how that's connected in terms of loans, but nothing 

2 that relates to this kind of situation.

3 CHAIRMAN GRUENBERG: Thank you.

4 MEMBER SCULLY: So, there's been some 

5 speculation, and we haven't seen it, but we're 

6 always right below the level that the scrutiny 

7 around CRE concentrations has intensified in the 

8 last year.

9 And, some stories in the industry that, 

10 you know, that rather than it being guidance and 

11 a requirement that, if you are concentrated, you're 

12 expected to have certain information systems and 

13 certain expertise resident in the organization, 

14 that it's becoming more of a hard line.

15 And, we've never experienced that. 

16 I've always said to people, we've never experienced

17 that if you can show your expertise.

18 But, we're now hearing stories, and I 

19 will say, not all necessarily or not mostly FDIC 

20 related but where some of the regulatory agencies 

21 are making it a bright line and actually raising 

22 capital requirements as a result.
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1 I mean, do you see that? Do you have 

2 that concern? I know we're at that point in the 

3 cycle perhaps, but --

4 MS. EBERLEY: Maybe a couple of things.

5 I can tell you that we work on this 

6 matter on an interagency basis, on a regular basis. 

7 And, we had some concern last year as we were seeing 

8 -- was starting to see some rapid growth in already 

9 concentrated portfolios, particularly ADC.

10 And, also seeing an increase in funding 

11 or that activity with wholesale funding.

12 You know, so, we want to make sure that 

13 we're out in front of any problems. And, we did 

14 issue guidance in December of last year, an 

15 interagency statement, reinforcing the importance 

16 of having strong capital and a strong allowance if 

17 you are concentrated.

18 We don't have a prohibition against it 

19 and, frankly, community banks are going to be 

20 concentrated.

21 But, you also have a concentration in 

22 your geographic market. You don't have a wide 
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1 dispersion of operations.

2 So, because you're vulnerable to any 

3 changes in your economy and you're going to have 

4 that vulnerability on your balance sheet of being 

5 concentrated, we have post-crisis.

6 Reemphasized with our examiners the 

7 importance of underwriting and credit 

8 administration, including not just your risk 

9 management practices paying attention to what's 

10 happening in your marketplace, understanding it, 

11 having risk limits, having those discussions at the 

12 Board, stratifying your portfolio, stress testing 

13 your portfolio.

14 But, also risk mitigation, which is the 

15 strong underwriting, having covenants, you know, 

16 using covenants. You know, what kind of brave --

17 what kind of -- and not loosening them as the 

18 market's getting frothier, right, you know, that's 

19 not the time to -- not doubling down.

20 So, those have been the kinds of 

21 conversations we've been having. I talked earlier 

22 this morning about kind of our round of training. 
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1 We're on a three-year training cycle and that was 

2 a major focus coming out of the crisis and the

3 lessons learned through all of our -- the bank 

4 failures.

5 But, that is the way that we've been 

6 approaching it. I believe we're consistent with 

7 the other regulators based on the conversations we 

8 have with them.

9 So, if there is a conversation about a 

10 need for higher capital, you know, it may be related 

11 to weaker underwriting or something particular to 

12 that institution.

13 MEMBER BEARD: I would just maybe 

14 follow up on that. Again, in Utah, we may be late, 

15 but the credit unions have become dominant factor 

16 in Utah.

17 Our bank, for example, used to do a lot 

18 of consumer lending, it's about two percent of our 

19 portfolio now. Is there any guidance from the FDIC 

20 looking at, it may not be that you want to be 

21 concentrated, it may be that you don't have the 

22 opportunity to be in other areas.
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1 So, for example, in that consumer area, 

2 is there any guidance helping banks to how to deal 

3 competitively with -- it's my perception of it of 

4 an unbalanced playing field. It is very difficult 

5 to attract consumers when they can get the same 

6 products for less down the street.

7 And, so, it forces us into that 

8 concentration mode. Any thoughts on that or help 

9 that you can give us?

10 MS. EBERLEY: I think, you know, we've 

11 approached it from the other side of saying that 

12 that is balance sheets have evolved over time and 

13 they have changed over time. And, that's 

14 something that's covered in the 2012 community bank 

15 study where community banks used to have quite a 

16 bit more consumer loans on their books.

17 And, as that product has kind of been 

18 commoditized, there's less of it. And, then, 

19 that's left you with more commercial real estate 

20 types of loans.

21 So, you know, from how to increase 

22 consumer lending or be more competitive in consumer 
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1 lending, you talked earlier today about --

2 MR. PEARCE: Yes, let me jump in a 

3 little on that.

4 I think, you know, obviously, we 

5 mentioned earlier a formal mortgage lending guide 

6 and some other efforts to sort of present some 

7 opportunities for banks to expand what they're 

8 doing in the consumer area.

9 Also, the technical assistance video on 

10 the mortgage rules to sort of -- the different side 

11 of the same issue of how can we help community banks 

12 manage an area of regulatory change and remain in 

13 the marketplace?

14 I think one of the bright spots, as 

15 we've been monitoring evolutions in the mortgage 

16 market, in particular, you know, a few years ago, 

17 there were a lot of concerns around community banks 

18 exiting the mortgage space.

19 And, I think, for the most part, looking 

20 at the data broadly, we haven't seen that happen, 

21 though. We've seen banks remain in the mortgage 

22 market.
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1 And, in fact, community banks 

2 increasing their mortgage lending as compared with 

3 the larger banks. So, we've actually increase in 

4 market share and growth and in community banks as 

5 compared to mortgage.

6 So, maybe a little bit of that's 

7 balancing out a little bit and not quite as stark 

8 a picture as maybe people had feared.

9 MEMBER DAKRI: If I could just go back 

10 to the concentrations and the ABC loans. Has there 

11 been a thought of maybe anyone thought about 

12 separating construction loans by kind of occupied 

13 constructions, if you will, versus trend 

14 speculative construction? Has there been thought 

15 to that?

16 MS. EBERLEY: No, not breaking out

17 speculative construction on the call report. We 

18 have not.

19 You have a little bit of that in terms 

20 of the breakdown now, basically, my words are the 

21 construction that's vertical and construction as 

22 horizontal.
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1 And, the horizontal type is so land 

2 development loans, that was the riskier piece 

3 during the crisis. And, as expected, I mean, 

4 you're probably not pre-sold there.

5 Whether or not -- we don't usually get 

6 asked to add call report items, but that that is 

7 something that, if it would be helpful to the 

8 industry, you know, that's something that we could 

9 contemplate.

10 MEMBER DAKRI: I think that a lot of 

11 community banks, they're probably going to be more 

12 on the side of the owner-occupied. But, 

13 generally, the customer needs a new warehouse, 

14 you're building that, it goes as a construction 

15 loan under that --

16 MS. EBERLEY: Right.

17 MEMBER DAKRI: -- bucket until it 

18 finished and you can flip into the permanent.

19 MS. EBERLEY: Right.

20 MEMBER DAKRI: And, those type of 

21 things, I know specifically for us, we're over the 

22 100 percent due to that.
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1 MEMBER BAER PAINE: That would apply to 

2 us as well. And, so, what we do to mitigate our 

3 risk, understanding that we've got concentration 

4 in that area, is to take a look at all the net codes 

5 and really break them down specifically and 

6 understand. Then break out another report that 

7 says owner occupied for instance.

8 And, I'm not asking to add a ton of call 

9 report, there is some available data there. But, 

10 we have to start tracking because there's 

11 concentration in that area.

12 So, is there a common bond? Is there 

13 a single breakout that would help mitigate that 

14 risk and then does that tie it into other commercial 

15 loans like, you know, like really sensitive and how 

16 does it affect those benchmarks if it's not as high 

17 risk?

18 And, it does bleed over into multiple 

19 areas. We have to look at that anyway.

20 MS. EBERLEY: It's part of your risk 

21 management practices around your concentration.

22 MEMBER TOLOMER: And, you might 
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1 capture that as you're stratifying your portfolio 

2 and you're discussing with the regulators, you can 

3 -- I certainly would be a proponent on breaking that 

4 out separately.

5 In terms of multi-family in New York, 

6 I know that's always been an issue. Do you see a 

7 difference between brokered applications as a --

8 applications coming from brokers or from the fact 

9 that you're dealing with a customer who owns a 

10 building?

11 MS. EBERLEY: I think, you know, that 

12 the answer I would give you, there is that when 

13 you're dealing with a broker bringing you a loan, 

14 you know, you've got to think about the third-party 

15 lending and you've still got to do your own due 

16 diligence.

17 MEMBER TOLOMER: Agreed.

18 MS. EBERLEY: And, so --

19 MEMBER TOLOMER: But, in terms of the 

20 concentration is what I meant. Do you really kind 

21 of look at that as a little different?

22 MS. EBERLEY: No.
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1 MEMBER TOLOMER: How is that different 

2 asset class but if you --

3 MS. EBERLEY: No.

4 MEMBER TOLOMER: -- it's a little 

5 different risk.

6 MS. EBERLEY: It's a different risk and 

7 so, we wouldn't look at the concentration 

8 differently. We would look, though, very closely 

9 and do look very closely at the due diligence that's 

10 done on the brokers, the due diligence that's done 

11 on the information provided by the brokers.

12 You know, so, what kind of validation 

13 work is done to make sure that it's accurate.

14 MEMBER TOLOMER: Right.

15 MS. EBERLEY: And, that sort of work. 

16 And, we absolutely do do that through the exam 

17 process.

18 MEMBER TOLOMER: Okay.

19 MEMBER HOWARD: In terms of 

20 conversations or maybe the appearance at the next 

21 meeting, several of my colleagues have talked about 

22 the Community Reinvestment Act.
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1 And, you know, obviously, at the time 

2 that it was introduced, it was, you know, it was 

3 something that was necessary.

4 But, what we're finding now is extreme 

5 difficulty in trying to adhere to -- there's not 

6 enough business for all the banks in a particular 

7 area to meet the requirements.

8 And, we're going through what I would 

9 consider to be fairly extraordinary means to try 

10 to get creative to try to, you know, purchase the 

11 loans or something like that where we can't make 

12 that because there's not demand.

13 And, so, if there is an opportunity to 

14 have a conversation around, you know, learnings 

15 from maybe other parts of the country where other 

16 institutions have been successful.

17 I know certainly in the Northeast, it's 

18 a real challenge. You know, in many of the urban 

19 areas, there are multi-family properties that are 

20 non-owner occupied and, yes, we don't do that kind 

21 of lending because of the risk associated with it.

22 So, if there's a, you know, if there's 
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1 a chance to have some conversation around that, I 

2 think it would be, certainly in our case, it would 

3 be really helpful.

4 MR. PEARCE: Sure, that's helpful 

5 feedback. You know, as part of the EGRPRA process, 

6 we have gotten some comments from different 

7 stakeholders on Community Reinvestment Act 

8 generally.

9 But, then, sort of understanding how, 

10 to your point, it's how are institutions in as the 

11 performance context change and the economy 

12 changes, how are they able to meet the community 

13 needs to their communities for credit?

14 MEMBER THOMPSON: But we know the 

15 community bank forum that was held in April here 

16 was, I thought, really good. Is there a plan for 

17 that on next year's calendar something of that 

18 fashion?

19 MS. EBERLEY: I think I'm going to 

20 defer to the Chairman.

21 CHAIRMAN GRUENBERG: Yes, we've had 

22 questions about that. I think we would like to do 
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1 it again. Doing it annually, you know, has been 

2 a challenge because there's a lot of work that goes 

3 into it or I haven't discounted the possibility.

4 But, certainly on a biannual basis 

5 seems to me to be a reasonable thing to do. But, 

6 there's a lot that, to every other year if there's 

7 enough that's going on in terms of the developments 

8 within the community bank industry, and we think 

9 it's a basis for hosting that -- a conference like 

10 that.

11 So, I think biannual will put it 

12 clearly, I will look at that, it'd be a bit of lift 

13 up.

14 MEMBER MENON: Well, let me throw this 

15 out. On the line of banking, it's an increasing 

16 problem --

17 CHAIRMAN GRUENBERG: It's not the 

18 first time it's been mentioned. It's not the first 

19 time we've heard it.

20 MEMBER MENON: -- but, it'd be nice if 

21 there could be, I know it's a legislative solution, 

22 it's not a regulatory solution, but is there any 
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1 possibility of any sort of a guidance streamline 

2 process, something of that sort.

3 You know, today, the amount of cash 

4 that's sloshing around in some of these economies 

5 is pretty bad. It's a safety and security issue 

6 for the community and everything else.

7 So, is there any likelihood of

8 something coming out that'll give us a little bit 

9 more confidence in banking some of these guys?

10 MS. EBERLEY: You know, we can't issue 

11 anything. You know, there's a conflict between 

12 federal and state law and we're bound by federal 

13 law where it remains an illegal activity.

14 We have asked our examiners that to the 

15 extent an institution is banking customers that are 

16 in the marijuana business to follow the guidance 

17 that's been put out by FinCEN and Justice.

18 And, that's what we'll check and just 

19 check for adherence to that guidance.

20 At FinCEN, we've had lots of 

21 conversations about this and I think there's an 

22 interest in clarifying -- an interest on their part 
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1 in clarifying a direct versus indirect exposure.

2 And, we've gotten questions about how 

3 far down the chain do you go if it's, you know, 

4 clearly, if it's a business, if it's a store front 

5 selling marijuana, that's clear.

6 But, if it's an employee of the store 

7 front, you know, if it's the employee of the store 

8 front and it's now the landlord, that you have the 

9 loan on the building where the employee, you know, 

10 how far do you have to go?

11 And, FinCEN has been, in our 

12 conversations, talking about clarifying that.

13 MEMBER THOMPSON: I know there's been 

14 a discussion and a focus for FDIC for some time on 

15 management succession, forward succession and 

16 whatnot and conversations around if there's been 

17 M&A activity related to that.

18 Are you seeing anything change there? 

19 Is it kind of the accounting or is getting worse 

20 or is it getting better or anything that you've seen 

21 in that realm?

22 MS. EBERLEY: You know, I don't have 
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1 any statistics about whether succession management 

2 challenges are being addressed. It's not 

3 something that we track. It is something that we 

4 do talk about in examinations and encourage our 

5 examiners to focus on with the Board.

6 But, and Diane indicated earlier that 

7 merger activity had paired off a little bit in the 

8 second quarter and we are looking at that on a 

9 quarterly basis.

10 It was a topic of conversation in the 

11 April meeting as well that how do you provide 

12 liquidity for shareholders that might need 

13 liquidity, you know, without going through a merger 

14 event or a sale of the institution.

15 So, you know, it may be something where 

16 we can do more research of have more discussion 

17 about the challenges. I don't know beyond that 

18 what we could --

19 CHAIRMAN GRUENBERG: I think we could 

20 give a little thought to it.

21 MS. EBERLEY: Yes.

22 CHAIRMAN GRUENBERG: That'll be for 
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1 succession planning is one of the key issues for 

2 community banks going forward. And, it's 

3 certainly a topic that comes up at almost every 

4 meeting I have with community bankers.

5 And, the thought's perhaps at our next 

6 meeting organizing a discussion around succession 

7 planning. The guidance that we have, how we engage 

8 with institutions around the issue, what our 

9 expectations going forward which would all provide 

10 for in terms of succession planning for your 

11 institutions.

12 It would be an interesting conversation 

13 to have. And that maybe that's something we could 

14 think about for the agenda for our next meeting. 

15 I would actually find that kind of interesting.

16 MEMBER DAKRI: I can add to that, 

17 having a review change of control and succession 

18 planning. That's another thing I'd like to -- some 

19 idea of what the thought process is behind as it 

20 shifts from generation to generation, if that is 

21 the case, what is considered, you know, how is that 

22 viewed upon by the FDIC, changing control 
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1 perspective?

2 MS. EBERLEY: Okay. So, from a change 

3 in management from one generation to the next?

4 MEMBER DAKRI: Yes, I would use my 

5 phrasing.

6 MS. EBERLEY: Okay.

7 MEMBER DAKRI: From my dad to me and my 

8 brother and et cetera and how it's, you know, how 

9 would that work?

10 CHAIRMAN GRUENBERG: So, in terms of a 

11 family owned institution?

12 MEMBER DAKRI: Yes.

13 MS. EBERLEY: So, we might ask the 

14 question back of you. And, I know we've got a 

15 couple of situations at the table where we've got 

16 family owned banks with multiple generations of 

17 family running the bank.

18 So, that might be an interesting thing 

19 for us to ask you about your experiences and how 

20 you've handled it.

21 CHAIRMAN GRUENBERG: And, not an 

22 uncommon issue for community banks.
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1 MS. EBERLEY: Yes.

2 CHAIRMAN GRUENBERG: As we were 

3 discussing at lunch, family ownership is a common 

4 feature for community banks. So, it's center for 

5 varied interest actually.

6 I wonder if there are other subject that 

7 often comes up which is how community banks manage 

8 their relationship with third-party technology 

9 service providers, of the issues that you have 

10 managing those relationships.

11 It's -- they are subject that we’ve

12 discussed previously with the community but it 

13 seems to be or diminish it in way as an issue and 

14 arguably the challenge for community banks.

15 So, maybe worth coming back for a 

16 discussion on that issues as well. But, I thought 

17 I'd get a reaction on your view for that.

18 MEMBER SCULLY: No, I think that would 

19 be terrific because it's not getting any better. 

20 I think it's, and I've said this before, I think 

21 it's a major threat for the community banking 

22 industry model.
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1 Especially with the third-party 

2 FinTech providers out there now. Because, if you 

3 want that connectivity to the front end payment 

4 system, it's in the hands of the core provider as 

5 to whether or not you can get it or not.

6 So, in the oligopoly controlling 

7 thousands of banks in this country.

8 MEMBER BAER PAINE: I think it's -- I'm 

9 on the -- we were discussing earlier, I'm on the 

10 operations and payments committee for the ICBA. 

11 And, this has been a big topic for us on a state 

12 level and on a national level.

13 The challenge is, do you have these 

14 larger companies stifling innovation because they 

15 are not offering it or they're holding it captive 

16 in some way.

17 We have challenges with specifically a 

18 mortgage software not keeping up with regulatory 

19 issues. And, I feel that's an area that the FDIC 

20 can help assist in.

21 But, then, communicating an example, we 

22 send to ACH required to receive in September, but 
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1 we're not required to originate until next year.

2 Whereas a financial institution, it 

3 would make sense that we would help our customer 

4 with that one topic all at one time. But, the core 

5 systems aren't ready. They've known it's been 

6 coming, they can't make it happen.

7 And, it can't work well with, if you 

8 have another in ancillary product using your online 

9 banking. So, they're not talking to each other, 

10 even if one is ready. And, it's a bit of a 

11 challenge.

12 And, then, when you go negotiate your 

13 contracts, unless you're leaving and serious about 

14 it, that's a challenge.

15 So, all of these different things come 

16 into play. And, we met with the Federal Reserve 

17 in Atlanta and had this same conversation in 

18 August.

19 As a regulator, what's your role? How 

20 can you help? Well, specifically, you can help 

21 with the mortgage software to say, you have to do 

22 this kind of a thing.
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1 But, I don't know exactly what your role 

2 is except that it's a challenge and it's dangerous 

3 to our industry.

4 MEMBER BEARD: Do you have regulatory 

5 authority over them?

6 MS. EBERLEY: We have -- our authority 

7 comes from the Bank Service Company Act. And, what 

8 the Bank Service Company Act says is that, we have 

9 the authority to exam the services, the 

10 technologies providers provide you. So, that's 

11 our authority.

12 And, we do that on an interagency basis. 

13 We have central points of contact at each agency 

14 for the largest firms, what we call the 

15 multi-regional data processing servicers. And, 

16 we engage in an annual joint supervisory strategy 

17 planning process for those examinations. And, we 

18 issue joint reports.

19 We have been expanding our examination 

20 activities to the extent that we can under law over 

21 the last several years, including focusing on the 

22 enterprise wide governance, focusing on the 
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1 preparation and the timeliness of readying systems 

2 to comply with new rules and including consumer 

3 protection rules.

4 So, we've been working to beef up this 

5 program and understand the challenges that you have 

6 and appreciate hearing about them. It helps us to 

7 focus our examination activities.

8 MR. PEARCE: And, I would just add on 

9 the consumer side, I think it's becoming clear of 

10 the salience that technology providers are 

11 certainly more central to and integrated into the 

12 way the products are being delivered and the way 

13 systems are being managed.

14 And, so, you know, you mentioned 

15 mortgage rules and certainly, as the rules have 

16 gone into effect, mortgage disclosure rules come 

17 to mind in particular, sort of vendor readiness to 

18 deliver systems and programs and forms that are 

19 compliant with new regulations was a real critical 

20 issue that we heard from community banks.

21 Different levels of satisfaction with 

22 the vendors in that process. But, it certainly 
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1 creates some risk for being able to manage the 

2 consumer compliance responsibilities.

3 And, earlier today, Luke Brown 

4 mentioned we have a webinar coming up related to 

5 -- on an interagency basis, related to some issues 

6 we've seen in overdraft practices, obviously, how 

7 those programs operate relying on core providers 

8 are a really key element for how some of those 

9 programs may be automated and there may be some 

10 issues there that banks should be aware of.

11 So, we certainly see that happening 

12 more frequently.

13 MEMBER DAKRI: Like on the core side, 

14 it seems to me that the innovation's really 

15 stifled. I mean, there are lots of products out 

16 there that we cannot get a hold of because of 

17 innovation, the total cost of that.

18 I think maybe one suggestion I might 

19 have as far as trying to speed this process along 

20 was the big issue of new ones is the de-conversion 

21 cost. I mean, you're basically held hostage the 

22 early conversion stuff there because of 
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1 de-conversion.

2 If there's a way to say, you know, if 

3 I've done my five-year contract, I shouldn't have 

4 to pay a de-conversion cost. There should be a 

5 nominal amount. It's my data anyway, why would I 

6 want to pay a million dollars to get out of this 

7 contract.

8 And, that would probably help these 

9 guys and their data. I'm going to lose somebody 

10 in five years if I don't keep up, it I don't keep 

11 pace on what's going on. That might help all of 

12 us over here have a nice little bonus there that 

13 other people's actually listen to us now and say, 

14 hey, I need this.

15 MEMBER BEARD: And, maybe a finer point 

16 on some of that is FinTech and the challenge that 

17 within community banks, we're continuing to have 

18 and will have is the FinTech that's better. If we 

19 can't respond, we almost abdicate to them.

20 And, our providers aren't necessarily 

21 sensitive to them.

22 MEMBER TOLOMER: How many people have 
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1 changed firms, change third processor --

2 third-party processors and products with their 

3 banking? People don't do it.

4 And, one is the cost, you're absolutely 

5 right. And, two is the concern that the real 

6 conversion and many happen to do it and we did in 

7 year five and it was somewhat painful, but we were 

8 able to pull it off.

9 But, the attitude of the firm that we 

10 were leaving was, do you know what you're going to 

11 put your bank through? I said, do you know what 

12 you put us through for the first five years? You 

13 really did not perform.

14 And, we've had a much better 

15 relationship with the second provider. We have 

16 points of contact and we're able to communicate.

17 But, the other aspect is, when you pull 

18 out your contract and you see it's a 168 pages of 

19 legalese, we had to hire a consultant to help 

20 marshal through that to be able to -- well, to 

21 negotiate with the second provider.

22 And, now, three years into it, we hired 
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1 him back to look at, as you grow your bank, your 

2 needs become a little bit different and, you know, 

3 we don't all of the capability of a firm. So, you 

4 need someone to -- so now, all of a sudden two or 

5 three years later, your bank is much bigger and has 

6 more need for their systems.

7 But, we were short sighted, arguably, 

8 and we signed the contract three years ago. So, 

9 now, you have to look to begin to bundle all the 

10 services and they're happy to do that with an 

11 extension.

12 So, it's a killer of an issue. And, as 

13 long as you're making enough money to be able to 

14 pay for the consultant and, the good news is, the 

15 consultant we hired really understands the systems 

16 so he's able to go to our people and say, let me 

17 tell you, I know how all the systems work. This 

18 is what you think you're going to need down the 

19 line.

20 But, of course, that's going to change 

21 in a year or two as well. So, it's a tough issue, 

22 but one that we, you know, we were fortunate that 
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1 we were able to move away. But, we were clearly 

2 felt we were held hostage.

3 MEMBER KELLY: I do feel it's become a 

4 concentration issue.

5 CHAIRMAN GRUENBERG: It is.

6 MEMBER KELLY: And, it's just clearly 

7 a concentration. It's no different than CRE 

8 lending.

9 CHAIRMAN GRUENBERG: That is a 

10 concentration issue in what way?

11 MEMBER KELLY: You're concentrated to 

12 the big four.

13 CHAIRMAN GRUENBERG: Oh, because of 

14 the concentration on the two SP side?

15 MEMBER DAKRI: I think one thing that 

16 might even help, and I don't know if you guys can 

17 help us, but even just having access to our own data 

18 without having to pay for that, that would be 

19 extremely helpful.

20 And, if I'd rather use a third-party, 

21 just that the point that they have in using 

22 systems, we're able to do that without a fee.
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1 MEMBER SCULLY: Well, they don't give 

2 you access to it, but they also don't store it. I 

3 think it's crazy, you know, they control it and they 

4 also throw it out every six months.

5 MEMBER BAER PAINE: I think it's a 

6 little bit of a challenge of ownership. Someone 

7 on our committee was working with their core system 

8 and saying, well, the customers are expecting this. 

9 And, they said, the core system said to him, well, 

10 those are my customers.

11 At some point, that core system took 

12 over the community bank's ownership of their 

13 customers. We don't know how that happened or 

14 where that happened, but, for some reason, they 

15 feel it's their data and they have to release to 

16 us.

17 So, I think that's a bit of a challenge 

18 and, again, working through, is there a standard, 

19 a key format that you send out for proposals for 

20 all companies? Is there, what's your checklist if 

21 you're going to de-convert? If you are going to 

22 look at other options, what's the best practices? 
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1 Is there a guidance or a best practice to evaluate 

2 something that is a huge risk to all of us.

3 It's our biggest expense that we have 

4 and systemically, it's our biggest risk that we 

5 have.

6 So, is there a guidance to say how you 

7 evaluate, how do you analyze your core system? 

8 Here are good business practices for that.

9 MS. EBERLEY: We've addressed that 

10 through the FFIEC and the Appendix J to the business 

11 continuity planning booklet we issued last 

12 February.

13 And, we're updating the outsourcing 

14 booklet right now. We've been going through each 

15 of the booklets updating.

16 And, hope that that will be helpful to 

17 you.

18 MEMBER BOEKA: But, still, if you 

19 decide to, all right, this is not it and I want out 

20 and then go back to this -- the breakup fee that 

21 it just puts you out of business.

22 MEMBER HOWARD: And, part of the 
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1 challenge is that, you know, there's a lot of 

2 reluctance to make a change on the part of the 

3 institutions. And, I think that many of the 

4 providers have a sense that they're pretty secure 

5 with the bulk of business that we have because there 

6 is this reluctance.

7 And, we, too, changed providers. And, 

8 it's a tremendous amount of leverage that you have 

9 when you decide to change. It takes a lot of 

10 courage to change and, you know, have to swallow 

11 a little.

12 But, I mean, when you, at that point, 

13 you have the opportunity to negotiate an agreement 

14 that's far more acceptable than maybe the one that 

15 you're living with.

16 And, when you also, at that point in 

17 time, have the opportunity to, you know, demand 

18 certain performance requirements. Maybe they 

19 don't have them today, but, you know, you kind of 

20 put some teeth in the contract because they're all 

21 looking, you know, there's not that many of them, 

22 they're all looking for business.
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1 So, to some extent we sort of, you know, 

2 support their notion that we're a stable book of 

3 business because of the reluctance on our part to 

4 change.

5 CHAIRMAN GRUENBERG: It sounds as if 

6 they've also structured their relationship to make 

7 it as difficult and costly for you as possible 

8 because it gives them leverage. That's built into 

9 the relationship it sounds like, it sounds to me.

10 MEMBER HANRAHAN: So, as you're developing 

11 your de novo handbook, this would be, seriously, 

12 this is a topic I thought little about when we 

13 started the bank.

14 And, the best time to start to negotiate 

15 terms is when you've got options and everybody 

16 wants you. And, once you get your contract, you're 

17 stuck with your contract.

18 It's, I think it'd be a subject worth 

19 well enough for de novo organizers.

20 MS. EBERLEY: Thank you.

21 MEMBER HARTINGS: Just to tag on that, 

22 if you create a vendor best practices, what we 
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1 should be looking at is our contracts, please also 

2 articulate that to the largest providers that you 

3 examine as well.

4 So, if you give it to me to ask my core 

5 processor, I would hope that you've presented that 

6 to the core processor when you're in there 

7 examining them.

8 And, I know, FDIC did that through FFIEC 

9 but that's the -- there's sometimes a disconnect 

10 there.

11 You want us to do this and we ask our 

12 core provider and they say, no, we're not going to 

13 do that. We're not going to put it in your 

14 contract.

15 MEMBER SCULLY: Or they're going to 

16 charge you more to do it.

17 MEMBER HARTINGS: Yes, yes.

18 MEMBER SCULLY: And, they've got all of 

19 us when they've had requests for information from 

20 the regulators. They've complied and charged us 

21 for that.

22 MEMBER HARTINGS: So, we need you to 
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1 help us with the push back a little bit.

2 MEMBER SCULLY: You have the leverage.

3 MEMBER HARTINGS: Yes.

4 MEMBER SCULLY: At least you have more 

5 leverage than any of us in this room do.

6 MEMBER BOEKA: Who plays a part in 

7 approving of acquisitions of one core system buying 

8 another and another and another of these new ones?

9 MS. EBERLEY: There's no regulatorial 

10 approval process. It would be just subject to 

11 normal kind of --

12 MEMBER BOEKA: DOJ?

13 MS. EBERLEY: -- DOJ standards on --

14 MEMBER BOEKA: It would be good if they 

15 have to go through the same regulatory approval 

16 that we have to go through when buying other banks.

17 MEMBER BEARD: That's an interesting 

18 discussion, because, if you think about it from the 

19 historical standpoint, it's evolving very rapidly 

20 to where the technology is more and more important 

21 than probably 20 years ago. It wasn't even a 

22 thought, but you don't have maybe the sole 
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1 authority over it, but you've got a lot of the 

2 banking that has gone out of the banks into this 

3 stack. It is somewhat regulated, but you're 

4 regulating the user.

5 K: And, it does seem the data, that's 

6 the biggest thing to me that is the risk. 

7 Releasing the data, but it's not ours to being with. 

8 I mean, we're just the keepers of the customers.

9 So, maybe if that can be examined during 

10 the examination process. We would keep the data, 

11 historical data forever and why would they not do 

12 that? That doesn't make any sense. Maybe that's 

13 --

14 MEMBER SCULLY: That makes perfect 

15 economic sense for them.

16 MEMBER THOMPSON: This is their big 

17 issue. I'm going to ask this -- my question on a 

18 different one, though. So, if I sound smart, it's 

19 because I'm using Chris's comment at lunch.

20 You did bring up to Mark at lunch and 

21 had this been -- had it been considered to do this 

22 type of activity on a more local or regional level 
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1 with even a smaller group or whatnot? Maybe expand 

2 on whatever else your thoughts were.

3 MEMBER EMMONS: Are we talking about 

4 financial entercy? Is that what you're --

5 MEMBER THOMPSON: No, this advisory 

6 group.

7 MEMBER EMMONS: Oh, oh, oh, okay, 

8 sorry.

9 Yes, I just -- we were reflecting on the 

10 effectiveness of this meeting and these sessions 

11 because it's -- for us, it gives us the opportunity 

12 to have a little more intimate contact with our 

13 regulatory friends.

14 And, for most institutions, most 

15 bankers, they only see their regulators at the most 

16 critical junctions when an examination takes 

17 place.

18 And, these conversations tend to be 

19 very constructive and it occurred to me that more 

20 of this is better and not necessarily for this 

21 group, but to perhaps push this down into some of 

22 the regional offices as a best practice to bring 
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1 bankers together, talk about some of the same 

2 issues or other issues that, perhaps, we haven't 

3 touched on.

4 That might -- we're going to build on 

5 those relationships that community bankers want to 

6 have with the regulators and vice versa.

7 So, just think it's the fact that you're 

8 listening is really important. And, I think 

9 that's good for our banking relationship.

10 So, that's all I was intending.

11 CHAIRMAN GRUENBERG: That was a -- I 

12 think that's an interesting thought. I would say, 

13 though, a considerable amount of effort goes into 

14 the preparation for these meetings. So, we'd have 

15 to just think about it from a resource standpoint.

16 But, it's certainly something we can 

17 talk about with our regional directors.

18 MEMBER HOWARD: I mean, I certainly, I 

19 agree with you. I think that these conversations 

20 are critical. And, I shared with the Chairman and 

21 others in the past. We have one tomorrow, 

22 actually, in Hartford with our regional office.
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1 And, we probably have every year to 18 

2 months or something like that. So, I think that 

3 the region, at least in our experience, the 

4 regional offices are open to --

5 MEMBER BOEKA: San Francisco does the 

6 same thing. They are very good, very good 

7 meetings.

8 MEMBER TURNER: Kansas City does, too. 

9 Our regional director goes all over his region 

10 periodically and we probably wind up meeting with 

11 him every couple of years, a group of bankers. So, 

12 it happens frequently.

13 MEMBER BEARD: I think they've been 

14 good at it. In fact, the commissioner, he came out 

15 and their chairman, you came out to San Francisco. 

16 I know Stan Ivie had us come over. And, I thought 

17 that was helpful. And, he's been very good. I 

18 think Cathy all is now doing that with --

19 And, it's a fairly intimate discussion 

20 where there's not a lot of people and it's helpful.

21 MEMBER EMMONS: One more shift in the 

22 conversation. One of the things that has become 
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1 a fact of life for us these days, relates to the 

2 security side and it's the compromised card the 

3 role of security where we have endless lists of data 

4 that comes into the bank on the multitudes of 

5 retailers and others that have been -- information 

6 has been obtained.

7 And, we get these lists and the cost 

8 associated with that, monitoring those and 

9 replacing cards has, for us, it's just, it's on a 

10 steady incline.

11 And, it feels like that we've got the 

12 MV chip and now we're doing things to try to 

13 minimize the loss to the consumer. But, the costs 

14 to the banks for replacing cards and -- or PIN 

15 numbers or all of the things that you do in 

16 communicating with your customers when this 

17 happens, it just feels like it's an epidemic.

18 It used to be you might have three or 

19 four over the course of a year and you'd get 

20 everybody together and you talk about what you're 

21 going to do. Well, let's replace these cards.

22 Now, it's like it's every day that we 
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1 have, you know, we have a list that, you know, and 

2 it can be, for us, it can be a 100 to 200 names that 

3 seem to be hitting the radar.

4 And, it just feels like it's an endless 

5 kind of exercise, one that's costly to the banks. 

6 And, I would point that out as not that I have the 

7 solution, but that it is -- I think it's a growing 

8 concern.

9 And, I'm worried a little bit that we 

10 kind of, because it's become a fact of life, that 

11 it's just one that we seem to be comfortable living 

12 with.

13 But, you know, when my operations folks 

14 talk about or my security team gets together and 

15 we talk about it, it's just, it's constant and I 

16 worry that it's -- I don't see any solutions on the 

17 horizon.

18 MEMBER SCULLY: It's a cost allocation 

19 issue, again. And, it's -- I mean, it's not 

20 directly and your hand are legislative. But, you 

21 know, the people that cause the breach don't bear 

22 the costs of replacing these cards.
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1 MEMBER TURNER: So, we're the fraud

2 losses. Yes, I mean, there can be emergent breach 

3 that may cost out bank $600,000 and we aren't 

4 getting anything back from the merchant. Maybe, 

5 say MasterCard or Visa has some penalties that they 

6 assess and maybe a bit of that will come back our 

7 way, but very little.

8 MEMBER EMMONS: So, we spend a lot of 

9 money on detection systems and, you know, we try 

10 to catch them early and it's a few dollars here and 

11 there. But, it just feels like it's almost become 

12 part of the wallpaper.

13 MEMBER SCULLY: It is, it's a permanent 

14 cost of doing business now.

15 MEMBER EMMONS: And it feels -- it's 

16 very uncomfortable. And, I'm not sure from a 

17 customer standpoint that they really get what's 

18 going on and who's -- I think they somehow we're 

19 always the accountable party.

20 But, it just feels like --

21 MEMBER SCULLY: They get mad if you --

22 if they lose money but they also get mad if you take 
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1 their card away so they don't lose money. It's a 

2 lose-lose unique situation.

3 But, I think, again, I think it's just 

4 a leverage issue. If there's anything you can do 

5 as, you know, somebody that understands the problem 

6 in aggregate because individually, we don't have 

7 the leverage.

8 CHAIRMAN GRUENBERG: Well, we will --

9 this is very helpful, by the way. And, in terms 

10 of the agenda for the next meeting, we'll also 

11 planning a part of the initiative we started with 

12 academic institutions on this issue of the next 

13 generation of the bankers. I think that's a very 

14 good topic to get on as well. And, I think there's 

15 some potential there.

16 So, you've given us things to work on 

17 for our next session.

18 Doreen, Mark, anything else? Anything 

19 else? Going once, going twice.

20 MS. RYAN: I just want to mention that 

21 the next meeting, the meetings next year have not 

22 yet been scheduled. But, we'll be reaching out to 
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1 everybody to find dates for the three meetings.

2 CHAIRMAN GRUENBERG: Thank you.

3 (Whereupon, the above-entitled matter 

4 went off the record at 2:44 pm.)