493

October 10, 2018

The Meeting of the Advisory Committee on Community Banking

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

October 10, 2018 – 9:00 A.M.

The meeting of the FDIC Advisory Committee on Community Banking (“Committee”) 

was called to order by Jelena McWilliams, Chairman of the Board of Directors of the Federal 

Deposit Insurance Corporation (“FDIC”).

The members of the Committee present at the meeting were: Christopher Donnelly, 

President and Chief Executive Officer (“CEO”), Bank of the Prairie, Olathe, Kansas; James J. 

Edwards, Jr., CEO, United Bank, Zebulon, Georgia; Christopher W. Emmons, CEO, Gorham 

Savings Bank, Gorham, Maine; David J. Hanrahan, Sr., President and CEO, Capital Bank of 

New Jersey, Vineland, New Jersey; Jack A. Hartings, President and CEO, The Peoples Bank 

Co., Coldwater, Ohio; Danny J. Kelly, President and CEO, The Hometown Bank of Alabama, 

Oneonta, Alabama; Kenneth Kelly, Chairman and CEO, First Independence Bank, Detroit, 

Michigan; Arvind A. Menon, President and CEO, Meadows Bank, Las Vegas, Nevada; Tiffany 

Baer Paine, President and CEO, Security Bank USA, Bemidji, Minnesota; Mary Ann Scully, 

Chairman and CEO, Howard Bank, Baltimore, Maryland; Alan Shettlesworth, President and 

Chief Operating Officer (“COO”), Main Bank, Albuquerque, New Mexico; John M. Tolomer, 

President and CEO, The Westchester Bank, Yonkers, New York; Joseph W. Turner, President 

and CEO, Great Southern Bank, Springfield, Missouri; Louise Walker, President and CEO, First 

Northern Bank of Dixon, Dixon, California; and Len Williams, CEO, People’s Intermountain 

Bank, American Fork, Utah. 

Asif Dakri, Vice Chairman and CEO, Wallis State Bank, Houston, Texas; Fred DeBiasi, 

President & CEO, American Savings Bank, Middletown, Ohio; and Gwen M. Thompson, 

President and CEO, Clover Community Bank and Clover Community Bankshares, Inc., Clover, 

South Carolina, were absent from the meeting.

Martin J. Gruenberg, Director, was present at the meeting. 

Corporation staff who attended the meeting included: Steven O. App, Ruth R. Amberg, 

Lisa Arquette, Ryan Billingsley, Carolyn Curran, Tim Davin, Chad R. Davis, Christine M. 
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October 10, 2018

Davis, Doreen R. Eberley, Bret Edwards, Diane Ellis, George E. French, Shannon N. Greco, 

William Henley, Jr., Martin D. Henning, Travis Hill, Nicholas S. Kazmerski, Vivek Khare, M. 

Anthony Lowe, Brandon Milhorn, Rae-Ann Miller, Patrick Mitchell, Michelle Ogren, Mark E. 

Pearce, Sylvia H. Plunkett, Lisa Roy, Betty Rudolph, Philip A. Shively, James C. Watkins, and 

Angela A. Wu.

Chairman McWilliams opened and presided at the meeting. She began by welcoming 

four new members to the Committee: Ms. Walker, Mr. Shettlesworth, Mr. Kenneth Kelly, and 

Mr. Edwards. Chairman McWilliams explained that Committee membership has been expanded 

to ensure representation of all geographic areas, including rural and agricultural areas. 

Next, Chairman McWilliams advised that she wished to allow more time for dialogue and 

input from members, emphasizing that the Committee is designed to obtain feedback so FDIC 

analyses will better incorporate all perspectives and create an environment where community 

banks can thrive. Against that background, she introduced Mr. Davis, Deputy to the Chairman 

for External Affairs, who moderated the rest of the day’s proceedings. Mr. Davis advised that 

the first item on the agenda was “Committee Member Discussions of Local Banking 

Conditions.” The Committee members, in turn, described the opportunities for and challenges 

faced by their community banks. 

The majority of members indicated that loan demand remained solid; small businesses 

benefited from the 2018 tax cut and experienced stronger profits; and small businesses had more 

confidence in the general economy and are therefore willing to expand. More recently, however, 

lending rates are creeping up; customers are therefore reluctant to borrow because they are 

accustomed to the low-rate lending environment of the recent past; and growth is beginning to 

moderate. The members agreed that charge-offs are virtually nonexistent and there are very few 

problem loans.

With respect to housing, several members observed that the real estate market, especially 

single-family housing construction, is showing signs of stress. Affordability is a big issue in 

many areas where the supply of new homes and buildable land is restricted. Construction firms 

say their biggest challenge is the tight labor market. Small and regional home builders, as 

opposed to national builders, bear the biggest impact of the tight market yet national builders 

aren’t typically part of the customer base of smaller banks. Due to the competitive markets and 

escalating home prices, some members see signs of buyer fatigue. At the same time, however, 

rents are increasing, making it difficult for consumers to save a down payment. In light of these 

factors, several members anticipate a slowdown in the residential real estate market over the next 

several years but ultimately agreed that market conditions vary by location. With regard to the 

commercial real estate (“CRE”) sector, some members advised that they are seeing aggressive 

pricing and other terms. Other members offered that components of the CRE market evidence 

lack of underwriting discipline; specifically, there appears to be more non-recourse financing and 

extensions of interest rate terms.

Turning to the issue of regulatory relief, one member recalled that they entered the 

mortgage business in 2010 but after five years found that the bank’s cost to produce a loan more 

than doubled. He attributed this increase to the fact that the bank hired individuals to manage the 
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burden of compliance; there were more employees in the bank’s mortgage division than at the 

commercial bank. Although the bank determined it could keep mortgage lending profitable over 

the long-term by increasing production, they ultimately exited that business line rather than put 

undue pressure on capital. Other members concurred, noting that they were committed to 

serving the residential mortgage needs of their communities but, for small community banks, it is 

a challenge to manage compliance issues and stay profitable. With respect to capital regulations, 

several members noted that simplified capital rules are very important and urged the agencies to 

implement a lower minimum rather than a higher minimum because bankers will always aim to 

be above the regulatory minimum.

With respect to deposits, members noted there appears to be a nationwide struggle for

deposits with larger banks attempting to bolster their liquidity by offering higher rates. As a 

result, banks are seeing their cost of funds increase which, in turn, puts pressure on profitability 

margins. One participant observed that past economic growth occurred, in part, because of the 

low interest rates paid to depositors; the return to higher interest rates is a factor that banks have 

to balance, he suggested.

Overall, members indicated the market for deposits has changed. At one time half a 

bank’s balance sheet might consist of local certificates of deposit (“CDs”). Now, out-of-area 

entities, internet players, nonbanks, and even hedge funds, compete for deposits. The members 

were therefore glad to see that the subject of liquidity and national-rate caps were on today’s 

agenda. In anticipation of that discussion they suggested, even though the national rate cap 

applies to banks that are less than well capitalized, the restrictions seem to be trickling down to 

well-capitalized banks potentially making it more difficult to manage funding sources. Members 

said whether the funds are sourced from local customers or brokers, if a bank makes bad loans, 

there will be a problem. The FDIC therefore needs to adopt an even-handed approach with 

respect to brokered deposits. In the current hyper-competitive market, discipline and reviewing 

one’s balance sheet on a regular basis are essential, advised the participants. 

The members also raised concerns with respect to predatory lending and scams targeting 

consumers. They described instances where consumers rely on sham credit-consolidation 

companies without fully understanding the fine print and then turn to local banks for help 

extricating themselves from the situation. In some states, minimal licensing and continuing 

training requirements pertain to brokers which sometimes lead to a lack of understanding of 

smaller markets. 

Following additional comments from members regarding the adoption of new 

technologies, fintech companies, recruiting the next generation of bankers, and mortgage 

lending, Mr. Davis announced that the meeting would briefly recess. Accordingly, the meeting 

stood in recess at 10:27 a.m. 

* * * * *

The meeting reconvened at 10:52 a.m. that same day, at which time Mr. Davis introduced 

the presenters of the first panel, “Supervision Update,” as Doreen R. Eberley, Director, Division 

of Risk Management Supervision (“RMS”); Rae-Ann Miller, Associate Director, RMS; Ryan 
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Billingsley, Corporate Expert-Capital Markets, RMS; and William Henley, Associate Director, 

RMS. 

Ms. Eberley framed the panel’s presentation by noting they would highlight a number of 

RMS initiatives, especially efforts to implement the Economic Growth, Regulatory Relief, and 

Consumer Protection Act (the “Economic Growth Act” or “EGRRCPA”) signed into law 

May 24, 2018. These efforts included proposed rulemakings regarding reciprocal deposits, 

examination frequency, and the definition of “high-volatility commercial real estate” or 

“HVCRE” exposures. 

Ms. Miller then referred to the “Supervision Update” hand-out included in the 

informational packet distributed to the members and asked them to turn to the “Interagency 

Statement Clarifying the Role of Supervisory Guidance,” FIL-49-2018 (Sept. 17, 2018). Ms. 

Miller explained that, unlike a statute or regulation, supervisory guidance does not have the force 

and effect of law; agencies do not cite violations for a bank not following supervisory guidance. 

Rather, the purpose of guidance is to articulate the agencies’ general views regarding appropriate 

practices for a given subject area. The FIL before the Committee was developed in an effort to 

reinforce that message for the public and for examiners. 

Ms. Miller next directed the Committee’s attention to a notice of proposed rulemaking 

(“NPR”) entitled: “Limited Exceptions for a Capped Amount of Reciprocal Deposits from 

Treatment as Brokered Deposits,” FIL-47-2018 (Sept. 13, 2018). She advised that the NPR is 

the first part of a two-part effort to revisit the brokered deposit regulations. This particular NPR 

is designed to conform FDIC regulations to the changes made by EGRRCPA. By way of 

background, section 29 of the Federal Deposit Insurance Act (“FDIA”) restricts insured 

depository institution from accepting deposits by or through a deposit broker unless the 

institution is well capitalized for Prompt Corrective Action (“PCA”) purposes. The FDIC may 

waive this restriction if the insured depository institution is adequately capitalized; the restriction 

cannot be waived if the institution is undercapitalized. The FDIA also imposes restrictions on 

the deposit interest rates that an insured depository institution may offer if the institution is not 

well capitalized. These interest rate restrictions cannot be waived. A “deposit broker,” as 

defined by section 29 of the FDIA, includes “any person engaged in the business of placing 

deposits, or facilitating the placement of deposits, of third parties with insured depository 

institutions or the business of placing deposits with insured depository institutions for the 

purpose of selling interests in those deposits to third parties. . . .” Under the FDIC’s regulations, 

a “brokered deposit” is thus defined as a deposit accepted through a “deposit broker.” 

Turning to reciprocal deposits, reciprocal deposit arrangements are based on a network of 

banks that place funds at other participating banks in order for depositors to receive insurance 

coverage for the entire amount of their deposits. Institutions within the network are both sending 

and receiving identical amounts of deposits simultaneously. Reciprocal arrangements are often 

managed by a third-party network sponsor. The institutions themselves (along with the network 

sponsors) are in the business of placing deposits, or facilitating the placement of deposits, of 

third parties with insured depository institutions. The involvement of deposit brokers within the 

reciprocal network means the deposits are deemed brokered deposits. Continuing, Ms. Miller 

advised that, for assessment purposes, reciprocal deposits have been treated more favorably than 
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other types of brokered deposits. More specifically, when the FDIC updated its risk-based 

assessment rate methodology for established small banks in 2016, it replaced the “adjusted” 

brokered deposit ratio with a brokered deposit ratio. This new ratio measures significant reliance 

on brokered deposits but continues to exclude reciprocal deposits for institutions that are well 

capitalized and well rated. But, in any event, prior to enactment of EGRRCPA, all reciprocal 

deposits were classified as brokered deposits. 

Returning to NPR before the Committee, Ms. Miller explained that with the enactment of 

EGRRCPA the FDIA is revised to except a capped amount of reciprocal deposits from treatment 

as brokered deposits for certain insured depository institutions. These revisions took effect upon 

enactment of EGRRCPA on May 24, 2018. The FDIC proposes to amend its regulations to 

conform to the statutory amendments. By incorporating the definitions from the new law, it 

excepts a capped amount of reciprocal deposits from being treated as brokered deposits for 

certain insured depository institutions. That cap is the lesser of either five billion dollars or 20 

percent of total liabilities. A special cap also kicks-in if the institution is either not well-rated or 

not well-capitalized. In response to questions from the members concerning the use of reciprocal 

deposits by de novo institutions, Ms. Miller clarified that, generally speaking, de novos may use 

reciprocal deposits but would need to report them as brokered; a de novo institution would also 

need to consider the level of brokered deposits included in its business plan. 

Ms. Miller acknowledged that the deposit market has changed since brokered deposit 

restrictions were first enacted through the “Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989” (“FIRREA”) and said that the FDIC is looking forward to receiving 

comments in response to this NPR as well as the proposal to be issued later this year on brokered 

deposit restrictions more generally. 

Ms. Miller then directed the Committee’s attention to an interagency interim final rule 

(“IFR”) on the “Expanded Examination Cycle for Certain Small Insured Depository Institutions 

and U.S. Branches and Agencies of Foreign Banks,” FIL-45-2018 (Sept. 7, 2018). She explained 

that the IFR implements provisions of EGRRCPA which increased, from $1 billion to $3 billion, 

the total asset threshold under which an agency may apply an 18-month on-site examination 

cycle for qualified banks that have an ‘‘outstanding’’ composite rating. The agencies are also 

extending eligibility for an 18-month examination cycle to qualifying banks with an 

‘‘outstanding’’ or ‘‘good’’ composite rating with total assets under $3 billion. Continuing, Ms. 

Miller observed that the IFR increases the amount of institutions eligible for the 18-month cycle 

by approximately 420 institutions, bringing the total number of eligible banks to 4,798. The vast 

majority of all banks will therefore be subject to the extended examination cycle. With respect 

to the exam cycle, members observed that by concentrating the agencies’ effort on those banks 

that are less than one- and two- rated, it could be a win-win for the agencies. 

Ms. Miller closed her remarks by advising the members that the FDIC planned to retire a 

number of outdated or redundant FILs, as outlined in FIL-46-2018 (Sept. 10, 2018).

Mr. Billingsley then provided an overview of the NPR regarding the definition of 

HVCRE exposures. He noted that an interagency NPR was issued in September 2018; the NPR 

aligns the definition of HVCRE currently found in the agencies’ capital rules with the definition 
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mandated by EGRRCPA; institutions may report HVCRE on Call Reports using the new, 

statutory definition; if categorizations change for future periods the agencies are not going to ask 

banks to refile prior Call Reports simply because the banks obtain new information in the future. 

Overall, the NPR definition is similar to the current definition but the scope will change slightly 

and some exemptions will likely change. After discussing the potential classification of multidwelling properties, Mr. Billingsley emphasized that the purpose of the NPR is to make sure the 

agencies obtain feedback from banks regarding potential categories, associated risks, and ensure 

consistency with other regulatory requirements. 

Next, Mr. Henley provided an update regarding a community bank cyber exercise called 

the “FDIC Cyber Challenge.” He explained that exercises are one of the best ways to prepare an 

organization to respond to an emergency. With that in mind, the FDIC has issued a total of nine 

“scenarios” that a community bank might encounter, designed training materials for conducting 

exercises, issued videos dramatizing each scenario, and issued questions designed to help 

bankers think through their recovery plans. The scenarios cover a number of challenges, such as 

an item processing failure, unauthorized withdrawals through a corporate account takeover, 

phishing scams, technology service provider problems, distributed denial of service attacks, 

ATM malware, and ransomware. The two latest scenarios concern reactions to a natural disaster 

(a flood) as well as a supply chain incident (a third-party software update infects the bank’s 

systems). In response to questions from members, Mr. Henley described the length of the 

training scenarios and said the exercises are not meant to require a significant investment of time.

Mr. Henley advised that October is “National Cybersecurity Awareness Month.” The 

Federal Financial Institutions Examination Council (“FFIEC”) will host a cybersecurity webinar 

on October 31st, he reported. In addition, the agencies are publishing a new guide designed to 

centralize cybersecurity resource information available from the government and private sector. 

Community banks report it is challenging to wade through the mass of cybersecurity resources 

available, he said, and the guide is designed to reduce that challenge.

In response to Mr. Henley’s remarks, members confirmed that phishing attacks are an 

everyday occurrence; they asked if there is anything the FDIC can do to facilitate fraud 

reporting, otherwise it will continue. Mr. Henley noted that the FDIC encourages participation 

in information-sharing groups such as the “Financial Services Information Sharing and Analysis 

Center” (“FS-ISAC”); they compile data about such threats and issue member-alerts. The 

members then referred to the practice of masking phone numbers and asked if the FDIC was 

seeing consumers and businesses defrauded by criminals using masked numbers to pose as 

financial institutions. Mr. Henley responded that there is simply no end to the schemes criminals 

create. The FDIC is aware of masking; it is another attack vector that criminals use. Mr. Henley 

agreed with the comments of several members that state banking associations are also a source 

for guidance when dealing with cybersecurity issues and can get the word out to other members. 

Members noted that, aside from bank staff, bank customers can trip-up and many customers fall 

for scams involving wiring funds to bogus accounts.

After further discussion of the cybersecurity challenges bankers are seeing in their 

community and businesses, Ms. Eberley closed the discussion by reminding participants that the 

FDIC has available on its website cybersecurity pamphlets that banks can distribute to 
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customers. There are pamphlets targeted to retail customers and pamphlets targeted to business 

customers. The FDIC also produced a Consumer News edition providing cybersecurity tips and 

tricks for customers of banks. 

Next, Mr. Davis introduced the FDIC’s Ombudsman, Mr. Lowe. Mr. Lowe reminded the 

members that on October 13, 2018, Chairman, McWilliams announced a new, agency-wide 

“Trust through Transparency” initiative at the FDIC. The Transparency Initiative unites each 

business area across the FDIC behind the goals of being accessible, understandable, responsive, 

and accountable. As part of that initiative, the FDIC issued a request for information on how to 

make communication with insured depository institutions more effective, streamlined, and clear. 

Mr. Lowe explained that, in support of the Transparency Initiative, the Office of the Ombudsman 

(“OO”) proposes to issue annual reports outlining the activities of the OO. Mr. Lowe directed 

the members’ attention to the proposed 2018 Report in their information packet and invited them 

to share suggestions to strengthen and enhance the report.

Members of the Committee commended Mr. Lowe for proposing the report, noting it 

would help clarify the role of the OO; they applauded his efforts to establish one-on-one 

relationships with bankers through the OO’s on-site visitation program; and they agreed that, 

when exploring difficult issues, it helps to have the OO available to serve as a confidential 

sounding board and a mechanism to probe issues more deeply. 

Several members voiced appreciation for the direct line of communication they have with 

the RMS Regional Director for their respective areas, noting that if they have an issue, they 

simply telephone the Regional Director for assistance. When promoting the services of the OO, 

they suggested the FDIC make it clear that bankers should still contact Regional Directors as 

their first level of recourse, emphasizing again that the Regional Directors are typically 

responsive and accessible and they value that one-on-one availability. Mr. Lowe assured the 

members that, when working through an issue, the OO staff routinely asks if the issue has been 

discussed with the Examiner-in-Charge, the Regional Director, or other relevant staff, and in that 

way tailors a more effective resolution. Ultimately, however, discussions with the OO are 

confidential and therefore appropriate in some situations. 

With respect to the format of the proposed report, participants suggested that the topic 

“Examination Issues” would be more helpful if it could be more specific. Moreover, as 

community bankers, some members noted that they really want to hone in on issues raised by 

other bankers and it will be helpful to share successful outcomes. In response to questions posed 

by the members, Mr. Lowe clarified that, with respect to contacts classified as originating with 

the public, a large number of those contacts originated with “whistleblowers.” Overall, members 

indicated it was a great idea to promote the role of the OO; it might be appropriate, however, to 

implement the report for a while, examine feedback, and revisit the report to gauge its value 

After further discussion of the proposed report, Chairman McWilliams closed the 

discussion by noting that agencies such as the FDIC have a range of formal and informal dispute 

resolution procedures. The FDIC, she emphasized, wants to make the OO position as robust as 

possible, ensure its independence, and confirm that OO communications are confidential.
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Mr. Davis announced that the meeting would recess for lunch. Accordingly, at 12:00 

p.m. the meeting stood in recess.

* * * * *

The meeting reconvened at 1:04 p.m. that same day, with Mr. Davis introducing the panel 

for the Committee’s next presentation, “Industry Collaboration Initiatives,” as Lisa Arquette, 

Associate Director, RMS; Betty Rudolph, National Director for Minority and Community 

Development Banking; and James Watkins, Senior Deputy Director, RMS. Mr. Davis advised 

that Ms. Arquette would highlight the “Bank Secrecy Act Interagency Statement on Sharing 

Bank Secrecy Act Resources,” (“Statement”) FIL-55-2018 (Oct. 3, 2018); Ms. Rudolph would 

discuss collaborative arrangements in the context of Minority Depository Institutions (“MDIs”); 

and Mr. Watkins would outline collaboration with de novo institutions.

Ms. Arquette recalled that the federal depository institutions regulators and the U.S. 

Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued the 

Statement on October 3rd in an effort to address instances in which banks and credit unions may 

decide to enter into collaborative arrangements to share resources to manage their Bank Secrecy 

Act (“BSA”) and anti-money laundering (“AML”) obligations more efficiently and effectively. 

The Statement allows community-focused banks and credit unions to share anti-money 

laundering resources in order to better protect against illicit actors seeking to abuse those 

institutions. At this point, Ms. Arquette paused to note that, aside from the Statement, there is a 

broader initiative underway to enhance efficiency and effectiveness in BSA/AML area. The 

agencies are working hard to determine what can be done to possibly streamline the examination 

process, reduce the burden of BSA/AML compliance, recognize innovation in AML techniques, 

while fully supporting law enforcement.

Returning to the October 3rd statement, Ms. Arquette described the nature of 

“collaborative” arrangements; outlined the components of an effective BSA/AML program; and, 

with reference to each component, described examples of collaborative arrangements that could 

be beneficial for banks.

She emphasized that appropriate safeguards should be in place to ensure confidentiality 

of sensitive business information; participants must ensure that shared resources conducting 

BSA/AML independent testing are qualified; employees should be trained and independent. She 

acknowledged it might be challenging to acquire personnel with BSA/AML expertise in some 

communities. Further, it might be cost prohibitive to attract a qualified, off-site BSA/AML 

trainer. A collaborative arrangement therefore provides latitude in hiring a qualified instructor 

and allows banks to share costs. She also acknowledged that sharing a BSA officer could be 

challenging due to the confidential nature of suspicious activity reports and the ability of the 

BSA officer to coordinate and monitor each bank’s day-to-day BSA/AML compliance. 

Moreover, sharing a BSA officer might create challenges with effective communication between 

the BSA officer and each bank’s Board of Directors and senior management. Accordingly, she 

acknowledged it may not be appropriate for banks to enter into collaborative arrangements to 

share a BSA officer. If, nonetheless, banks plan to share an officer, they are encouraged to 
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discuss the issue with the appropriate regulator beforehand. Ms. Arquette then described 

strategies to mitigate risks, including implementing clear contractual agreements and providing 

periodic reports to management and the Board regarding collaborative arrangements.

In response to questions posed by the Committee, Ms. Arquette advised that the agencies 

do not have data available concerning anticipated savings of collaborative efforts but indicated 

some banks are already engaging in such arrangements. One member commented that his 

institution has been assisting institutions that did not have the in-house expertise to conduct 

internal audits for several years. Ultimately, the parties created an engagement letter and the 

collaboration is working well for both parties. Ms. Arquette also agreed with the members that 

there is a role for state bank associations; they would be similar to any third-party provider.

Next, Ms. Rudolph discussed collaborative arrangements in the context of MDIs. As 

outlined in the “Resource Guide for Collaboration with Minority Depository Institutions” 

included in the information packet, Ms. Rudolph advised that MDIs as well as non-minority 

banks can recognize regulatory and business benefits by forming collaborative relationships with 

other MDIs. She then discussed at length various types of collaborative arrangements, including 

direct investment in an MDI, loan participations, sharing of bank staff, and information 

networking.

In response to questions by the members, Ms. Rudolph advised that FDIC staff had 

occasionally brought together MDI trade groups and CEOs of non-MDI institutions in an effort 

to facilitate exploration of opportunities, the most recent effort being a session held in Salt Lake 

City with industrial loan companies. The members suggested it would be helpful to involve a 

broader audience. Ms. Rudolph concurred and noted that the FDIC is promoting the Resource 

Guide to state associations and exploring a number of channels to locate potential partners. She 

highlighted one of the benefits of such arrangements: Community Reinvestment Act (“CRA”) 

consideration. She clarified that all banks receive consideration under CRA for activities in their 

assessment areas and the broader state-wide or regional area if it’s responsive to the community 

development needs in their assessment area. Non-MDIs may also receive consideration if they 

partner with a MDI outside of their geographic area. After further describing mechanisms of 

partnering with MDIs, Ms. Rudolph returned to the topic of locating a partner. She advised that 

the FDIC has regional MDI coordinators in each regional office. In addition, FDIC community 

affairs regional managers, state/regional trade associations for community development or CRA 

officers, and MDI trade associations can all help banks find collaborative opportunities. When 

asked to prioritize who to contact to learn about opportunities, Mr. Watkins suggested calling the 

FDIC’s MDI coordinator and the FDIC’s regional CRA specialist. Ms. Rudolph noted that she is 

available to assist as well. 

Next, Mr. Watkins summarized FDIC efforts to encourage “de novo” or new bank 

formation. He recalled that, in 2016-2017 the FDIC participated in day-long sessions at each 

regional office, meeting with potential new organizers in an effort to discuss the application 

process. The highlight of those sessions was hearing from a panel of bankers describing their 

experiences and “lessons learned” in forming de novo banks. He discussed how helpful other 

bankers can be in the development of essential documents. For example, bankers provided 

organizers with sample loan policies, interest rate risk policies, funds management policies, and 
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CRA policies. The organizers used those samples to develop policies appropriate to their 

business plans. He indicated that the early stages of formation can be difficult and it takes time 

to achieve profitability. Loan participations might help, he suggested. Existing banks can 

provide, essentially, initial credit via loan participations and correspondent banking relationships. 

Another important aspect of these de novo sessions was the ability to discuss information 

technology challenges for de novos. Again, de novos benefited when existing banks shared their 

experiences in developing IT contracts. Overall, existing banks are a remarkable resource to 

those creating de novo institutions. The FDIC is seeing renewed interest in new bank formation, 

he indicated, and the FDIC appreciates the support provided by existing banks to de novos. 

One member agreed that cooperation was important but said one of the more challenging 

aspects in new bank formation is the perception that regulators are ratcheting up the capital 

levels required for a new bank. He recalled that the RMS Division Director explained at a 

meeting he attended that the FDIC does not have a minimum capital level other than that de novo 

banks must maintain an eight percent leverage ratio for the first three years and show the bank 

can turn a profit inside of those three years; the onus is on the organizers to tell the FDIC how 

much capital will be needed to fulfill that business plan. He observed that de novos therefore 

have a varied range of capital levels approved, depending on their business plan. He agreed with 

that approach, he advised. Another member concurred, noting that organizers often want to 

provide as little capital as possible but, ultimately, the calculation is based upon the business 

plan, the niche the de novo will fill, and potential customers. 

In response to concerns that organizers must continually return to regulators with more 

detailed information, Mr. Watkins emphasized that in the formation of a de novo bank, the 

business plan is paramount; where banks have encountered challenges is when they deviate 

sharply from the original business plan and grow more rapidly than originally anticipated. If 

significant business plan changes occur without control systems in place, he cautioned, de novos 

could assume excessive risks. He clarified that banks can deviate from their business plans as 

long as the changes are well-informed, thought through, and structured in such a way that it will 

lead to sustained profitability. 

The panelists for the next discussion concerning “Deposit Insurance Assessment Pricing 

for Small Institutions,” were Diane Ellis, Director, Division of Insurance and Research (“DIR”), 

and Patrick Mitchell, Deputy Director, DIR. 

After summarizing past assessment pricing models, Ms. Ellis noted that the FDIA allows 

the FDIC to establish separate risk based assessment systems for large and small institutions. 

Turning to the scheme currently in place, she explained that all of the measures in the assessment 

pricing regulation are derived from a statistical model that estimates a bank’s probability of 

failure, and the model uses data going all the way back to the mid-1980s. 

Against that background, Mr. Mitchell directed the Committee’s attention to charts 

included in the information packet and discussed, in turn, the average assessment rate over time; 

the effect of assessments on bank income; small bank assessments as a percentage of total 

assessments; and the distribution of assessment rates for all small banks (those with less than $10 

billion in assets). Mr. Mitchell then described for the benefit of the Committee the factors used 
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in small bank pricing. He indicated the factors were straight-forward and included (1) weightedaverage CAMELS, (2) leverage ratio, (3) net income before taxes/total assets, (4) nonperforming 

loans and lease/gross assets, (5) other real estate owned/gross assets, (6) a brokered deposit ratio, 

(7) the Loan Mix Index, and (8) one-year asset growth. He clarified that the biggest factors in 

determining the price of deposit insurance for small banks, in order, are the leverage ratio, Loan 

Mix Index, and weighted-average CAMELS. 

Following the panelists’ presentations, the Committee members and staff discussed the 

assessment pricing regulation applicable to small institutions at length. The members asked 

several clarifying questions with respect to the factors used in small bank pricing. Ms. Ellis 

referred the members to the assessment rate calculator found on the FDIC’s website at: 

https://www.fdic.gov/deposit/insurance/calculator.html. One member asked about the reliability 

of the calculator for budgeting purposes. 

Mr. Mitchell assured the members that, to the extent a bank can project accurately what 

its balance sheet and the relevant components will look like, the model is 100 percent accurate 

and completely transparent. In response to concerns regarding the lack of granularity in the 

model, Mr. Mitchell noted that one of the biggest challenges is to use data the FDIC has 

available; thus the model is limited by the granularity of the Call Report. Overall, however, he 

suggested that this pricing model is a significant improvement over prior models. He 

acknowledged that the Loan Mix Index is a significant component. He explained that the FDIC 

is attempting to look forward and make sure risks are being priced as they are incurred. Those 

risks may or may not be realized, he acknowledged, but as they are incurred, the FDIC needs to 

make sure it is charging for those risks.

Members suggested that as the FDIC weighs the loan mix too heavily and is not taking 

differences in underwriting standards into account. As a result, the loan mix formula might 

indicate a higher risk than actually exists in a given bank. Participants suggested the FDIC 

conducts annual bank examinations and is equipped to actually review a bank’s asset quality. An 

examination might reveal that a bank has a higher asset quality than that suggested by the loan 

mix formula. The FDIC could achieve more granularity and be more precise as to any given 

bank, they urged. 

Staff then briefly reviewed the outlook for the Deposit Insurance Fund (“DIF”) and the 

background on the assessment credits for community banks. Staff noted that current regulations 

require that each small bank be notified of the amount of credits it would receive as soon as 

practicable after the reserve ratio reaches 1.35 percent and that the calculation of the total amount 

of credits would require information available only after the reserve ratio reached 1.35 percent, 

including the amount of insured deposits at that time. 

Referring again to the information packet, Mr. Mitchell advised that, when the reserve 

ratio is at or above 1.38 percent, the FDIC will automatically apply credits to reduce the 

assessments of small banks in order to offset the effect of their contribution to raise the reserve 

ratio from 1.15 percent to 1.35 percent. The credits will offset in whole each small bank’s 

assessment until the credit is exhausted. The expectation is that, for most banks, the credits will 

fully or partly offset their deposit insurance assessments for two to four quarters. The members 
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indicated that was positive news. 

Mr. Davis then announced that the meeting would briefly recess. Accordingly, the 

meeting stood in recess at 2:20 p.m. 

* * * * *

The meeting reconvened at 2:37 p.m. that same day, at which time Mr. Davis introduced 

the next agenda topic, “Interest Rate Restrictions Applicable to Less than Well-Capitalized 

Banks,” presented by Ms. Miller and Vivek Khare, Counsel, Legal Division.

Ms. Miller opened the discussion by reminding the members that the FDIC plans to 

engage in a broad review of brokered deposit and rate restrictions and indicated that today’s 

discussion will be helpful to that broader review. She then reviewed the history of brokered 

deposits and the reasons that statutory rate restrictions exist. She noted that CDs were a new 

product in the late 1960s, as financial markets became more global and investors sought higher 

rates; at the same time brokerage accounts became available to more consumers and were no 

longer the domain of wealthy investors. She discussed a linkage between institutions that have 

used brokered deposits and high rate deposits for excessive risk taking and excessive growth. 

She cited FDIC annual reports and other reports produced in the 1980s that noted that many of 

the failures and problem institutions had heavy levels of brokered deposits. Congress therefore 

instituted restrictions on brokered and high rate deposits through FIRREA and again in the 

Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). In summary, she 

said, the statutory restrictions are designed to prevent rapid growth, minimize volatility, and 

preserve franchise value in the event of failure.

Next, Mr. Khare provided an overview of the legal framework underlying the rate 

restrictions. He explained that, although the statute prescribes a general framework with respect 

to rate restrictions, it does not prescribe definitions for key terms such as “significantly higher” 

or “national rate.” To address those gaps the FDIC promulgated regulations in 1992 and, 

leveraging data collected over the years, refined the regulations in 2009. The interest rate 

restrictions currently in place provide as follows: 

 A well capitalized insured depository institution has no restrictions on the rates it pays on 

deposits.

 An adequately capitalized institution that has a waiver to accept, renew, or roll over 

brokered deposits may not pay an effective yield which, at the time the deposit is 

accepted, renewed, or rolled over, exceeds by more than 75 basis points: (1) The 

effective yield paid on deposits of comparable size and maturity in the institution's 

normal market area for deposits accepted from within its normal market area, or (2) the 

national rate paid on deposits of comparable size and maturity for deposits accepted 

outside the institution's normal market area. The national rate is a simple average of rates 

paid by all insured depository institutions and branches for which data are available and 

is determined by the FDIC. 
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 An undercapitalized insured depository institution may not solicit deposits by offering an 

effective yield that exceeds by more than 75 basis points the prevailing effective yields 

on insured deposits of comparable maturity in such institution's normal market area or in 

the market area in which such deposits are being solicited.

He noted that the regulation permits flexibility so that if a bank believes prevailing rates 

in its local market area are higher than the national rate they may provide evidence supporting 

that conclusion. If the FDIC Regional Office agrees, the bank may then pay 75 basis points over 

its prevailing local market rate. Mr. Khare then invited Ms. Miller to discuss emerging trends 

impacting rate restrictions and the FDIC’s plans to update restrictions.

Ms. Miller directed the members’ attention to a chart included in the information packet, 

explaining that it illustrated rate caps for a 12-month certificate of deposit product under the 

1989-2009 methodology based on Treasury rates, caps under the methodology in effect 2010 to 

present based on a national average published by the FDIC, and a proxy for high-rate payers 

derived from a listing service. The high-rate CDs tracked the Treasury rates until the 2007 

disruption when investors rushed to safety and Treasury yields were driven down. This meant 

that beginning in 2007 banks that were less than well capitalized were running out of options. 

They were running into a liquidity crunch because the rate restrictions were quickly impactful. 

In 2009, the FDIC revised the methodology and implemented a national rate that the FDIC 

publishes weekly based upon a national rate survey. During this time, the survey results were 

above the high-rate payers. This change allowed banks that were less than well capitalized to 

access funds from ListServs and other high-rate sources. That added flexibility was challenged 

in 2015, however, when the Board of Governors of the Federal Reserve System started raising 

rates. The rate caps became applicable on weakened banks, and they could no longer compete 

for deposits. The FDIC had a few failures. Banks had not been dealing with rate restrictions for 

a number of years. The FDIC published its observations of liquidity stress at some banks in an 

article titled, “Community Bank Liquidity Risk: Trends and Observations from Recent 

Examination (Supervisory Insights, Summer 2017), included in the packet. In response to 

market trends, the FDIC is re-considering its current methodology. Ms. Miller then asked the 

members to share their insights with respect to the rate restrictions.

The members observed that large banks have access to a range of liquidity sources. 

Consequently, rate restrictions could be perceived as penalizing small banks. Members also 

questioned the concept of a national cap and suggested it may be more realistic to approach caps 

from a regional perspective. Since the rate restrictions do not apply to well-capitalized banks, 

the members acknowledged that most banks would not run into restrictions. The reason bankers 

are nonetheless concerned, the members advised, is the potential danger that the definitions used 

to identify high-rate deposits will be incorporated into the evolving definition of high volatility 

deposits. Explaining further, one member advised that when discussing liquidity with regulators 

during a recent examination they mentioned high volatility deposits but it does not seem to be a 

defined term.

Commercial deposits often exceed insurance limits and even though banks consider these 

deposits to be core deposits, bankers perceive the danger that the FDIC might consider them high 

volatility deposits. Members also noted that rates paid by credit unions should be included in the 
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calculation. There was additional discussion regarding FDIC staff statements noting that failed 

banks with significant levels of brokered deposits were costly to the FDIC since acquiring banks 

don’t pay for brokered deposits and in some cases, the FDIC does not even pass brokered 

deposits to the acquirer. One member noted that the FDIC seems to be placing a higher value on 

cost to the insurance fund associated with failed banks that have brokered deposits versus the 

liquidity available to the institution before it fails. The member noted that when an institution 

becomes troubled local certificates of deposit are just as likely to flee and thus there are similar 

issues relating to franchise value as those raised about brokered deposits. Other members agreed 

that as soon as rates are lowered, deposits tend to move even if they are derived from the local 

market. The members advised that it is in no one’s interest to allow an otherwise viable bank to 

fail due solely to a lack of liquidity. Ms. Miller acknowledged that brokered deposits and highrate deposits are part of many institutions’ business models and, when used appropriately, 

provide liquidity.

Staff conceded that credit union rates are not included in the national rate sponsored by 

the FDIC but emphasized again that a bank that is less than well capitalized is encouraged to 

bring evidence of rates to the FDIC and may certainly include credit union data if they are 

finding that in the bank’s region. As to why FDIC staff does not automatically include credit 

union data, staff indicated that when the FDIC began calculating the national rate, it may not 

have had access to reliable data concerning credit union rates.

In response to questions posed by the members, Ms. Miller indicated that rates posted 

nationally by online banks are not included in the calculation nor are special promotion products. 

Rather, the rates are aggregated by a service that surveys an extensive range of bank offices and 

branches. Members countered that if the survey company includes 3,000 branches of the same 

national bank in the mix the calculation could be skewed. They also suggested the market is 

evolving so rapidly that the industry does not have the luxury of studying the appropriate 

markers over time. Instead, the issues must be dealt with in a much compressed period of time. 

Further challenging the calculation methodology, the members advised that it was not precise 

because it did not capture offers unless they were widely known. One member also questioned 

the methodology by noting that a bank could pay half the cost of the rate at which the U.S. 

Treasury borrows yet still be regarding as paying a high rate of interest. 

Following further discussion of alternative models for determining the national rate and 

other rate restrictions, Mr. Davis thanked the members for their contribution and brought the 

discussion to a close. Chairman McWilliams thanked the panelists and the Committee members 

for their very helpful and insightful discussions. Director Gruenberg commended the Chairman 

for initiating the previous roundtable discussion with the members, noting that it was as fine a 

seminar on community banking as he had ever participated in. 
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There being no further business, the meeting was adjourned at 3:16 p.m.

_____________________________

Robert E. Feldman

Executive Secretary

Federal Deposit Insurance Corporation

And Committee Management Officer

FDIC Advisory Committee on Community Banking
Minutes

of the

Meeting of the FDIC Advisory Committee on Community Banking

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

October 10, 2018 – 9:00 A.M.

I hereby certify that, to the best of my knowledge, the attached minutes are accurate and 

complete.

________________________________

Jelena McWilliams

Chairman

Board of Directors

Federal Deposit Insurance Corporation