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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,

OCTOBER 10, 2018

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The Advisory Committee convened at 9:06 a.m. 

in the Federal Deposit Insurance Corporation Board 

Room, 550 17th Street, NW, Room 6010, Washington, 

D.C., Jelena McWilliams, Chairman, presiding.

PRESENT:

JELENA McWILLIAMS, Chairman

MARTIN GRUENBERG, FDIC Board of Directors

CHRIS DONNELLY, President & CEO, Bank of the

Prairie

JAMES EDWARDS, CEO, United Bank, Zebulon, Georgia

CHRISTOPHER EMMONS, President & CEO, Gorham

Savings Bank

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

Bank of New Jersey

JACK HARTINGS, President & CEO, The Peoples Bank 

Co.

DANNY J. KELLY, President & CEO, Hometown Bank of

Alabama

KENNETH KELLY, First Independence Bank

ARVIND A. MENON, President & CEO, Meadows Bank

TIFFANY BAER PAINE, President & CEO, Security

Bank USA

MARY ANN SCULLY, President & CEO, Howard Bank

ALAN SHETTLESWORTH, Main Bank

JOHN M. TOLOMER, President & CEO, The Westchester
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Bank

JOSEPH W. TURNER, President & CEO, Great Southern

Bank

LOUISE WALKER, President & CEO, First Northern

Bank of Dixon

LEN WILLIAMS, President & CEO, People's

Intermountain Bank

ALSO PRESENT:

RUTH AMBERG, Assistant General Counsel, Legal

Division

LISA ARQUETTE, Associate Director, Division of

Risk Management Supervision

RYAN BILLINGSLEY, Corporate Expert, Division of

Risk Management Supervision

CHAD DAVIS, Deputy to the Chairman for External

Affairs

DOREEN EBERLEY, Director, Division of Risk

Management Supervision

DIANE ELLIS, Director, Division of Insurance and

Research

WILLIAM HENLEY, Associate Director, Division of

Risk Management Supervision

VIVEK KHARE, Counsel, Legal Division

M. ANTHONY LOWE, FDIC Ombudsman

RAE-ANN MILLER, Associate Director, Division of

Risk Management Supervision

PATRICK MITCHELL, Deputy Director, Division of

Insurance and Research

MARK PEARCE, Director, Division of Depositor and

Consumer Protection

Lisa Roy, Associate Director, Division of Risk 

Management Supervision

BETTY RUDOLPH, National Director for Minority and

Community Development Banking

JAMES WATKINS, Senior Deputy Director, Division

of Risk Management Supervision
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CONTENTS

Introductory Remarks

Jelena McWilliams........................ 4

Committee Member Discussion of Local

Banking Conditions....................... 6

Supervision Update

Doreen Eberley ............................... 81

Rae-Ann Miller .............................. 825

Ryan Billingsley ............................. 98

William Henley .............................. 103

FDIC Ombudsman Update

M. Anthony Lowe ............................. 124

Industry Collaboration Initiatives

Lisa Arquette ............................... 148

Betty Rudolph ............................... 161

James Watkins ............................... 171

Deposit Insurance Assessment Pricing

for Small Institutions

Diane Ellis ................................. 183

Patrick Mitchell ............................ 184

Interest Rate Restrictions Applicable

to Less Than Well-Capitalized Banks

Rae-Ann Miller ............................. 2164

Vivek Khare ................................. 224

Closing Remarks

Jelena McWilliams ........................... 249
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1 P-R-O-C-E-E-D-I-N-G-S

2 (9:06 a.m.)

3 CHAIRMAN McWILLIAMS: I think we're good 

4 to begin. Good morning, everybody.

5 PARTICIPANTS: Good morning.

6 CHAIRMAN McWILLIAMS: That was a great 

7 good morning. We are so pleased to have new 

8 members of the committee with us, and I'll 

9 introduce them in a second. So we have Louise 

10 Walker from First Northern Bank of Dixon, Dixon, 

11 California. Welcome, pleasure to have you here. 

12 Alan -- where's Alan? Alan is over here. Alan 

13 Shettlesworth from Main Bank, Albuquerque, New 

14 Mexico. We have Ken Kelly.

15 MEMBER KELLY: Yes.

16 CHAIRMAN McWILLIAMS: Hi, Ken. Nice 

17 to see you.

18 MEMBER KELLY: Good morning.

19 CHAIRMAN McWILLIAMS: From First 

20 Independence Bank, Detroit, Michigan, and Jim 

21 Edwards from United Bank, Zebulon --

22 MEMBER EDWARDS: Georgia. Zebulon, 
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1 Georgia, yes.

2 CHAIRMAN McWILLIAMS: Zebulon, I got 

3 it.

4 MEMBER EDWARDS: Very good.

5 CHAIRMAN McWILLIAMS: All right, 

6 Zebulon, Georgia.

7 We expanded the membership of the 

8 committee to ensure that we have representation 

9 from different geographic areas of the countries, 

10 of the country, also that we have more 

11 representation from more diverse areas, so looking 

12 at rural, agricultural, farm landing, etc. We 

13 also want to allow more time for dialogue and input 

14 from the members, and for the new members, we're 

15 actually very friendly, we engage nicely, so I 

16 expect you to please, please provide your input.

17 This is not a perfunctory committee. 

18 This committee is supposed to serve truly to get 

19 your feedback. You can tell us what's happening 

20 on the ground, and we will implement that into our 

21 thought process and policymaking and move forward, 

22 hopefully, in a, in a productive manner where we 
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1 can create an environment where our community banks 

2 can thrive, so we do expect you to engage, and I 

3 put my new members close to me, so I can poke you 

4 if you're not asking questions.

5 (Laughter.)

6 CHAIRMAN McWILLIAMS: You'll see from 

7 the agenda today that we are starting off by hearing 

8 from the committee members about your banks and 

9 your communities. And I'm going to turn the 

10 program over to Chad Davis, Deputy for External 

11 Outreach who will serve as the moderator for 

12 today's meeting. Again, welcome.

13 MR. DAVIS: Thank you, Chairman.

14 As the Chairman indicated, we're going 

15 to start with presentations or just a discussion, 

16 if you'd like to call it that, from the committee, 

17 so for this session, I'm going to turn it over to 

18 all of you. And we didn't just turn it to him cold. 

19 We talked to him ahead of time, but asked John to 

20 please kick it off, so, again, this is a very 

21 flexible time. Please tell us about your markets, 

22 your banks, whatever you find most relevant for 
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1 this period.

2 MEMBER TOLOMER: Sure. Thank you very 

3 much, Chad. I appreciate it. The Westchester 

4 Bank was founded ten years ago. We are in the 

5 Westchester market, which is a suburb of New York 

6 City, and we are typically geared toward 

7 small/medium-sized businesses and being able to 

8 have a full suite of product for consumers as well.

9 What we're seeing in the market more 

10 recently is there's a great deal -- loan demand has 

11 been solid and growth has been in the 15-16 percent 

12 range year over year. Deposits, on the other hand, 

13 I think are a struggle that we're seeing throughout 

14 the industry, not just in Westchester County or in 

15 New York Metropolitan area, but I think nationwide.

16 One of the things that we're seeing is 

17 some of the larger banks are looking to, I think, 

18 bolster their liquidity and are offering higher 

19 rates than normal, and so when you talk about the 

20 normal rates nationwide, it tends to be very 

21 different in New York, because you have regional 

22 banks and larger banks offering 1.75 for money 
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1 market rates and 2.5 for one-year CDs, and those 

2 are -- creates a great deal of pressure for smaller 

3 banks to be able to build their business.

4 You know, we've always said we want to 

5 do well by doing some good in our market, and when 

6 you have that pressure, it's certainly, you know, 

7 has been difficult from a competitive standpoint. 

8 The good news is with the tax cut, our 

9 year-over-year profits are very strong, and even 

10 if you back out the effects of the tax cut, we still 

11 have fared very well.

12 We're lean. We utilize technology 

13 where we can and consultants where we can to augment 

14 what our employees are doing, so it's -- I think, 

15 as we look forward, I think, banks have to really 

16 look at what is going to happen to -- there's 

17 greater pressure for deposit rates increasing, 

18 and, of course, there's pressure from customers not 

19 to increase our loan rates, and so, you know, with 

20 the relatively flat yield curve, it's something 

21 that we all have to consider as, how do you handle 

22 your business on a going-forward basis?
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1 Thus far, we've been able to compete. 

2 We're asset sensitive and -- but in terms of the 

3 overall market, there's -- there isn't any lack of 

4 competition, and, certainly, you know, we are --

5 have learned to put forward the loan proposals that 

6 we think make sense for us and for our shareholder.

7 Fortunately, we've been able to win 

8 more than we've lost, but you do sometimes lose to 

9 banks that want to have a more aggressive approach 

10 to terms and conditions, something we're not 

11 comfortable with, and, also, there are pricing 

12 considerations. Some of the larger regionals for 

13 multifamily will -- are still below four percent, 

14 which is beyond my comprehension as to how they can 

15 do that effectively, but they are, and it's 

16 something that we have chosen not to do and we'll 

17 continue not to do that.

18 So, I think discipline is -- I don't 

19 mean to pontificate, but I think discipline is the 

20 order of the day of how you operate your business, 

21 and looking at the deals you want to put forward, 

22 for the credit quality you want to put forward, and 
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1 recognize there's going to be pressure on margin, 

2 and how you go about managing that is going to be 

3 very important for the future strength of your 

4 organization.

5 So, if there's anything that I didn't 

6 cover, I certainly am open to any questions.

7 CHAIRMAN McWILLIAMS: Thank you.

8 MR. DAVIS: Great. Tiffany, can we 

9 turn it to you?

10 MEMBER PAINE: You know, you didn't 

11 talk to me beforehand.

12 (Laughter.)

13 MEMBER PAINE: I'm Tiffany Paine. I'm 

14 from Security Bank in Bemidji, Minnesota. Just to 

15 give you an idea where that is, we are four hours 

16 south of Winnipeg and four hours north of 

17 Minneapolis, so we are in a small rural community 

18 that is very diverse.

19 We have -- in the 20-mile radius, we 

20 have about 50,000 people and we have 10 financial 

21 institutions competing for their business. That 

22 does not include brokers or anything like that, so 
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1 I'm going to say ditto, yes, what John said, but 

2 exactly looking at your balance sheet on a regular 

3 basis, managing that on a regular basis.

4 We have been fortunate enough to grow 

5 over seven percent in our loans in the last two 

6 years and over eight percent in our deposits in the 

7 last two years. One thing that I know will come 

8 up later is the reciprocal account conversation, 

9 and that's a big thing for us, so I'll wait on that 

10 conversation.

11 But what we are seeing in our markets 

12 is a little bit of the, maybe loosening of 

13 underwriting in some situations. You are seeing 

14 people that are willing to, to get the money, again, 

15 adjust their terms, adjust their rates, lock in for 

16 longer, and you see customers shopping for that on 

17 a regular basis.

18 What they're basing that on maybe, for 

19 example, is they think they should get better terms 

20 and better rates because their score on Credit 

21 Karma is 800 and they come in and they want to debate 

22 why Credit Karma is right, and the three agencies 
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1 that you're pulling their credit report from are 

2 wrong. So there's a little bit of misinformation 

3 out there for the consumer and it's readily 

4 available to them. And because they have this 

5 information, they think that they should come in 

6 and get these better terms.

7 We are seeing that that goes to the 

8 fintech disruption a little bit. It's not just the 

9 apps that you can get. The immediate approval, 

10 which is also untrue, which to me falls under UDAP, 

11 but it does take a longer term, and then the 

12 question is, “Who's regulating them, and how is 

13 that being taken care of?”

14 It's the Credit Karmas, it's the -- all 

15 of that disruption coming in. It's the spam, it's 

16 the phishing, it's the -- all of the different 

17 technology aspects of it.

18 Then, what -- another thing that we are 

19 seeing is that in the state of Minnesota, brokers 

20 only have to take a test to get their license. 

21 There's no continuing education that is required, 

22 I believe, from them, and so they don't understand 
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1 our smaller market, and so that actually is good 

2 for us on one side of it, but it does create a bit 

3 of a challenge.

4 We are starting to see customers trying 

5 to stretch their limits, trying to push the ratio 

6 limits, put little money down, borrow to fix up 

7 immediately, so we're starting to see that, and to 

8 help rein them in can be a bit of a challenge.

9 Manufacturing -- manufactured housing 

10 is still a challenge. If we put the same customer 

11 through our system and that customer will -- for 

12 a manufactured home will come up denied or caution, 

13 if we put a stick build in there, it's approved, 

14 so I think in our area, again, in rural communities, 

15 not everybody can afford a stick build house.

16 And construction is coming in over as 

17 it typically does, so manufactured homes are good 

18 opportunities. If you have a large farm or a 

19 family farm and the parents give the kids some of 

20 the acreage, to finance that manufactured home is 

21 still a challenge and that's unfortunate, because 

22 those are future customers we want to build.
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1 Credit consolidation companies are 

2 popping up again, and it's a challenge. People are 

3 getting stuck, and they, they don't read the fine 

4 print, so eventually, they're coming back to us.

5 I have several topics, but I'm going to 

6 pass it on, and we can discuss them in the future. 

7 Thank you.

8 MR. DAVIS: Chris, could you go next?

9 MEMBER DONNELLY: Thank you, Chad. 

10 I'm Chris Donnelly with Bank of the Prairie, $140 

11 million, two-location branch, a bank in Olathe, 

12 Kansas. Olathe is a suburb in the southwest part 

13 of Kansas City, Missouri metro, about 140,000 

14 people and growing quite well.

15 The bank, we've experienced some 

16 significant growth, and then back in January, we 

17 kicked the brakes on pretty hard and then are 

18 pushing them harder, because the small business 

19 community is doing well. We're starting to see 

20 some stress in the real estate market, 

21 single-family housing construction.

22 In fact, we saw it start to trickle down 
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1 from the larger more expensive houses, and they 

2 were starting to slow early on in the year, and now 

3 we're seeing it even down in the more affordable 

4 housing, so we've really decided that it's probably 

5 best to let somebody else get into that business.

6 And the small business sector by itself 

7 -- and we're a well-diversified bank with real 

8 estate, commercial, C&I, very little ag, but in the 

9 ag that we do have is struggling still. Then --

10 and it does not appear to be anytime soon that that 

11 will repair itself.

12 I think probably our biggest challenge 

13 is gathering deposits. Our cost of funds has 

14 increased pretty rapidly. As a small bank in a 

15 metro community, it's hard to gather deposits. Our 

16 headquarters is directly across the street from 

17 Garmin International where there's 3,000 employees 

18 and they're adding 2,000 more, and it's hard to get 

19 those young engineers to bank with a small 

20 community bank and bring their deposits in.

21 On a daily basis, I tell the story that 

22 probably 500 electric, or electronic engineers, 
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1 whatever they are, at Garmin walk through my 

2 parking lot and go to a restaurant or go to the 

3 convenience store across the street, and it's hard 

4 to get them to come in and -- when you're not a large 

5 regional and have all the technology, and so those 

6 deposits are hard to find. And with the cost of 

7 funding going up, it's hard to see how you can make 

8 a profit in a small bank.

9 I was sitting with some of my colleagues 

10 at a table this morning, and they were talking about 

11 interest rates in the fours and fives for loans, 

12 and we've started pushing six percent and we are 

13 now seeing at that rate that customers stop 

14 borrowing money.

15 Deals quit. They just won't do the 

16 deal. And I don't -- I don't think they recall the 

17 time when six percent was a really, really good 

18 interest rate, and it still is a good interest rate, 

19 but when we start to see that pressure, we start 

20 to get concerned, and so that's why it makes sense, 

21 for us at least, to maybe back off a little bit and 

22 see where the markets are going to go. It's 
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1 disconcerting to see good solid projects back away 

2 when you get approaching to a higher interest rate 

3 at six percent.

4 So, that's kind of it with Olathe, and 

5 I'll pass to Len here.

6 MEMBER WILLIAMS: Great. Thank you. 

7 Well, I'm Len Williams. I'm with the People's 

8 Intermountain Bank, which is the bank associated 

9 with People's Utah Bancorp holding company. We're 

10 about a $2.2 billion bank located just south of Salt 

11 Lake is our headquarters, but we've got 25 

12 locations throughout the state.

13 And it's been a -- it's been a pretty 

14 good run here the last several years. The state 

15 has a lot going for it. Favorable business 

16 climate, tax rates, so there's been strong 

17 in-migration. It's been the top two or three in 

18 the country the last several years. Same with job 

19 growth, same with income growth, so all of those 

20 going for you have been very helpful to us and the 

21 banks in our market.

22 A competitive area from a credit union 
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1 perspective -- also, Utah is one of the states that 

2 really encourages the ILCs, the -- and right now 

3 as the last couple of weeks, there are four or five 

4 applications in for new ones now, so we're starting 

5 to see a little bit of bank charter application 

6 growth.

7 The industrial loan companies are not 

8 direct competitors for us in our market, but 

9 they're direct competitors for all of us in all of 

10 our markets. They actually go out nationally. 

11 For their lending, they tend to fund themselves 

12 predominately with brokered CDs, and other 

13 sources, so it's -- it's good for the Utah Bankers 

14 Association, good for the membership, the growth 

15 and the support, and they tend to be fairly 

16 innovative too, so we do have some collaborative 

17 opportunities with those folks where we talk about 

18 different ways they're funding their bank, 

19 different type of technologies they're using to --

20 on their national scale, so that's been interesting 

21 for us.

22 Some of the issues in our market, 
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1 there's starting to be the affordability index for 

2 residential housing. There's been a lot of 

3 in-migration to where a lot of the local kids, the 

4 folks growing up in the market, are having a hard 

5 time affording new homes. That's becoming a bit 

6 of concern, as is real estate concentration, but, 

7 again, there's a focus in that area.

8 While there's virtually no new home 

9 inventory for sale, you know, having been in the 

10 industry for 40 years, my spider senses are 

11 starting to tingle a little bit. It's just a 

12 matter of when and how severe the next downturn is, 

13 so we spend a lot of time now focusing on what we 

14 don't even see yet, which is how do we prepare our 

15 balance sheet, how do we prepare our funding for 

16 a slowdown in the real estate market, which we think 

17 will probably happen in the next couple of years 

18 in our market.

19 So, it's been great for organizational 

20 profitability. We've had record years the last 

21 several years. It continues on at this point, but 

22 we are seeing deposit -- you know, it was nice those 
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1 first four rate increases, nobody raised their 

2 rates. In these last three, people have gone, at 

3 least in our market, rates have climbed 

4 exponentially particularly for deposits, and we 

5 continue to see that, so funding costs are going 

6 up, margins are being squeezed a little bit, and 

7 we continue to be concerned about that as well.

8 MR. DAVIS: Thanks, Len.

9 MEMBER HARTINGS: I'm the other 

10 Peoples Bank in the group here. Jack Hartings. 

11 I'm with Peoples Bank in Coldwater, Ohio. We're 

12 about a $500 million institution, 7 locations.

13 I was listening to the population size. 

14 I think our county is about a 40,000 population. 

15 The counties that surround us, roughly 50 or 60. 

16 We're the number one agricultural county in Ohio, 

17 Mercer County.

18 Agricultural is suffering, but the rest 

19 of the economy is going well. I think our 

20 unemployment in our county is less than three 

21 percent right now. And we're starting to see 

22 effects certainly on our own income, but from the 
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1 tax changes, but several manufacturers.

2 We've got one in our area that's 

3 building about a 500,000 square foot building. 

4 They build forklifts. We've got a recreational 

5 vehicle manufacturer in the area that's adding on 

6 800,000 square feet. Those are just -- the dirt 

7 is just being turned today, so those are going to 

8 have some long-term effects.

9 And, you know, when I talk to the other 

10 small businesses about why they're feeling maybe 

11 good about the economy and expanding right now, 

12 certainly, they look at taxes, they look at the 

13 general economy, they feel the sense of a more 

14 common sense regulatory environment, that's kind 

15 of what they passed on to me, so things on that side 

16 look good.

17 We're having a housing push as well. 

18 It's just the really affordable housing as 

19 construction costs rise. We're a fairly 

20 substantial residential lender at our institution. 

21 Haven't seen the rates slow that down yet, but I 

22 think you'll see that in maybe these fourth and 
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1 first quarter, because they mostly track the ten 

2 year, and as you guys know, the ten years are --

3 is coming up the last couple of weeks.

4 When I talked to the other bankers in 

5 the area and ourselves, we're starting to see 

6 deposit pressure. When you're a banker, you first 

7 look at the special rates on CDs, money markets, 

8 but those rates are now creeping into all rates, 

9 and so I think that's, that's maybe the change we're 

10 starting to see over the last month, but most of 

11 us still, at least in our general vicinity, have 

12 fairly good lines.

13 It's been good loan growth, but most of 

14 us have seen our growth moderate a little bit. I 

15 think most of us are still growing in different 

16 industries, depends upon what we're into.

17 Concerns out there, I know we didn't 

18 talk about regulatory too much yet. The reg burden 

19 of TRID I want to say is kind of behind us now for 

20 two reasons. Number one, a lot of banks just got 

21 out of mortgage lending, so I'm not sure that's a 

22 good thing, but the rest of us that have stayed in 
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1 it, if you give us a little bit of time, community 

2 bankers are usually pretty good at handling 

3 regulation, but you can't throw it all at them at 

4 one time.

5 And we're getting used to e-documents. 

6 There are talks to the CFPB about improving those 

7 a little bit, making them a little bit better. 

8 We're all getting used to beneficial ownership, 

9 another latest reg burden on all of us. And the 

10 biggest frustration that I have with beneficial 

11 ownership is we have the same customers, and they 

12 come in year after year. We have lines of credit, 

13 we have those, but every year, I've got to have this 

14 beneficial ownership form.

15 And a lot of my customers I probably 

16 have had their lines of credit for ten years. In 

17 their file, it's going to be ten beneficial 

18 ownership signed forms, which -- you know, I get 

19 one resolution from these folks when they come in, 

20 and if they don't change their organization, I 

21 don't get another resolution. I get their ID one 

22 time until they change their ID, so those are just 
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1 a little bit of frustrations.

2 I know that the regulatory agencies are 

3 looking at the simplified capital rules. We think 

4 that's very important. Again, we're a $500 

5 million bank. I would just ask -- I think it goes 

6 to the heart of our franchise value that you 

7 consider that in an 8 percent minimum and not 10, 

8 because 8 is really 9 and 10 is really 11, because 

9 as a banker, if you put the minimum at 10, probably 

10 not going to operate at 10, I'm going to operate 

11 at something higher than that.

12 And, again, those are all little pieces 

13 that help us as community banking. I've been 

14 around a little while. I've been president at my 

15 bank for about 28 years, I'm previous chairman of 

16 ICBA, so I get a chance to talk to a lot of bankers.

17 And the one thing, I think, we got give 

18 ourselves credit a little bit, we're pretty good 

19 at cycles. I know we're seeing deposit pressure, 

20 but in some respects, we saw the growth on our 

21 depositor backs, and so I don't feel too bad if I 

22 got to pay a little bit more interest rate. I mean, 
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1 I certainly have to balance that, I understand 

2 that, but that's -- that's kind of how we look at 

3 it as more of a holistic way of taking care of our 

4 customers, so we're confident that the economy will 

5 stay fairly strong in our area.

6 Concern with liquidity, concern with, 

7 you know, the rate burden going forward, but our 

8 bank is 115 years old, a little over that right now, 

9 so we hope we've got another 100 years in us, so 

10 --

11 MR. DAVIS: Alan.

12 MEMBER SHETTLESWORTH: Hi. I'm Alan 

13 Shettlesworth, Main Bank in Albuquerque, New 

14 Mexico. I looked at our balance sheet this morning 

15 in my hotel room, and we're about a $139 million 

16 in total assets today. Our bank started in 

17 November 1, 2005, and I can tell you that was both 

18 the best of time and the absolute worst of time to 

19 start a bank.

20 We ended up acquiring a bank with about 

21 30 million in total assets – helped advance our, 

22 I guess, our game plan going forward, so we've had 
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1 an acquisition since that time period and a lot of 

2 business cycles and a lot of business changes for 

3 us.

4 Our specialty right now is primarily in 

5 the commercial, in commercial real estate space. 

6 That tends to be what we know. We are small, and 

7 I'm proud to report that we just made a hire last 

8 month, so that brings our employee base to a 

9 whopping 13 employees, and it puts a little bit of 

10 strain on our folks back home, because when I'm here 

11 and they're away -- when I'm here away from the 

12 bank, they have to coordinate bathroom breaks a lot 

13 better than---

14 (Laughter.)

15 MEMBER SHETTLESWORTH: For us, you 

16 know, the deposit market in New Mexico is 40 percent 

17 controlled by two big banks, Wells Fargo and B of 

18 A, and so we have some of a benefit from there, 

19 because those banks have not really increased their 

20 rates.

21 We have started to increase our rates 

22 because we are growing and we continue to grow. 
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1 We'll probably hit between 8 and 12 percent total 

2 asset growth and total loan growth, and so we are 

3 currently actively raising our costs of funds right 

4 now, and so our costs of funds in the last 12 months 

5 will have more than doubled, and that is putting 

6 some margin compression. That's presenting some 

7 challenges for us.

8 We, in 2010, got into the mortgage 

9 business. We hired a group that was pretty 

10 successful and that had been basically kicked out 

11 by the, by the recession. Since they didn't have 

12 a lack of the funding or liquidity for their 

13 mortgage loans, we brought them in-house.

14 Did that program for about 2015, and 

15 then we looked back and realized at the end of 2015 

16 that our cost to produce a loan had more than 

17 doubled exclusively because we had hired more 

18 bodies for compliance burden, and so it was 

19 becoming an unreasonable burden for a bank of our 

20 size at that point.

21 We had more employees at our mortgage 

22 division than we did at our commercial bank. In 
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1 order to make that successful long-term, we thought 

2 we would need to have doubled the size of our 

3 production and that would have probably put too 

4 much pressure on our capital and too much risk for 

5 that, for that piece, and so we exited the business 

6 in 2015. Since then, we've continued to grow.

7 In our market -- in Albuquerque, I'm not 

8 quite sure if we have, if perhaps technically we 

9 have made it out of the recession, but at such a 

10 slow pace that by the time, you know, the next 

11 recession comes around, I've heard the r-word said 

12 for 2020 that's potentially when the next recession 

13 is coming.

14 I'm just concerned -- our big concern 

15 is that Albuquerque will just have made it out of 

16 the recession in time for the other one, and so 

17 that's a real concern of ours, but we're -- we're 

18 -- because of our small size, in spite of the fact 

19 that Albuquerque isn't doing incredibly well 

20 economically compared to surrounding cities and 

21 surrounding states - Arizona, Colorado and Texas, 

22 we're still able to grow in spite of all that, 
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1 because of our size.

2 We have one location and that is 

3 probably our big challenge and we are strategically 

4 going forward. We're not interested in branching. 

5 We're not interested in multiple branches. We 

6 lend exclusively in our market, which is the 

7 Albuquerque area, and we're going to continue to 

8 do so.

9 We should be able to get to 500 million 

10 before we need to worry about any other branches, 

11 and so that's another challenge for us. In some 

12 regards, I feel like we are closer to an 

13 Internet-based bank than we are to a local 

14 community bank, because of the one location, so 

15 that creates its problems and challenges for 

16 getting depositors, certainly for the younger 

17 generation.

18 Yes, so -- so we're doing fine, but I 

19 just say because of our size, and so we're 

20 continuing to do what we've always done. In our 

21 local market, I would say that some new trends that 

22 have started up this year have been out-of-state 
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1 lenders coming in to Albuquerque originating a lot 

2 of SBA 7a transactions. Those are the 

3 transactions that you can do a lot of real 

4 estate-based transactions.

5 A lot of folks are getting very 

6 aggressive terms with 10 percent down and 25-year 

7 amortization loans, and we -- we wouldn't do those 

8 loans even with an SBA guarantee, and so that is 

9 probably one new recent trend we're seeing.

10 When we started the year, there were 38 

11 banks that were based and headquartered in New 

12 Mexico, and by the time we get to the end of the 

13 year, we're going to have 36 banks. It's 

14 unfortunate to see that from our standpoint, but 

15 there are other larger out-of-state banks that are 

16 coming in to New Mexico, I think, almost 

17 exclusively for access to our low cost of funds, 

18 our deposit market, and so while that's a very big 

19 negative for New Mexico, that's a huge positive for 

20 Main Bank as we look around and we're about the only 

21 locally owned, based bank there in Albuquerque.

22 So, thanks for having me.
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1 CHAIRMAN McWILLIAMS: Thank you.

2 MEMBER EDWARDS: Good morning. I'm 

3 Jim Edwards. I'm CEO of United Bank, which is 

4 based in Zebulon, Georgia, which is only about 40 

5 miles south of the world's busiest airport in 

6 Atlanta. Interestingly though, the county where 

7 our bank is headquartered has just 2 stop lights 

8 and less than 20,000 people in the county, so we 

9 operate in 10 counties, contiguous counties sort 

10 of in a southern arc around the southeast and west 

11 side of Atlanta, and it's an interesting mix.

12 The communities closer to Atlanta are 

13 more suburban, and then we go all the way down to 

14 about 60-70 miles south of Atlanta, and those 

15 communities are more rural. Bank is 110 years old. 

16 It's a Sub S bank, and I'm really proud to be the 

17 third generation in my family that's involved with 

18 running the bank.

19 We also have trust and mortgage, pretty 

20 large trust and mortgage businesses. And the 

21 bank's loan mix is really -- we're a traditional 

22 community bank. I mean, we do a little bit of 
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1 everything from consumer to C&I to real estate 

2 lending.

3 I think many of you in this room 

4 remember, or I certainly do, how challenging the 

5 recession, the great recession was in Georgia from 

6 a banking perspective. We lost about a third of 

7 our bank charters during that, during that time.

8 In one of the counties next to us, we 

9 lost every community bank that was headquartered 

10 there, so we, fortunately, are little bit further 

11 away from the epicenter when things turned really 

12 bad there, but I think the good news today is that 

13 the Georgia banking market is back and I think it's 

14 healthier and I think many of the lessons that were 

15 learned back in that recession were learned well. 

16 And we are not seeing a real loosening of credit 

17 standards in that market now and that's good to see.

18 We are seeing, however, a good bit of, 

19 I guess, pricing pressure on the loan side, which 

20 is, which is somewhat interesting with rates 

21 rising. I think there's been this, a little bit 

22 of a feeling that rates just weren't going to rise, 
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1 that never really was going to happen, and 

2 certainly as we've seen this week and over the last 

3 couple of years, that is beginning to happen, and 

4 so we're starting to see some pressure on deposits 

5 just as the other bankers here have mentioned.

6 I think it's going to be interesting to 

7 see what happens with all of that, because earlier 

8 in my career, you know, half of our balance sheet 

9 would be made up or better of local CDs. We've seen 

10 a transition out of that due to low interest rates 

11 over the last five or six years here, so we're 

12 trying to pay a lot of attention to what happens 

13 with those deposits, because unlike earlier in my 

14 career when my primary competitors were right

15 across the street from me, now the -- our 

16 competition we feel like both on certainly the 

17 deposit side and from a growing perspective on the 

18 loan side are banks all over the place and nonbank 

19 lenders and nonbank opportunities to invest money, 

20 so I think we, just as bankers, have to be very 

21 cautious and concerned about that and not just say, 

22 "Well, this is -- we don't have a problem because 
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1 this is our little market here, we're okay."

2 I think consumers are looking, as we've 

3 heard from some of the other bankers here, they are 

4 spending more time in comparing and there's not 

5 that reluctance to maybe do, to work with somebody 

6 out of state that there was, that there was in the 

7 past.

8 But, you know, from a portfolio 

9 standpoint, you know, loan quality metrics are 

10 frankly as good as I seen in my career. Just 

11 charge-offs are virtually nonexistent, problem 

12 loans are extremely low, and so I like the, what 

13 one of the former speakers said, you know, "That 

14 makes my spider sense tingle," too. You know, it 

15 feels almost a little too good to be true here, and 

16 I think we have to be careful in this type of, this 

17 type of environment here.

18 We're spending a lot of time trying to 

19 figure out how to stay on top of technology for our 

20 consumers as well. That is a challenge. One of 

21 the bankers who was, spoke previously about his 

22 Garmin customers potentially, while we don't have 
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1 that, you know, gosh, anybody under the age of 40 

2 it seems like is if you don't have the latest in 

3 technology, it's a challenge.

4 And, so, for -- even though we're a 

5 billion three, it's still a challenge for us to 

6 figure out how to implement the right technology 

7 to work with, and there's some really good 

8 solutions out there, but frankly, trying to make 

9 those solutions work with our core data providers 

10 has been a challenge for us.

11 I think the cores are at least saying 

12 the right things about trying to integrate with 

13 more, with some of the latest technology, but 

14 that's something that we're spending time working 

15 on and trying to stay out in front of.

16 And, I think, finally, one thing I'll 

17 mention is a challenge that we're facing and 

18 spending time working on is how do we recruit the 

19 next generation of bankers. In Georgia, you know, 

20 the first thing that happens when you get into --

21 that happened during the recession was people 

22 stopped training, they cut training budgets, they 
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1 cut hiring staff, new staff, and so ten years on 

2 now, in some cases, we turn around and we look for 

3 that next generation of leadership and it's not 

4 there.

5 And I'm talking from an industry 

6 standpoint, but we've -- and we sort of have over 

7 the years, you know, the typical pipeline was we 

8 would, we would hire the young person who maybe got 

9 out of college, went to work for one of the regional 

10 banks, and was ready to come back home, and they 

11 were well trained. That market is not really out 

12 there as much.

13 We find that most of the larger banks 

14 are training more specialists, and so for the 

15 community bank world, we need more of a generalist, 

16 and so we've just had to start our own training 

17 programs basically.

18 And we're doing that now, and, 

19 fortunately, are having some good results with 

20 that, but I think as an industry, we've got to work 

21 to figure out how to attract, to show young people 

22 that banking can be a very satisfying and good 
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1 career. And I think we've got some work as an 

2 industry to do there, but I do think that there are 

3 very good opportunities to do that, but we've got 

4 to -- we've got to get out in front of that, I think, 

5 and we're working hard to do that in our 

6 institution, so.

7 This is my first meeting and it's a real 

8 honor to have a chance to do this, and I appreciate 

9 the opportunity to participate.

10 CHAIRMAN McWILLIAMS: Thank you.

11 MEMBER EDWARDS: Thank you.

12 CHAIRMAN McWILLIAMS: Thank you very 

13 much. I won't have to poke the new members - they

14 are talking. This is good.

15 (Laughter.)

16 MEMBER WALKER: Yes, so I agree with 

17 Jim. It's an honor to be here, so thank you. I'm 

18 Louise Walker. I'm the CEO of First Northern Bank, 

19 which is a community bank in Dixon, California, 

20 which is located between Sacramento and San 

21 Francisco.

22 We are $1.3 billion organization, 68 
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1 percent loan-to-deposit ratio, which is unique for 

2 our area, because a lot of the banks are running 

3 in the 90s to 100, 8 percent loan growth, and about 

4 5 to 6 percent deposit growth. We operate in five 

5 counties in that area, so very metro, but yet, rural 

6 at the same time.

7 And right now, we're working on 

8 digitizing everything, but to just give you an idea 

9 of the market conditions in our area. The 

10 Sacramento Valley region right now is very strong. 

11 In the area of regional housing, the median closing 

12 price on a detached home is around 470,000, 

13 attached homes 592,000, homes priced between 

14 400,000 and 500,000 are the most active if you can 

15 find it, affordability is a huge issue in 

16 California.

17 And right now in the Sacramento area, 

18 it's about a 35 percent affordability ratio. 

19 Supply is extremely tight. To give you a feel for 

20 that, we need about 9,000 homes per year. At the 

21 peak, we were building 17,000 to 18,000. And last 

22 year and this year, we're at 6,000.
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1 Again, affordability is an issue. 

2 However, we are seeing buyer fatigue and price 

3 increases and also increasing rents and that's a 

4 real difficult situation, because it's hard for 

5 people to save if their rents are continuing to go 

6 higher.

7 The biggest thing I hear out there 

8 between -- in the home building area and talking 

9 to home builders and business owners is this 

10 shortage of labor. Labor is a huge issue, 

11 especially in California, and because of that, 

12 that's a natural kind of governor on overbuilding, 

13 like we did last time.

14 There are also, right now, is in the 

15 residential housing area adherence to strict 

16 under-guiding -- underwriting guidelines, higher 

17 interest rates, and the impacts of new tax reform 

18 as reasons for why we think the housing market will 

19 continue to be stable.

20 And -- but, again, we need more 

21 affordable housing. The cost to build, about 

22 one-third of the cost is for governmental fees. 
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1 Also -- now, I'm going to move to the commercial 

2 real estate area.

3 Again, that area is very strong. 

4 Valuations though, we think are stretched compared 

5 to risk-free alternatives. As interest rates 

6 increase, we're going to start seeing a repricing 

7 of risk assets, and so that's very much a concern 

8 for us. We're seeing aggressive lending in the 

9 commercial real estate area.

10 And I can give you some examples, but 

11 I'll give you them later. Because some of the 

12 banks that are running between the 90 to 100 percent 

13 loan-to-deposit ratios are focused on commercial 

14 real estate, and so because of that, we're seeing 

15 deposits become, become an issue, become an issue.

16 We -- on the commercial small business 

17 side, strong business conditions, again, the 

18 biggest issue is the shortage of skilled labor, 

19 especially in our area, because of the wild fire 

20 damage that was done, so it's very hard. We're 

21 getting labor coming in from other states. And in 

22 California, regulation and higher labor costs are 
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1 an issue.

2 Ag -- in the area of ag, crops grown in 

3 our market are strong. We build, not build, but 

4 we grow a lot of permanent nut orchards, rice, 

5 tomatoes, grapes. We are seeing a steady climb in 

6 bearable acres. Our concern in this area is the 

7 dollar and its impacts on commodity prices.

8 Also, water is an issue. It continues 

9 to be a challenge. California has passed a law 

10 where local management of underground water will 

11 be implemented, and so we know that will impact 

12 crops and land prices.

13 So, overall, our markets are doing 

14 well. Although, we are seeing -- because we also 

15 are close to San Francisco, what we're seeing is 

16 because of home affordability, a lot of the 

17 population is being pushed out up into our area.

18 CHAIRMAN McWILLIAMS: Excellent. 

19 Thank you.

20 MEMBER WALKER: Thank you.

21 MEMBER KELLY: Good morning. I'm 

22 Kenneth Kelly. I serve as Chairman and CEO of 
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1 First Independence Bank in Detroit and would like 

2 to say to Chair McWilliams, thank you so much for 

3 allowing us to join this committee and represent 

4 our industry, in particular, in the Detroit, 

5 Michigan area.

6 Our bank is roughly 250 million in 

7 assets. It's been in existence since 1970, so we 

8 are in our 48th year. Our bank has predominately 

9 been based on three prongs. One has been the 

10 residential markets. We've also had a fairly 

11 strong commercial practice along with equipment 

12 leasing.

13 As many of my colleagues mentioned 

14 earlier, we have had to really cinch back on the 

15 consumer lending aspect, because it just has not 

16 been as profitable in trying to manage our ratios. 

17 Our challenge right now really has been focused on 

18 ensuring that we are profitable.

19 For a bank our size dealing with the 

20 compliance issues -- I heard one of my colleagues 

21 speak of -- it becomes very challenging for us to, 

22 to do things in a profitable manner. For instance, 
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1 in the residential market, we have had a challenge 

2 in just running that business in a way that's been 

3 profitable, but we've made a commitment to the 

4 people of Detroit that we were going to be in that 

5 business.

6 And, so, what we've done is try to 

7 continue to streamline and look at ways that we can 

8 make mortgages in such a way more affordable from 

9 an in-house practice perspective, but that is a 

10 very big challenge, so regulatory aspect of that 

11 is something that we continue to try to address and 

12 try to adjust to, but it's one of those areas that 

13 it's just really challenging for us from the 

14 residential mortgage side.

15 When I think about our overall economy, 

16 I will tell you the state of Detroit is very good. 

17 If you reflect back maybe ten years ago when you 

18 saw what was going on in the auto industry, and so 

19 as the auto industry, so you saw the tail of 

20 Detroit.

21 Today, you are seeing a change in the 

22 momentum within the city. There have been quite 
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1 a bit of investments in some of the, I'll call them, 

2 people who have a large stake in the city, such as 

3 Dan Gilbert and many others, that has really 

4 created a resurgence in Detroit, and Detroit has 

5 become more of a destination than it was ten years 

6 ago.

7 That has brought more interest into 

8 looking at creating and starting businesses in 

9 Detroit. It has created an opportunity for more 

10 collaboration. And I can say publically, we've 

11 done a collaboration with Chemical Bank, which is 

12 the largest bank in the state of Michigan, and so, 

13 we're seeing more of a collaborative effort around 

14 Detroit and looking at ways that we can improve 

15 banking, because banking is the cornerstone of 

16 overall economic development.

17 I'd also like to make a quick comment 

18 as the incoming chair of the National Bankers 

19 Association, which has really been the voice of 

20 minority banking since 1927. Some of the 

21 challenges you heard my colleagues talk about 

22 really impact minority banking.
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1 And I can tell you firsthand for us, one 

2 of them is capital. In fact, if you look at our 

3 ratios today, we're actually having to manage to 

4 capital. We could grow easily in the double-digit 

5 range from a long-growth perspective, but we're 

6 trying to manage our capital at this point in time. 

7 And I would tell you that's a theme that definitely 

8 runs through many of the minority banks in the 

9 country.

10 The other items I will tell you, one of 

11 my colleagues mentioned a moment ago, is succession 

12 planning. When you go from a market that had 

13 15,000 banks and the luxury of navigating 5,600 

14 banks, everyone is managing all their costs in a 

15 way that they're trying to manage their, their 

16 ratios of ROA and ROE, and so you just do not have 

17 the luxury of bringing in succession planning.

18 And I will tell you, for us, that's very 

19 challenging, because I can't just go hire that new 

20 hire right out of school. I'm waiting on them to 

21 go get trained by one of the bigger houses, which 

22 then, I can't afford to bring them in, because they 
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1 make too money over there, and, so, my point there 

2 is as we think about this industry, we've got to 

3 think about it a little bit differently in how we 

4 bring in talent, especially for small 

5 institutions, and be creative in dealing with that.

6 The other topic I will bring up is, and, 

7 I think, one of my other colleagues mentioned this, 

8 is how do we really be attractive to the millennial 

9 generation. We think they think differently, but 

10 they just think in a different manner. I won't say 

11 it's different.

12 The point I'm trying to make is when I 

13 look at my customer base, my customer base has a 

14 tail end to it relative to the demographic of age. 

15 And when I look at my long-term sustainability, I 

16 know I've got to figure out how to become attractive 

17 to that age group in such a manner that we can be 

18 prosperous going forward, not 5 years from now, but 

19 10, 15 and 20 years from now.

20 And, so, I want to have -- I want to 

21 mention that because as you think about it from a 

22 regulatory perspective and you look at the fintechs 
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1 that are out there, and I mean, I heard Credit Karma 

2 mentioned by one of my colleagues, but there are 

3 others that are out there who are going to be 

4 attractive to a demographic that could change all 

5 of our businesses, and so from a regulatory 

6 perspective, my suggestion is to think through how 

7 can we in a way create a marriage there in such a 

8 way that is not disruptive to these institutions 

9 that are critical to our community.

10 And my point being as I talked about 

11 capital, I can put a business plan together to do 

12 an app and to deal with fintech and can raise money 

13 a lot faster than I can with a solid business that's 

14 been in business for 48 years, so I'll end with that 

15 comment.

16 CHAIRMAN McWILLIAMS: Thank you.

17 MEMBER EMMONS: Good morning. I'm 

18 Chris Emmons. I'm the CEO of Gorham Savings Bank 

19 in Portland, Maine. We are a $1.2 billion mutual. 

20 I'm not sure that there are many mutuals 

21 represented at this table today, but it's -- we are 

22 celebrating our 150th year this year.
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1 The Maine -- if you're not familiar with 

2 Maine, population, total population of about 1.3. 

3 We are in the southern part of the state. And the 

4 southern part of the state is the most, is the most 

5 productive from an economy perspective. Two hours 

6 roughly from Boston. Go Red Sox.

7 (Laughter.)

8 MEMBER EMMONS: So -- and a lot of the 

9 trends that we're experiencing in southern Maine 

10 are reflective of what's happening in the rest of 

11 New England, and in particular, liquidity and real 

12 estate are the two areas that, that we're all 

13 focused on.

14 You had mentioned, I think, your 

15 loan-to-deposit was 65 percent somewhere, yes, so 

16 we're 130 percent loan-to-deposit. We manage to 

17 our capital as well, as a mutual. Our only source 

18 of capital is through earnings, so it's important 

19 for us to have the eye on the bottom line.

20 It's -- our greatest challenge today is 

21 liquidity. We're seeing some of the same 

22 pressures that others have spoken about regarding 
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1 customer source deposits. Our strategies have 

2 been supplemented a little bit by the fact that 

3 we're seeing a number of the larger institutions 

4 shedding branches in our markets, and so with a 

5 strong CRM system, we're able to identify 

6 opportunities and take advantage of some of those 

7 customers that are leaving the larger 

8 institutions.

9 We talked about workforce, meet the 

10 challenges around workforce. Interestingly, we 

11 are the oldest state in the country. We are 

12 challenged by our young, our young residents moving 

13 out of state, graduating from college, and seeking 

14 their fortune outside of Maine, so we're 

15 particularly challenged around how to attract 

16 people into our workforce.

17 We have a program at the bank. It's a 

18 millennial group that we've put together that we're 

19 not quite ready to turn the bank over to them, but 

20 if given the opportunity, they would gladly take 

21 the reins.

22 They are very helpful in setting the 
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1 pace on technology and the adoption of technology 

2 and they, you know, they are a -- within themselves, 

3 they are a great source of attracting other, other 

4 young people to our, to our institution, so -- so, 

5 I think, asset quality at our institution has been, 

6 has been exceptional. Our challenge is really built 

7 around the liquidity.

8 Real estate, I can tell you that we all 

9 have our eye on a proverbial bubble. I think, 

10 southern Maine, in particular, is starting to see 

11 real estate prices that are reflective in the 

12 Boston market, so we're paying attention to our 

13 underwriting and making sure that, that we have 

14 strong recourse in all of our, all of our 

15 transactions, but market has been pretty solid in 

16 southern Maine, and, I think, we got another 150 

17 years in us, so thank you.

18 CHAIRMAN McWILLIAMS: Thank you.

19 MEMBER SCULLY: So, I'm Mary Ann 

20 Scully. I'm the CEO of Howard Bank. Howard is a 

21 $2.1 billion bank headquartered now in Baltimore 

22 and started in 2004, so clearly, a lot of organic 
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1 growth and a series of acquisitions over the last 

2 14 years that allowed us to do that, as did 

3 diversifying our capital sources. We became an 

4 SEC registrant in 2012, and that access to the 

5 institutional markets funded a lot of that growth.

6 From an economic perspective, I think, 

7 like most of the people around the table, you know, 

8 the local economy is strong. While it's not the 

9 D.C. market and often suffers from a comparison to 

10 the D.C. market, it benefits by the contiguous 

11 nature. Many of our customers do a lot of business 

12 in greater Washington.

13 I think probably the unique element 

14 about our local economy, maybe unique to this 

15 table, is the fact that we've focused on small and 

16 medium-sized businesses almost exclusively. When 

17 we started the bank in 2004, we made a decision to 

18 not really try to attract mass market retail as we 

19 were concerned that even then it was largely a 

20 big-bank game and that we would not be able to 

21 compete successfully.

22 And the focus on the small and 
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1 medium-sized businesses has served us well, but the 

2 market that we serve, being greater Baltimore, is 

3 probably one of the greatest examples of the income 

4 inequality in the country side-by-side.

5 We were formerly headquartered before 

6 our last acquisition in Howard County. Howard 

7 County is the fourth wealthiest from a household 

8 income standpoint, fourth wealthiest county in the 

9 United States, and it sits right next door to 

10 Baltimore City, which is clearly one of the most 

11 challenged local economies.

12 And that certainly impacts us probably 

13 more from a community development, a philosophy 

14 perspective. I mean, we have plenty of places 

15 around Baltimore City in which we do business, but 

16 that sincere desire that we have as a community bank 

17 to help the city is a huge challenge and creates 

18 a lot of noise, and some of it impacts the ability 

19 to attract and retain talent when we moved our 

20 headquarters back into the city.

21 Generally speaking, what we're seeing 

22 from a commercial standpoint is, I would say 
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1 strong, but not as robust C&I growth as we would 

2 have anticipated. And what we've observed over 

3 the last 20 months is basically that many of our 

4 C&I customers are taking the gains that they 

5 received from the tax law changes and are investing 

6 it into their businesses, which is good, so 

7 employment growth, but at the same time, we're not 

8 seeing them so confident that they're moving back 

9 into a traditional borrowing mode.

10 So, for example, we see our line usage 

11 is much lower than it was historically. I would 

12 say many of our business customers remain more 

13 cautious than we would have anticipated.

14 We're concerned about the CRE market, 

15 the non-owner-occupied CRE market in particular. 

16 That's probably the one market where we're seeing 

17 some of those late in the cycle evidences of lack 

18 of underwriting discipline in terms of a lot more 

19 non-recourse financing being done, extension of 

20 interest rate terms.

21 I mean, we're seeing commercial banks 

22 offer fixed 15 and 20 years, not the traditional 
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1 5- or 7-year fixed-rate financing. We're seeing 

2 a much higher loan-to-value, so a lot of things that 

3 begin to look reminiscent about 2005 and 2006.

4 And, then, of course, we're seeing in 

5 the CRE market locally a lot of nonbank 

6 competitors, so we're seeing private equity funds, 

7 we're seeing insurance funds. Again, not unlike 

8 the C&I example that I gave, just, I think, examples 

9 of still a lot of liquidity in the market and the 

10 impact that that has on structure and on pricing.

11 We have a relatively strong housing 

12 market. I think like some others have talked 

13 about, the housing market is being adversely 

14 impacted however by a significantly rising cost of 

15 development and construction, the development, 

16 just the scarcity of land, and so much higher prices 

17 for land.

18 Much higher development costs, 

19 especially in some of those strong parts of greater 

20 Baltimore where there's not necessarily a desire 

21 on the part of the counties to see an influx of 

22 people, and so they're making it more difficult and 
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1 more expensive to develop, so before you even put 

2 a stick on the property, you're seeing much higher 

3 costs of the land acquisition itself and the 

4 development, and then the stick construction has 

5 increased dramatically.

6 And what that means is that in our 

7 market, you're starting to see the small and the 

8 regional home builders come under much more 

9 pressure, because it's the national builders that 

10 are able to compete. And, obviously, those 

11 national builders are not going to be our natural 

12 customers.

13 We've been fortunate, I think, because 

14 of our focus on the small and medium-sized 

15 businesses that we've -- while we've certainly seen 

16 the deposit pricing pressure that others have, in 

17 particular, because of credit unions, a lot of 

18 credit unions in our market that are very 

19 aggressive on the pricing side and because of some 

20 of the internet players and not the, just the 

21 traditional internet players, but Goldman Sachs 

22 with a lot of our private banking customers is very 
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1 competitive on the money market side, but at the 

2 same time, we've been able to continue to acquire 

3 a lot of transaction deposits as our commercial 

4 business has grown, and so our deposit betas have 

5 changed, but have not changed as rapidly as others 

6 have, but I think like all of us around the table, 

7 we're certainly not just focused on the cost of 

8 funds, but on the appropriate emphasis on 

9 liquidity, but also, and I know we'll talk about 

10 it later today, some of the definitions of 

11 liquidity and some of the definitions of high 

12 volatility deposits and how high costs of deposits 

13 might affect some of those definitions. And as a 

14 bank with 103 percent loan-to-deposit ratio 

15 certainly looking forward, that would concern us.

16 I think -- I think that we're certainly 

17 advantaged being in a metropolitan area, wealthy 

18 suburban area from a talent attraction standpoint 

19 compared to some of my colleagues around the table 

20 in more rural areas, but I would say that we have 

21 the same competition for young talent when we look 

22 at long-term succession planning.
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1 And one of the things that our greater 

2 size has afforded us the ability to do is that this 

3 year, we've actually restarted a commercial 

4 training program and concluded, like others around 

5 the table, that we can't really continue to rely 

6 on attracting very expensive, albeit, experienced 

7 talent from some of our competitors, but it's much 

8 too new an initiative to determine whether or not 

9 it'll be successful.

10 I don't think that we think we're going 

11 to be able to go back to the '80s, but we're hoping 

12 to be able internally grow a little bit more of our 

13 talent. And that's it.

14 CHAIRMAN McWILLIAMS: Okay. Thank 

15 you.

16 MEMBER MENON: Good morning. I'm 

17 Arvind Menon from Meadows Bank. We're 

18 headquartered in Las Vegas. We've got a couple of 

19 branches in Reno. We also have a branch in 

20 Phoenix, Arizona.

21 As well as we do a significant amount 

22 of SBA lending around the country and we've got 
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1 about six LPOs in five western states going all the 

2 way far as Texas and California and Oregon and 

3 Washington.

4 Nevada has always been a boom and bust 

5 state. Things can be looking rosy at one time, and 

6 very soon, you hit the depths. The Great Recession 

7 was no exception as we were hurt badly. Some say 

8 we were ground zero for the Great Recession. That 

9 may or may not be true.

10 Hearing, you know, some of your talk, 

11 you lost a lot of banks in your markets as well, 

12 so we are no exception from that standpoint, but 

13 our economy has been pretty much, not diversified 

14 enough if you will. That's been the problem in 

15 Nevada.

16 The primary drivers have been gaming, 

17 tourism and construction. And all three of them 

18 have pretty significantly affected construction to 

19 begin with during the loose lending standards. I 

20 believe most of the home builders and office 

21 builders felt, build it and they will come, and that 

22 philosophy soon turned out to be wrong.
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1 And when the recession hit us, people 

2 stopped building, you know, offices laid vacant. 

3 Office vacancies were as high as 25 and 26 percent, 

4 and so it was really a lot of, a lot of pain along 

5 in every corridor if you want to look at it from 

6 that standpoint.

7 Reno was hit hard earlier because 

8 Indian gaming or gaming in tribal areas took over 

9 some of the gaming out of Reno, and people could 

10 stay in California and not have to come all the way 

11 to Reno to gamble, and so Reno, we noticed even 

12 earlier before the Great Recession hit us, and 

13 we’ve had to kind of change our economic base, if 

14 you will, and consequently, there's been a little 

15 bit more diversification of the economy.

16 The recovery really started about six 

17 or seven years ago. And since then, it has been 

18 a pretty steady upward curve with all of the 

19 indications being that the economy is still going 

20 strong. Vacancies are down. Office vacancy is 

21 down to about 15 percent, which is high by many 

22 standards, but when I said -- what I said earlier 
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1 was 25 percent occupancy -- vacancy I should say, 

2 so compared to that, there's been a lot of progress.

3 In-migration has always been strong. 

4 Being part of the Sunbelt states, retirees have 

5 come in, into Nevada mostly from the Midwest, and 

6 more recently, a lot of people from California. We 

7 love California because California just drives 

8 people and businesses out of that state.

9 (Laughter.)

10 MEMBER MENON: And properly being 

11 situated next to it, we are a big beneficiary of 

12 that. We get a big significant number of 

13 businesses relocating, especially into the Reno 

14 area, and some to the Las Vegas area as well.

15 As you might have heard, Tesla, the 

16 electric car manufacturer, put a factory in Reno. 

17 It's a 5.5 million square foot building and it's 

18 supposed to grow to about 10 million, so we'll see 

19 how big it is. It's huge.

20 Now, Tesla has had their own problems 

21 lately, you've all heard about that, so we'll have 

22 to see how that goes, but the battery factory that 
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1 is what's built there is a lithium battery factory, 

2 so, hopefully -- and Panasonic runs it, so there's 

3 going to be demand for that. And I'm sure even with 

4 Tesla's problems, it's not going to go away anytime 

5 soon.

6 On top of that, we've had Apple, Google, 

7 Amazon. They're all building distribution 

8 centers and data centers and what have you.

9 I don't know if you've heard of Switch. 

10 Switch is a huge data center facility, and they also 

11 have a co-location facility, which a lot of the 

12 backroom IT operations need as a co-location site, 

13 so that's another big, big draw in Reno.

14 In Vegas, as you know, we got our first 

15 NHL expansion franchise last year. We went all the 

16 way to the Stanley Cup. And sorry to say, we lost 

17 to the Washington Capitals, so hats off to you guys 

18 here locally.

19 In 2020, we're expecting the Raiders to 

20 move. I know Louise is sad to see them go, but 

21 we're looking forward to that, so we're building 

22 a new stadium for them, 65,000 square foot -- I 
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1 mean, not square, occupancy stadium, practice 

2 facilities, all of those that go with any NFL 

3 facility that comes in, so it's driving business 

4 significantly.

5 Lots of businesses are moving in, 

6 ancillary businesses, not just for the 

7 professional sports side, we're also seeing 

8 professional business services moving in, health

9 and educational services. All of those are 

10 growing, so we're expecting that the 

11 diversification of the economy that has started in 

12 a modest way, it's going to be a while before gaming 

13 gets taken over by some of these other things, 

14 because gaming is a 600-pound gorilla and it's 

15 going to be a long time before gaming will be 

16 supplanted by some of these other kinds of 

17 businesses, but it's still a good plan to see 

18 happening.

19 Our challenges, like anything else in 

20 the room here today we heard about, is continuing 

21 to find affordable housing. Housing is a problem 

22 in Nevada. Now, the average or the median home 
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1 price in southern Nevada is $300,000 as of 

2 September of this year. That's still lower than 

3 what it was ten years ago.

4 When the recession started in 2005, I 

5 think, inflation-adjusted that it would be 

6 $391,000, so it's still lower than that, but when 

7 you think back 15-20 years ago, people moved to 

8 Vegas because the cost of living was cheaper.

9 You could buy a decent home for about 

10 $150,000. It's not the case anymore. And 

11 especially when you see a lot of these -- the new 

12 job growth has not been in the construction as much 

13 as it's been in the service businesses that don't 

14 pay as much, and so it's a challenge.

15 Given the cost of building homes, as 

16 we've heard from around the table, land prices in 

17 Vegas have gone up from 100,000 an acre to about 

18 500,000 an acre now. Labor costs have gone up, 

19 because the construction labor is getting more 

20 expensive, and material costs have gone up. This 

21 is even before any of the tariffs that are being 

22 talked about now is going to have an effect on the 
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1 cost of building, so given all of that, it's going 

2 to be a challenge.

3 And how we -- how we work through that 

4 is yet to be seen. There's a lot of multifamily 

5 housing being built, a lot of rentals. I think --

6 you go around Vegas and you see apartment complexes 

7 cropping up all over the place.

8 And the reason is, number one, the 

9 affordability of single-family homes is low, and 

10 number two, the people who have probably had to have 

11 a short sale in their history are not able to 

12 qualify for a mortgage, so they're forced to rent 

13 for the time being, and so apartment complexes are 

14 doing well. Their vacancies are low and are doing 

15 well.

16 The last thing I want to talk about 

17 challenge-wise is finding skilled workers in 

18 Vegas. Skilled workers, especially in the 

19 construction field and even the professional side, 

20 are few and far between, and that is going to 

21 continue to have an impact on the way the city 

22 grows, as well as in Reno.
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1 Reno is almost impossible to find good 

2 people. All of the IT guys are moving in from the 

3 Bay area and they're finding it hard to find 

4 qualified people to staff all their functions.

5 Having said all of that, Vegas is still 

6 a good proposition. It's got a good climate. It's 

7 got the cost of -- cost of living index is pretty 

8 reasonable. Business-friendly, so businesses do 

9 want to move into Nevada. We have no personal 

10 income tax, so that continues to drive the economy.

11 And last but not least, Vegas must be 

12 looking good because the FDIC just recently 

13 approved a charter. For the first time, a new bank 

14 will be opening in the next few months in Las Vegas 

15 since as far back, far back as 2010.

16 We opened in March of 2008. We're 

17 going on 11 years now. We've grown about $8 

18 million in size. It's about time we got another 

19 bank in town. Thank you.

20 MEMBER HANRAHAN: Good morning, 

21 everyone. My name is Dave Hanrahan. I'm 

22 President of Capital Bank of New Jersey. Let me 
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1 start by saying, Chairman McWilliams, my 

2 compliments on adding this feature to the meeting 

3 agenda. I've enjoyed listening to my colleagues 

4 and I'm sure the FDIC will benefit as well.

5 Although, Chad, I got to tell you, 

6 following 12 intelligent esteemed colleagues is 

7 leaving me, Danny, and Joe precious little really 

8 to say, so perhaps next time, you could reverse the 

9 order.

10 MR. DAVIS: I'm going to start the 

11 other way.

12 MEMBER HANRAHAN: Yes, we appreciate 

13 that.

14 Capital Bank of New Jersey is a $500 

15 million commercial bank headquartered in South 

16 Jersey just southeast of Philadelphia, 

17 Pennsylvania. We're privately held. Have about 

18 450 stockholders. We're a state nonmember bank.

19 And our model is a classic community 

20 bank model. We're a commercial lender and we 

21 gather local deposits. Overall, it's a really 

22 good time to be a community bank in my opinion.
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1 Asset quality is so good, probably 

2 unsustainably good. Business owner and consumer 

3 confidence is up, and we're the beneficiary of a 

4 big income tax cut that we all got on January 1st, 

5 so we're on track to post the best results we've 

6 ever put up in our 11-year history.

7 That said, the topic I'll focus my 

8 comments on are deposits, and many of my colleagues 

9 have done that already this morning. I find myself 

10 spending more time focused on the right side of my 

11 balance sheet than I have in my 11-year history.

12 We all think we have loyal depositors, 

13 but then that loyalty gets tested when rates go up, 

14 and I'm no longer offering the best rate that they 

15 can get. And we're having to spend a lot of 

16 thoughtful energy on managing that in the best way, 

17 and, unfortunately, saying goodbye to some 

18 depositors when we just can't rationalize what 

19 they're being offered elsewhere.

20 There's nothing the FDIC can do about 

21 market effects on that, but I am really glad to see 

22 that on today's agenda is the subject of liquidity 
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1 and national rate caps. Thank you for putting that 

2 on the agenda today.

3 I've heard more about national rate 

4 caps from my colleagues than ever in the last nine 

5 months. And I'm no mathematician, but it seems to 

6 me there's something flawed about the way that 

7 calculation is performed today.

8 I know that national rate caps per se 

9 only apply to banks that are less than 

10 well-capitalized. Nevertheless, I -- I feel like 

11 it's trickling down to well-capitalized banks. 

12 And I've got a safety and soundness exam starting 

13 in a couple of weeks. I expect to have a lot of 

14 focus on liquidity and the, the higher cost funds 

15 that I might have.

16 And I've got to manage -- we've all got 

17 to manage our funding sources smartly and 

18 thoughtfully, but I do need to be able to pay higher 

19 rates in certain cases to customers to retain those 

20 clients, and it seems to me that some of the 

21 national rate cap-driven math is causing those 

22 good, local, loyal depositors to be looked at a 
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1 little differently than I think they should be, so 

2 I understand that FDIC will soon be seeking comment 

3 on the national rate cap, and I will be commenting 

4 on that.

5 Thank you for looking afresh at that, 

6 at that topic, and I'm looking forward to this 

7 afternoon's presentation on that. Thank you.

8 CHAIRMAN McWILLIAMS: See, you managed 

9 to add something after 12 people.

10 (Laughter.)

11 MEMBER KELLY: I'm Danny Kelly. I'm 

12 President and CEO of Hometown Bank of Alabama in 

13 Oneonta, Alabama. Just we're a rural bank about 

14 45 miles north of Birmingham. We have a very 

15 diversified workforce.

16 And our primary customer is 

17 wage-earning people, small -- individuals and 

18 small businesses. We do quite a bit of real estate 

19 lending in, you know, owner-occupied homes. One 

20 to four carry those on our books and has been a real 

21 income generator for us over the past seven, eight 

22 years.
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1 Interesting story about -- I mean, I 

2 hear all these stories about deposits. We did a 

3 CD special for the first time in, I think, we looked 

4 back, it was eight years. And the biggest issue 

5 was the system, how do we do this? We forgot how 

6 to do this.

7 (Laughter.)

8 MEMBER KELLY: And, then there was that 

9 whole litany of discussion about how to discuss it 

10 with the customer. And I said, well, you know, 

11 it's a special. Everybody has one now. It's like 

12 a 12-month CD. It's a special. It's what 

13 everybody has.

14 So, it was really interesting to kind 

15 of take a step back and say, wow, it's been this 

16 long since we've had to do anything as far as 

17 liquidity is concerned, because, you know, we were 

18 at about 65, 68 percent loan-to-deposit. Now, 

19 we're at about 83 percent.

20 We purposely let some high-cost stuff 

21 run off. We didn't try to compete. I think that 

22 that rag is dry now, and we're going to have to 
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1 really get back in the business of raising 

2 deposits.

3 We do -- I mean, we're just your, you 

4 know, textbook community bank. We raise money 

5 from our depositors and we do, you know, 

6 occasionally use the home loan bank depending on 

7 what the demand is or the need is, but other than

8 that, you know, that is our source of funding, and 

9 I think that's going to be our biggest challenge 

10 coming up is how to manage that right side as David 

11 was talking about.

12 But we got about 44 percent of our 

13 market share where it -- our county is about 50,000 

14 people, so Alabama has been fairly aggressive about 

15 incentivizing businesses to come there. And 

16 workforce development is a big issue, and it's one 

17 of those things that they spend a lot of money, you 

18 know, doing that and continue to pour money into 

19 that, so I think we're -- I have discussions with 

20 people all the time.

21 The only thing you know about Alabama 

22 is the football team or unless they drive through 
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1 there on the way somewhere and that's basically it. 

2 I doubt they're going to the coast today, but, you 

3 know, somewhere down in that general area anyway.

4 But, anyway, I don't have a whole lot. 

5 I'm with David. I'm at the end of the table, so 

6 I'm going to make it real short, but, again, we --

7 our bank is close to 15 years. In fact, 10 days, 

8 it'll be 15 years old, so the crisis was a lot of 

9 fun, but, you know, we did learn some things from 

10 it, and I appreciate the opportunity also to serve. 

11 Thank you.

12 CHAIRMAN McWILLIAMS: Thank you.

13 MEMBER TURNER: Okay. Thanks, Danny. 

14 And I'm actually at the very end of the table, so 

15 -- and whatever there was to say, David and Danny 

16 finished it up, but I'm Joe Turner. I'm CEO of 

17 Great Southern Bank. We're headquartered in 

18 Springfield, Missouri. We're $4.6 billion.

19 Kind of our legacy operation has been 

20 in Missouri. We have operations in Springfield 

21 and Kansas City and St. Louis and then throughout 

22 rural Missouri as well.
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1 We purchased five banks from the FDIC 

2 during the last crisis. They had operations in Des 

3 Moines, Iowa. It's been a good -- it's been good 

4 for both parties. Des Moines, Iowa, Sioux City, 

5 Iowa, the Quad Cities in Iowa, Twin Cities, 

6 Minneapolis/St. Paul. We have loan production 

7 offices in Dallas, Tulsa, Atlanta, Georgia and 

8 Denver.

9 And I would echo many of the comments 

10 that have been made. You know, I think the 

11 economies in all those areas are strong, you know, 

12 they remain strong. I would say maybe activity has 

13 slowed just a bit, and so I think we're at a 

14 dangerous point. Other folks have alluded to 

15 this.

16 I think, you know, people are used to, 

17 like John said, 15 percent growth rates, and it's 

18 harder to get, and so, you know, what do you do? 

19 The banking industry seems to compete on loan 

20 proceeds. In other words, how much will you loan, 

21 what's the price, and what's the guarantee 

22 structure?
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1 And, so, I think in certain markets, 

2 Minneapolis/St. Paul probably being one of them, 

3 extremely aggressive there, you know, and maybe 

4 some non-traditional competitors, credit union 

5 competitors, and some others, but I think all our 

6 markets, we're seeing a little bit more 

7 competition.

8 I think, as some of the speakers have 

9 alluded to, labor availability is going to be a 

10 constraint on continuing economic growth. I was 

11 visiting our banks in the Twin Cities about a month 

12 ago, and they mentioned that a large grocery store 

13 chain was looking at opening a sizeable grocery 

14 store or two in kind of what they described as a 

15 second-ring suburb of Minneapolis/St. Paul, so 

16 relatively near to the, the central business 

17 district.

18 And they concluded there's not enough 

19 available workforce to make that make sense, so 

20 they decided not to do that. And I think that's 

21 happening elsewhere too.

22 We -- we have a pretty large industrial 
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1 customer, a customer that develops industrial 

2 property, and those folks have told us their 

3 biggest -- the biggest thing they look at is 

4 workforce availability when they're buying a 

5 ground. It's not road access. It's not 

6 necessarily geography. In other words, central 

7 part of the U.S. or whatever, it's what's the 

8 availability of qualified workforce.

9 Like everybody, our loan-to-deposit 

10 ratio is over 100 percent, so I'm also encouraged 

11 that we're going to be talking about, you know, 

12 brokered deposits and other things. I think, you 

13 know, we've had brokered deposits on our balance 

14 sheet for a long time, and so just an advertisement 

15 for it, I think it is a quality alternative funding 

16 source that banks should be able to use.

17 You know, I realize, I think, the FDIC 

18 has done a study that showed that, you know, many 

19 of the banks that failed had brokered deposits, and 

20 I would suspect that's true. I'm not sure there 

21 was causation between having brokered deposits and 

22 failure. It's more -- it's more an issue of what 
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1 you do with the deposits. Whether you -- whether 

2 you bring deposits in in your local market or you

3 get them from a broker, if you make bad loans with 

4 them, you're going to have a problem.

5 And, you know, I just think, you know, 

6 for us as we think about raising maybe $100 million 

7 in deposits, you got two ways to do that. You can 

8 go -- or lots of ways to do that, but, you know, 

9 you can, you can borrow money from brokers or you 

10 can risk repricing your entire $4 billion 

11 portfolio, so as you raise that $100 million, if 

12 you re-price your entire portfolio, the marginal 

13 cost of that is extremely high, so, you know, I'm 

14 glad to see that we're going to be talking about 

15 that. I think, you know, that a really even-handed 

16 approach by the FDIC to brokered deposits, you 

17 know, would be a very good thing.

18 Interest rate risk, I think, we're like 

19 most of the industry is seeing higher beta factors. 

20 It was interesting in our last ALCO meeting, we had, 

21 you know, kind of an expert talking to our ALCO 

22 committee, and this person said that the last time 
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1 rates came up like in 2004, they rose 425 basis 

2 points. Beta factors during the first 100 basis 

3 points were 8 percent, during the next 100 basis 

4 points were 25 percent, and during the third 100 

5 basis points were about 100 percent, and, you know, 

6 that's kind of what we're seeing, and, I think, 

7 that's what the industry is seeing.

8 You know, we haven't had the third 100 

9 basis point yet, but the first 100 was about 8 

10 percent beta factor. We've had 25 or 50 since 

11 then, and I think it has been about 25 percent, and 

12 so, yes, I think increasing beta factors are, you 

13 know, going to be a fact going forward.

14 We're starting to look at -- I mean, 

15 we're asset-sensitive, which has been a good thing, 

16 but, you know, we've heard many of the people say 

17 the economy is going to turn, and when the economy 

18 turn, rates are going to turn down, and we're 

19 frankly not as well positioned for that, and so 

20 we're trying to, you know, think about maybe how 

21 do we take a bit of our asset sensitivity off the 

22 table to better prepare for, you know, what we think 
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1 inevitably will be, you know, rate declines. 

2 And when rate declines happen, you 

3 know, you start seeing generally a weaker economy. 

4 They happen as a result of a weaker economy, so 

5 you're going to see more credit costs, maybe less 

6 economic activity otherwise, so you don't want to 

7 have a compressed margin on top of that, so we're 

8 focused on that.

9 That's all I have.

10 CHAIRMAN McWILLIAMS: Thank you. 

11 This is great. Thank you. I joke that I have to 

12 go around the country to solicit this type of 

13 feedback, so this is remarkable that we are able 

14 to get a very diverse perspective. And I know you 

15 felt like you were at the end of the table, but I 

16 guarantee you, this side added as much as this side, 

17 so thank you very much for that.

18 MR. DAVIS: We actually have, 

19 amazingly, a couple of minutes left. Usually, I'm 

20 going to be the guy cutting things off, but we can 

21 just go to the break, but I thought I'd give folks 

22 the option first if there was any questions that 
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1 folks had as they were listening to peers. If 

2 there's any topic that they want to discuss, again, 

3 we got a couple minutes just thought I'd give people 

4 the option.

5 CHAIRMAN McWILLIAMS: I actually have 

6 a question. Some of you mentioned exiting 

7 mortgage originations. Can you just raise your 

8 hand if that's an issue for your bank?

9 MEMBER SCULLY: We haven't exited, but 

10 we've cut it by two-thirds.

11 CHAIRMAN McWILLIAMS: Okay. Okay, 

12 thank you.

13 MR. DAVIS: Okay. Well, if there 

14 isn't anything else, we've got a break then until 

15 10:45, so feel free to grab coffee, water, make some 

16 calls, check some emails and we'll meet back here 

17 in about 15 minutes. Thank you.

18 (Whereupon, the above-entitled matter 

19 went off the record at 10:27 a.m. and resumed at 

20 10:52 a.m.)

21 MR. DAVIS: Okay, now we're going to 

22 provide the committee an update on several 
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1 supervisory issues. From our Division of Risk 

2 Management Supervision, we have Doreen Eberley, 

3 the director, Rae-Ann Miller, an associate 

4 director, who oversees the risk-management policy 

5 area, Ryan Billingsley, a corporate expert on 

6 capital markets, and William Henley, an associate 

7 director of our Information Technology Supervision 

8 branch. I'll now turn the program over to Doreen.

9 MS. EBERLEY: Thanks, Chad. So, we've 

10 been busy the last few months, since we last met, 

11 in Risk Management Supervision, and we're going to 

12 talk about a number of matters this morning that 

13 we've been working on, some of them addressing 

14 implementation of aspects of the Economic Growth, 

15 Regulatory Reduction, and Consumer Protection Act, 

16 signed in May of this year, and others that address 

17 information that we've provided to the industry.

18 Rae-Ann's going to touch on the role of 

19 supervisory guidance, notice of proposed 

20 rulemaking on reciprocal deposits, examination 

21 frequency, and retirement of a large number of 

22 financial institution letters. Ryan's going to 
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1 talk about the notice of proposed rulemaking, 

2 relating to the definition of high-volatility 

3 commercial real estate, or HVCRE, exposures. And 

4 William's going to cover the issuance of two new 

5 cyber challenge vignettes, as part of the FDIC's 

6 technical assistance video program, as well as an 

7 FFIEC resource guide. So, I'll turn it over to 

8 Rae-Ann to kick us off.

9 MS. MILLER: Thanks very much. And in 

10 your packets, you should have a pretty hefty stack 

11 of stuff that we've been working on. So, as Doreen 

12 mentioned, we've been very busy. I'll just 

13 probably go in order of that stack, just to make 

14 it a little easier, but really in no particular 

15 order of importance. 

16 They're all important, but I guess, 

17 most recently, my group has worked on an 

18 interagency statement that clarifies the role of 

19 supervisory guidance in our examination process 

20 and our supervisory process. And this was an area 

21 where there has been some confusion and some 

22 concerns that examiners were applying guidance as 
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1 if it were a regulation, as if it were something 

2 that were binding, and that's never been our policy 

3 and never been our process.

4 So, you might not realize this, but in 

5 July of 2016 -- some of you folks were on the 

6 committee at that time -- we did, our board, issued 

7 a statement to us on developing and reviewing 

8 supervisory guidance that basically indicated, you 

9 know, guidance is not a regulation, but is an 

10 important piece of information, is an important 

11 framework for risk-management practices, but is 

12 not a binding document.

13 But on an interagency basis, we very 

14 recently issued a very similar statement to 

15 reinforce that message for the public and for 

16 examiners. And it basically talks about the fact 

17 that, unlike a statute, unlike a regulation, that 

18 guidance is not binding, and examiners will not 

19 indicate that a bank is in violation, so-called, 

20 for not following a guidance document.

21 You should know as well that we have 

22 been working with our examiners on training, on 
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1 reinforcing this message. I personally, with my 

2 section chief, have been out to every region, 

3 training our commissioned examiners and 

4 reinforcing that message in the earlier part of 

5 this year.

6 So, should I just go through them all 

7 and then hold questions? Would that make sense? 

8 Okay.

9 So, the second one that I'm going to 

10 talk about, we touched on a little, and I know Dave 

11 is very interested in our conversation this

12 afternoon. But we issued a notice of proposed 

13 rulemaking regarding the treatment of reciprocal 

14 deposits. And Tiffany was interested in this, as 

15 she mentioned.

16 So, we issued this NPR on September 

17 12th, and basically, this is a conforming 

18 regulation. There were some changes in the new 

19 law. I can never remember the name of the new law, 

20 so we call it S.2155.

21 And so basically, the changes we made 

22 in our NPR were to conform Section 29 of the Federal 
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1 Deposit Insurance Act to the new law. So, what the 

2 NPR does is it basically incorporates a definition 

3 from the act. And what that does, it accepts a 

4 capped amount of reciprocal deposits from being 

5 treated as brokered deposits for certain insured 

6 depository institutions. And that cap, just as a 

7 reminder, is the lesser of either 5 billion 

8 dollars, or 20 percent of total liabilities. And 

9 a special cap also kicks in if the institution is 

10 either not well-rated or not well-capitalized. 

11 And that's a little tricky, but that cap gets 

12 calculated based on the average of the last four 

13 quarters before the institution either became less 

14 than well rated or less than well-capitalized.

15 So, basically, it's a conforming type 

16 of notice. It was published in the Federal 

17 Register on September 26, and the comment period 

18 is open through October 26. I think more 

19 interestingly, perhaps, in the NPR we announced

20 that we are going to be -- this is the first of two 

21 parts of a broader rulemaking effort, where we're 

22 proposing, or we're planning, rather, to seek 
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1 comment on a broader range of issues later this 

2 year, on the overall brokered deposit regulations.

3 I mean, as you know, the law, with 

4 respect to brokered deposits was first put in place 

5 in 1989. We're going to talk about a little bit 

6 about it more this afternoon, but first, from the 

7 last crisis in 1989, and it was amended in 1991 and 

8 basically tied to the PCA, Prompt Corrective 

9 Action, framework. 

10 So, it's certainly been a while since 

11 the law has been written. I was very interested 

12 in your conversations this morning about really how 

13 the deposit market has changed, and continues to 

14 change. And David and I were just talking a little 

15 bit about that at the break. So, very interested 

16 in your thoughts on that. And we certainly 

17 encourage comments on the broader rule later this 

18 year.

19 So, that's reciprocals. I will move on 

20 to the next one, which I believe is exam cycle. So, 

21 the new law also extended the 18-month examination 

22 cycle for certain institutions. And as we did the 
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1 last time the law was changed, we issued an interim 

2 final rule to make the law immediately -- or, the 

3 law was immediately effective for one-rated 

4 institutions, but to make that change immediately 

5 effective for two-rated institutions, which we 

6 must do via regulation.

7 So, basically, for qualifying one- and 

8 two-rated institutions with assets up to 3 billion, 

9 they are subject -- or, eligible for the 18-month 

10 exam cycle, provided they're well-managed, 

11 well-capitalized, not subject to enforcement 

12 action, not subject to a change in control. 

13 The interim final rule is going to 

14 increase the amount of institutions eligible for 

15 the cycle by about 420 institutions. So, that 

16 brings the total number of eligible to 4,798. So, 

17 that's the vast majority of all institutions would 

18 be subject to the extended examination cycle. And 

19 just as it is with the existing regulations, we 

20 still have significant flexibility, for safety and 

21 soundness reasons, to examine more frequently if 

22 it's necessary.
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1 So even though that's the interim final 

2 rule, we do accept comments on interim final rules. 

3 We got one comment on the last one. It's a great 

4 job, guys. Which is great. So, that's awesome. 

5 So, we're accepting comments up through --

6 CHAIRMAN McWILLIAMS: We took that one 

7 seriously.

8 (Laughter.)

9 MS. MILLER: Up through October 29th. 

10 But we have already implemented that change in the 

11 field, so maybe some of you, I heard about what your 

12 asset sizes are. Maybe you've benefitted from 

13 that.

14 And finally, I just wanted to touch --

15 MEMBER TURNER: Excuse me, do you 

16 happen to know -- So, the rule is, if you're less 

17 than 3 billion, is that right?

18 MS. MILLER: Yeah.

19 MEMBER TURNER: So, do you happen to 

20 know, during the last crisis, what the dollar

21 amount of losses the insurance fund suffered from 

22 that asset range? You know, institutions 0 to 3 
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1 billion?

2 MS. MILLER: I do not know that number 

3 off the top of my head.

4 MEMBER TURNER: I didn't think you 

5 probably would.

6 MS. MILLER: They are costly, they are 

7 costly.

8 MEMBER TURNER: They -- Yeah, but I'm 

9 sure it was, even though there were a lot of those 

10 institutions that failed, they just don't have as 

11 big an impact when they do fail. So, I'm sure it 

12 was relatively small, compared to the overall loss 

13 that the insurance fund took.

14 MS. EBERLEY: Zero to ten was about 40 

15 billion, out of the 70 billion total.

16 MEMBER TURNER: Okay.

17 MS. MILLER: Those failures can be 

18 costly.

19 CHAIRMAN McWILLIAMS: So, please don't 

20 fail.

21 (Laughter.)

22 MS. MILLER: Okay, the final release 
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1 that we issued was we proposed to retire a pretty 

2 wide swath of our financial institution letters and 

3 move them to inactive. So, this kind of started, 

4 this review of our financial institution letters 

5 started back in March of last year. In our EGRPRA 

6 report, which we briefed up to this group many 

7 times, we committed to looking at our guidance 

8 documents and looking for ways, even though it was 

9 outside of the EGRPRA process, but looking for ways 

10 to reduce burden there.

11 So, we view this look at our FILs as sort 

12 of the first step in that process. So, we looked 

13 at our risk-management FILs. We have other parts 

14 of the agencies also issue financial institution 

15 letters, but we in RMS are by far the most popular 

16 users, the best customers for public affairs, if 

17 you will.

18 And we identified 374, out of 664, 

19 between 1995 and 2017, that we felt were either 

20 outdated, or you could find the information 

21 elsewhere that lives on the website. So, we have 

22 proposed to retire them. And when we say retire, 
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1 it doesn't that you can't find them. I mean, they 

2 do still live on our website, and they'll have a 

3 retired label, archived label, whatever it's 

4 called.

5 So, we proposed to do that. It's 

6 interesting because we did issue that for comment, 

7 and we have gotten some comments, which I thought 

8 we would. And oftentimes, it's from people who 

9 just can't possibly live without something. 

10 And so, we're trying to do a better job 

11 overall in organizing our website and in 

12 communicating. You may have heard the chairman 

13 talk about communication and transparency is an 

14 important thing. But a better way to do that so 

15 people won't be so reliant on the FIL.

16 The FIL was never intended to be a 

17 standalone communication or standalone document, 

18 but more of an envelope to communicate various 

19 things. So, we're sort of trying to break that 

20 reliance factor on FILs. They were never really 

21 intended to be a permanent document. So, I think 

22 that is my things. And we could turn it over to 
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1 Ryan, or we can ask questions.

2 MEMBER SCULLY: So, you're saying that 

3 every industry has its hoarders, is that right?

4 (Laughter.)

5 MS. MILLER: You said that, Mary Ann, 

6 not me.

7 (Laughter.)

8 MR. BILLINGSLEY: So, next up, Ryan 

9 Billingsley.

10 MS. EBERLEY: Dave did you want to --

11 MEMBER HANRAHAN: Yeah, I do, if you 

12 don't mind Ryan.

13 MR. BILLINGSLEY: Yeah, sure.

14 MEMBER HANRAHAN: Thank you. 

15 Rae-Ann, a comment on the document that's out for 

16 comment on reciprocal deposits. One of the 

17 questions posed in there is, how should de novos 

18 be treated, with respect to reciprocal deposits. 

19 And even though my bank is no longer de novo, it's 

20 a fresh memory, and I still have a soft spot in my 

21 heart for that. 

22 My understanding of the issue is, as the 
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1 legislation was written, it pertains to banks not 

2 well-rated. If a bank is not well-rated, that's 

3 an issue for reciprocal deposits. And de novos, 

4 by definition aren't well-rated because of their 

5 newness. I'll use a line that I hate when my kids 

6 use on me. That doesn't seem fair.

7 The de novos have done nothing to earn 

8 a not-well-rated status, and reciprocal deposits 

9 take just as long to cultivate and foster with 

10 customers as any other vanilla deposit account. 

11 De novos have sometimes an added burden of 

12 convincing their market that this brand new bank 

13 is a safe place to put their money. So, the 

14 reciprocal aspect could be very valuable to a de 

15 novo in its early days, and it just doesn't seem 

16 right to me that a de novo would be ineligible to 

17 use reciprocal deposits, simply by virtue of its 

18 newness.

19 So, I will be submitting a comment 

20 letter -- and I'll say it better than I just did 

21 -- in that regard before the October 26th deadline.

22 MS. MILLER: We look forward to that 
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1 comment letter, David. But I will say that --

2 CHAIRMAN McWILLIAMS: I think you just 

3 need to block David's address, because he's 

4 submitting a comment letter on everything.

5 (Laughter.)

6 CHAIRMAN McWILLIAMS: No, we encourage 

7 you to. Please do. It would be immensely 

8 valuable to us if you could provide comments on 

9 this.

10 MS. MILLER: And just to correct 

11 something that you said, it's not that they 

12 wouldn't be able to use them. They would be able 

13 to use them, but they would need to report them as 

14 reciprocal. I mean that's -- As brokered, rather. 

15 Yeah, as brokered deposits. So, that's the issue.

16 But that's a very good point, and I 

17 don't know that the drafters had thought about --

18 MEMBER HANRAHAN: And they're probably 

19 not allowed, under their new business plan, to use 

20 brokered deposits.

21 MS. MILLER: That, I don't know. It 

22 depends.
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1 MS. EBERLEY: Yeah, de novos typically 

2 have some amount of brokered deposits in their 

3 business plan.

4 MS. MILLER: I guess it depends on that 

5 thing. But you made me think of another thing too, 

6 David. One of the other aspects of this law is that 

7 the reciprocals can't come through a third party, 

8 so they have to be that cultivated with --

9 MEMBER HANRAHAN: True, right. That 

10 makes sense.

11 MEMBER HARTINGS: Rae-Ann, if I could 

12 just make a comment about the exam cycle. And this 

13 is kind of the thought process. You know, you talk 

14 about I think 420 banks now will fall underneath 

15 the new exam 3 billion dollar cycle. You know, I 

16 hate to say it's a win-win, but even if you look 

17 to losses that we've sustained, one thing it gives 

18 you is it allows you to concentrate your effort on 

19 those banks that are less than one- and two-rated, 

20 which is what you need to do.

21 And I'm a 500 million dollar bank, and 

22 I'm already looking at a billion or a billion and 
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1 a half, so does that make my strategic planning a 

2 little bit better going down the road? And what 

3 I mean by that is, if you can keep regulatory 

4 thoughts in long-term planning, I'm a 115-year-old 

5 bank. All of our banks here have been around a long 

6 time. We talked about succession planning and 

7 getting people on-site, and the right workers.

8 About eight years ago, we started a 

9 management training program because we were having 

10 the same issue. I didn't benefit from that for the 

11 first five years. Now, the last two-three years, 

12 it's starting to benefit. And I think this exam 

13 cycle is the same way. We see our banks getting 

14 larger, so let's build a plan that's good for you, 

15 good for our oversight, but also doesn't restrain 

16 that growth of community banking, because I think 

17 as you look forward and say, well, we'll do this, 

18 but what happens if we get a little bigger?

19 And so, I mean, I think it's great that 

20 you're expanding that, but kind of think of that 

21 thought process. It's, what will that do for us 

22 five years from now or ten years from now, not what 
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1 will it do for us today. Because, unfortunately, 

2 a lot of our regulation is reactive, and I think 

3 that planning is what -- I think everybody around 

4 this table sits and does a great amount of planning, 

5 and they don't look out next year, they look out 

6 five years or ten years. So, I think that's a real 

7 positive for everyone.

8 CHAIRMAN McWILLIAMS: Thank you.

9 Before we move to Ryan, Mark, will you 

10 just give us the number of the consumer FILs we're 

11 looking to retire, as well.

12 MR. PEARCE: Sure, I can do that from 

13 here. You all can hear me. So, we have somewhere 

14 in the neighborhood of a hundred and 

15 seventy-something FILs on the consumer side. And 

16 we think we'll be able to retire somewhere in the 

17 neighborhood of 112, I think is the number. So, 

18 about 63 percent of the FILs related to consumers 

19 will be inactive as a result of this process.

20 CHAIRMAN McWILLIAMS: Thank you.

21 MS. MILLER: One more correction 

22 before we move on. It's not that de novos are not 
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1 well-rated, they are not --

2 MEMBER HANRAHAN: Apparently I made a 

3 lot of wrong comments.

4 (Laughter.)

5 MEMBER HANRAHAN: Go ahead, pile on,

6 Rae-Ann.

7 MR. BILLINGSLEY: Sorry to cut you off, 

8 I was so excited to talk about HVCRE.

9 So, why don't we go there? So, the last 

10 time we were together, we talked a little bit about 

11 the capital aspects of S.2155, and I wanted to give

12 you an update on what we had done on HVCRE. So, 

13 it'll be very brief. I'm happy to take questions.

14 We issued a notice of proposed 

15 rulemaking with the Fed and OCC on September 18th. 

16 The rulemaking really only does two broad things. 

17 Number one, it just aligns the definition of HVCRE, 

18 or High-Volatility Commercial Real Estate, in our 

19 capital rules with that that's in the statute. 

20 That's pretty straightforward.

21 And number two, the reason it's a 

22 proposal is that we want to get feedback on that 
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1 definition, to sort of do what we can do to make 

2 it clear. So, if there's areas of that definition 

3 that need additional clarity, we want to hear from 

4 you so we can get it right.

5 One of the things that we had a problem 

6 with, with the HVCRE definition in the old 

7 regulation, was this inconsistent application 

8 idea, right? So, I think that that's the aspect 

9 of this I would focus your attention on.

10 In the meantime, so while we work 

11 through the NPR phase and collect comments -- by 

12 the way, comments are due on that proposal on 

13 November 27th. While we work through that 

14 process, you are permitted to report HVCRE on your 

15 Call Reports, using the statutory definition. So, 

16 don't feel as if you have to use the reg definition. 

17 If you want to use the statutory definition, please 

18 do.

19 It's a best-efforts basis. We realize 

20 that, as you collect information on these loans, 

21 that might change how you categorize them in a 

22 future period. That's okay. We're not going to 
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1 ask you to refile old Call Reports because you have 

2 new information in the future.

3 So, that's something I wanted to 

4 definitely mention, as I'm not sure a lot of 

5 institutions are aware of that. I went through 

6 some of the key differences of the statutory 

7 definition last time we were here, so I won't really 

8 do that. But I will say that the construct of the 

9 definition is largely similar to what it was in the 

10 old regulation.

11 The scope is slightly changed, and some 

12 of the exemptions, how you can classify a loan as 

13 not HVCRE are changed. So, if you're a bank that 

14 does ADC lending, I would definitely focus on that. 

15 It might behoove you to pay attention to that, but 

16 I won't go into the gnarly details of that 

17 definition. But I'm happy to take questions on 

18 that and on any other capital issue.

19 MEMBER SCULLY: So, Ryan, I have a 

20 question that's come up recently. And you've just 

21 alluded to the ADC lending, and that is that there 

22 has been some discussion, and we haven't been able 
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1 to get clarification as to whether this is true or 

2 not, that 1 to 4 family now might come under the 

3 umbrella of the HVCRE, if there's a certain number 

4 of lots available.

5 And my reading of that is, no, they're 

6 just clarifying that 1 to 4 is 1 to 4, not five, 

7 but some people are interpreting that to say, if 

8 it's a larger subdivision, if it's more than five. 

9 And then the question is it more than five spec, 

10 is it more than five in total? So, maybe the 

11 general question would be, to your point about look 

12 at ADC, does some 1 to 4 now come under the umbrella 

13 of HVCRE?

14 MR. BILLINGSLEY: So, under the old 

15 definition -- It's a great question -- under the 

16 old definition, it would not have. Under the 

17 statutory definition, the definition just says, 1 

18 to 4 family residential real estate is excluded. 

19 Well, the question is, “What does that mean?” So, 

20 that's the purpose of the proposal is to get 

21 feedback from you all on, is that consistent with 

22 how you report on the Call Report? How do you use 
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1 it in your Real Estate Lending Guidelines, your 

2 policies and procedures?

3 MEMBER SCULLY: We look at the 

4 dwelling. We don't look at how many dwellings 

5 there are. We just look at the dwelling.

6 MR. BILLINGSLEY: What I would point 

7 you to is, the 1 to 4 is really getting at, is it 

8 single-family or multifamily, right? So, if you 

9 have an apartment building that has five or more 

10 units, that's in the multifamily space, right? If 

11 you have single-family dwellings, that's in the 1 

12 to 4 family space.

13 So, a lot development loans to 

14 construct a small subdivision is likely going to 

15 be excluded in the 1 to 4 family exception. Again, 

16 the purpose of the rule is to make sure that we get 

17 feedback from you on how you're going to categorize 

18 that and what the risks are, and to make sure that 

19 how you report that to the system with other 

20 regulations as well. Consistency with other 

21 regulations is kind of a big deal with this one. 

22 Is that helpful?
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1 MEMBER SCULLY: Yes.

2 MR. BILLINGSLEY: Okay.

3 CHAIRMAN McWILLIAMS: I think David 

4 may have to submit one more comment on this.

5 (Laughter.)

6 MR. HENLEY: Well, good morning. My 

7 name is William Henley. And thank you for the 

8 opportunity to inform you about two coming 

9 attractions from RMS's Operation Risk Group. So, 

10 the first update is to the FDIC Cyber Challenge, 

11 a community bank cyber exercise.

12 So, practicing your response in the 

13 face of an operational incident is key to an 

14 organization's resiliency, should an incident 

15 actually occur. Post-incident critiques often 

16 confirm that experience gained during exercises 

17 provides the best way to prepare organizations to 

18 respond effectively to an emergency.

19 Effective exercises are designed to 

20 engage team members so that they can collaborate 

21 in the management of a response to a hypothetical, 

22 yet possible, incident. Exercises enhance 
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1 knowledge of plans, allow members to improve their 

2 own performance, and identify opportunities to 

3 improve capabilities.

4 In 2014, the FDIC published for the 

5 first time four scenarios that a community bank 

6 could use to exercise their business continuity 

7 plans. We added three more scenarios in 2015, and 

8 this month, we will release an additional two 

9 scenarios, bringing the number to nine scenarios 

10 that are available.

11 Each scenario is supported by 

12 guidelines for conducting an exercise, a video that 

13 walks through the scenario with actors, and 

14 challenge materials that describe the scenario and 

15 include questions that can be used to think through 

16 how your bank would react in the scenario.

17 Just briefly, I'll go through the

18 scenarios that are available today, the first seven 

19 that were released. The first is an 

20 item-processing failure. A new item-processing 

21 service provider cannot process the volume of 

22 transactions generated by the bank.
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1 Customer account takeover is the second 

2 scenario. A corporate customer reports 

3 unauthorized withdrawals on its account.

4 The third is a phishing scam. Bank 

5 staff receive a phishing email that appears to have 

6 been sent by the institution's president and causes 

7 disruptive malware to be introduced to the bank 

8 systems.

9 The fourth is a technology service 

10 provider problem. It is occurring as a result of 

11 a system update.

12 The fifth is DDOS, or a Distributed 

13 Denial of Service attack. The bank IT manager 

14 investigates a possible DDOS attack and discovers 

15 a second attack that steals data from the 

16 institution.

17 The sixth is ATM malware. ATM malware 

18 reveals deficiencies in the bank's service 

19 provider contract.

20 And the seventh is ransomware. A 

21 cyber-attack has taken place, and important files 

22 are being held for ransom.
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1 So, all of the scenarios that are 

2 currently available are based on actual incidents. 

3 The two new scenarios are natural disaster, a 

4 flood. Operational problems ensue after the bank 

5 status center and their telecom provider's 

6 operations are flooded. 

7 And a supply chain incident. A 

8 third-party software update infects the bank's 

9 systems, disrupting core processing, and breaches 

10 sensitive data.

11 So, by the descriptions that are 

12 provided, we see that these are current and 

13 applicable to the environment today. We chose to 

14 add these two new scenarios because recent 

15 incidents that remind us of the higher probability 

16 of these types of incidents are actually occurring.

17 And the first scenarios are currently 

18 available on our public website, fdic.gov, and the 

19 two new scenarios will be added shortly. They 

20 should be out this month. And we hope that these 

21 resources are helpful to community banks, as you 

22 test your business continuity plans. And we 
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1 continue to welcome your feedback on these 

2 scenarios.

3 The second release is October, for the 

4 last fifteen years, has been designated as National 

5 Cybersecurity Awareness Month, which is an annual 

6 initiative to raise awareness about the importance 

7 of cybersecurity. The Federal Financial 

8 Institution Examination Council, or FFIEC, is 

9 hosting a cybersecurity webinar on October 31st. 

10 And we're also publishing a new cybersecurity 

11 resources guide for financial institutions.

12 Webinar registration materials will be 

13 sent to you via FDIC connect, and they should be 

14 out shortly for registration. So, it's an 

15 industry-only, or institution-only webinar.

16 The webinar will review the programs 

17 and initiatives included in the guide, which are 

18 designed to help organizations meet their 

19 cybersecurity control objectives.

20 The resources are divided into four 

21 types: assessments, exercises, information 

22 sharing, and response and reporting. The first 
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1 page of the guide identifies the 16 cybersecurity 

2 resources and whether they're free, or a fee 

3 service, or a combination thereof. And the 

4 subsequent pages provide an overview of the 

5 services, as well as information on how to 

6 investigate further.

7 The intent of this guide is to 

8 centralize information about a set of resources 

9 currently available from government and the 

10 private sector, that can help improve the 

11 resilience of the sector. We often hear from 

12 community banks that it's hard to know where to 

13 start in assessing the myriad of cybersecurity 

14 resources available, and we hope that this guide 

15 reduces burden on institutions that would 

16 otherwise have to complete this research 

17 individually. Thanks again for the time to update 

18 you on these initiatives.

19 MEMBER SHETTLESWORTH: Concerning 

20 phishing attacks, that's a real issue that we face 

21 every day. My question is, when it comes to the 

22 FDIC, have you all ever considered what to do with 
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1 the information whenever someone is emailing us 

2 trying to come off as a customer of ours, saying, 

3 please send a wire to X bank somewhere else?

4 Most of the time, we'll delete those 

5 emails. Sometimes we'll play along and say, 

6 please send us your wiring information. And so we 

7 have the account information, the fraudulent 

8 account information, at a legitimate institution. 

9 It's usually a larger institution or an online 

10 bank.

11 But is there anything that we can do? 

12 Because that's the point of fraud, through that 

13 account, and I'm just curious, is there any type 

14 of reporting we can do or FDIC can facilitate with? 

15 Because until you cut it off there, at the new 

16 account opening place, you'll never even make a 

17 dent in this process. I'm just curious if that's 

18 ever come up.

19 MR. HENLEY: Yes, so, questions like 

20 that have come up. In our last alerts on security 

21 alerts, one of the things that we have encouraged 

22 is participation in information-sharing groups 
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1 like FS-ISAC. And I know that they compile that 

2 information, and I think that the public-private 

3 partnership and the provision of FS-ISAC is really 

4 where we would encourage you to join and to share 

5 that information there, because they do provide 

6 aggregated information on those types of threats 

7 and do a good job of pushing out to members about 

8 those threats.

9 MEMBER SHETTLESWORTH: Okay.

10 MEMBER HARTINGS: Have you seen --

11 we've seen in our area, masking phone numbers. 

12 Basically, the technology today, it's kind of like 

13 the good old-fashioned way to defraud. They are 

14 able to make it look like our bank's phone number, 

15 make a call to customers. And I mean, we're seeing 

16 that happen a lot in our areas, and now it's 

17 starting to move down to texting. Have you heard 

18 much of that? We talked to the phone companies. 

19 That's a technology that's available out there. 

20 It doesn't seem like anyone can do anything about 

21 it. But have you heard about that? It's a little 

22 bit different than phishing, but it's done over 
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1 your phones. Have you heard much feedback from the 

2 banks on those issues?

3 MR. HENLEY: You know, we were talking 

4 this morning over breakfast that there's no end to 

5 these schemes that criminals come up with, because 

6 it's important to them, right? It's part of their 

7 business model. And so, with that, you know, we've 

8 received calls like that, even here within the 

9 FDIC, that type of phone masking. And yes, it's 

10 just another attack or attack vector that the 

11 criminals are using.

12 CHAIRMAN McWILLIAMS: I got one of 

13 those on my work phone, yes.

14 MEMBER DONNELLY: William, just on 

15 those exercises, you said there's going to be seven 

16 of them. And we participate in the FS-ISAC payment 

17 attacks exercises. It's a couple-day event and 

18 two or three hours a day. What do you expect the 

19 time to be to run through one of your exercises? 

20 Because it is a cost. Absolutely good stuff, but 

21 you've still got to apply a cost to that. So, do 

22 you have an expectation of time it would take to 
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1 go through those?

2 MR. HENLEY: That's an excellent 

3 question. So, each of the vignettes, they start 

4 off with the video, and the videos that are being 

5 released, and the seven that are available and the 

6 two that are being released, I believe are all under 

7 five minutes. I think that numbers 8 and 9 are like 

8 three and a half minutes each.

9 And then, they come with a set of 

10 instructions, or instruction cards, that kind of 

11 walk you through a facilitated discussion. So, I 

12 think that an institution could set aside a 

13 reasonable period of time, you know, an hour or two, 

14 or maybe even less, because like I said, the 

15 scenario is presented through the video in a 

16 three-and-half-minute segment. It's got a set of 

17 questions that help the staff to walk through it. 

18 So, it's not intended to be a long investment of 

19 time.

20 MEMBER DONNELLY: No, I'm just looking 

21 for an idea, because I totally agree with the 

22 exercises, because they do open up and enlighten 
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1 what you need to do in your own shop, and just kind 

2 of getting an estimate of time before we get 

3 started. I'd hate to get into something and find 

4 that one take three weeks or a month to do, and then 

5 say oh. So, thank you. That's exactly what I was 

6 looking for.

7 MEMBER HARTINGS: We've done these, 

8 and we have about twelve to fourteen individuals 

9 in a room, I'd say. You can do two of them in about 

10 an hour, a little over an hour. That's about what 

11 we planned for.

12 MEMBER DONNELLY: Thank you.

13 MEMBER K. KELLY: William, I just want 

14 to commend you. This is a very important topic, 

15 and it's one that, to be perfectly honest, I think 

16 for the CEOs up here, it could keep us up at night, 

17 because it's the new form of robbery in this 

18 industry. And so, I want to commend you for it. 

19 We're going to take it to heart and use the nine 

20 that you've put before us.

21 My question would be, is there a -- I 

22 heard the acronym used for the group that's focused 
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1 on this, but my concern on a broader level would 

2 be how do we transfer information without creating 

3 a panic when something new happens? And I don't 

4 know the answer to that, and maybe I'm just not 

5 aware, but, you know, it's an arms race out there, 

6 as you and I talked about this morning. The guys 

7 are getting just as smart as we are at playing 

8 defense on it, and my point is, every time something 

9 new happens, is there a way to communicate without 

10 creating paranoia and a crisis, such that people 

11 can play defense on some of those new methods that 

12 they're using?

13 MR. HENLEY: Certainly. And thank you 

14 for the question. And I forgot to mention that 

15 acronym. You know, here in D.C., we speak only in 

16 acronyms. The rest of the world does not. 

17 So, the FS-ISAC, that's the Financial 

18 Services Information Sharing and Analysis Center. 

19 And so, it was the product of a presidential 

20 directive that set up the public-private 

21 partnerships between the 18 critical 

22 infrastructure sectors. And so, each sector has 
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1 an information sharing and analysis center. And 

2 so, that member-driven organization that reporting 

3 into that organization, into FS-ISAC, is on a 

4 noncompetitive basis. It's for analysis for the 

5 sector. So, that would be the site or the 

6 destination that I would encourage the members to 

7 do, is to work with FS-ISAC.

8 MEMBER K. KELLY: Okay, great. 

9 Thanks.

10 MEMBER TOLOMER: I commend your 

11 efforts, but I would also suggest -- I know we do 

12 it. I'm sure many of you do as well -- is there 

13 are programs that you can purchase, where you can 

14 periodically test phishing for your entire 

15 employee base. And what we found was, the first 

16 go round, we had four or five people that didn't 

17 make it. And now, it's very unusual if somebody 

18 clicks onto the site. But we make it part of their 

19 job responsibilities, and so, if somebody fails 

20 twice, they end up having a conversation, being 

21 verbally warned for their employment, and 

22 continued means that they'll leave.
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1 This is the number one way a bank can 

2 protect itself against phishing, and that's the 

3 number one thing that happens for cybersecurity. 

4 So, it's a very serious matter, and there are 

5 programs where you can test yourself, and you'd be 

6 amazed that from time to time, people click on a 

7 $5 coupon or a $10 coupon just because they can't 

8 help themselves. But they begin to learn it's not 

9 to be trifled with.

10 And so, it's the best we way we know how, 

11 so I think it's a great way to do this, but I would 

12 encourage people to purchase a program that you can 

13 test your employees on all the time on an ongoing 

14 basis. I think that you were talking about that, 

15 Kenneth.

16 MEMBER K. KELLY: Right, and John, 

17 we've used some of that. In fact, we've seen, back 

18 to the sophistication, where now, there's the 

19 effort that they would use, 

20 kkelleyfirstindependence@gmail.com. And so, my 

21 point is, the nuances are increasing with the 

22 ability to try to figure out how to penetrate. And 
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1 so, for someone who says, oh, that's Kenneth, he's 

2 sending me an email. But really it's not, it's 

3 kennethkelleyfirstindependence@gmail.com.

4 My only point is, as leaders up here 

5 around this table, we have to figure out how do we 

6 communicate in such a way that if I see that, all 

7 of us should see that, so that we can play defense 

8 against it, versus having to figure it out on our 

9 own. Because by that time, it could potentially 

10 be a loss for one of our institutions. That's the 

11 only point that I wanted to make on that.

12 MEMBER EMMONS: I would just, as a 

13 point of interest, I would offer that we have a very 

14 strong state banking association, and if there's 

15 one time when we stop acting as competitors, it's 

16 when we have an attack that's perpetrated on one 

17 of the banks. And the communications that takes 

18 place at the committee level -- so, they have an 

19 info security committee or a security committee. 

20 And when an attack happens, it's often 

21 geographical, and so there's a communications that 

22 goes through the state association that tends to 
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1 be very helpful. So, I think that's one of the 

2 areas where you can look for some help.

3 MR. HENLEY: Yeah, so, the State 

4 Liaison Committee and the Conference of State Bank 

5 Supervisors are members of the FFIEC. We work 

6 closely with the representatives from those 

7 organizations. And in the face of incidents or 

8 disasters in the past, we've had many lessons 

9 learned that we've tried to incorporate, just for 

10 example, with incidents that happened at service 

11 providers, that now, with the speed of technology, 

12 and being able to move across geographic 

13 boundaries, that we formerly would only contact 

14 those commissioners for the state or states that 

15 were affected by an event.

16 But after lessons learned, we were able 

17 to -- we saw that was a blind spot, that we needed 

18 to work with commissioners in banking departments 

19 more reflective of the customer base, as opposed 

20 to the geographic impact. And so, we have a strong 

21 partnership with the state banking departments in 

22 this area, particularly through those two 
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1 organizations that I mentioned.

2 MEMBER PAINE: I do think that, when we 

3 talk about disruption, a lot of people focus on the 

4 fintechs, but really, if you're talking about 

5 spoofing, or malware, or phishing, or -- we had this 

6 thing happen to us, spambot. That's crazy. It 

7 was just, we had our executive secretary just 

8 flooded with a thousand emails in fifteen minutes. 

9 And this kind of disruption -- and it's debit card 

10 fraud, and it's ACH fraud, and internet banking 

11 fraud, and it's not just key loggers anymore. It's 

12 so much that I think that the disruption portion 

13 of it, the automation has made our life simple, and 

14 the disruption has made it twice as hard.

15 So, not only the cost, because we can't, 

16 as a 140 million dollar bank in rural Minnesota, 

17 hire an IT person that's going to stay more than 

18 a year or two before they want to go to a metro area 

19 -- it has created financial and at times emotional, 

20 because these are customers. And it's not our 

21 employees necessarily. We do the social 

22 engineering like we're supposed to do. But it's 
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1 not our employees, it's our customers. It's our 

2 customers that went on their online banking, and 

3 went through the two layers of security because 

4 their CEO sent them an email to wire funds. And 

5 just because we are a 140 million dollar bank, when 

6 that wire came through, and we went through and 

7 verified, with that customer, hey, did you actually 

8 send this wire? They said yes. And we went 

9 through our second check internally, manually, and 

10 we said, they don't -- this is abnormal. So, we 

11 called the president and stopped a $500,000 wire 

12 from going out, because we know our customers.

13 It's not necessarily just us. It's our 

14 customers. So, we try to educate our customers, 

15 especially the ones with the cash management, we 

16 sit down with them on their annual review, when 

17 we're going through their contracts. But if some 

18 way, the regulators, in a reasonable form, could 

19 help assist us to say, these are things that you're 

20 liable for -- because guess what. They're not 

21 going to take the loss, we are.

22 We had a $13,000 loss on an ACH file that 
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1 was somebody used a public computer in Vegas, in 

2 Caesar's, signed onto their commercial banking. 

3 And guess what, they got hacked. So, we ended up 

4 taking the loss on that. Even though in the 

5 contract it says we won't, you can't do that in a 

6 small town, for a small business.

7 So, if we can get some assistance, that 

8 would be so helpful because there's a liability 

9 aspect of that. We're not IT professionals. 

10 Neither are you, and I get that. But if we can 

11 somehow team up together to get a be safe, you know, 

12 bullet-pointed, something that we can either add 

13 to the contract, or put in our annual training, or 

14 something like that, that would be very helpful for 

15 us because, again, our number one risk is our 

16 customer.

17 MS. EBERLEY: We do have, on our 

18 website, pamphlets that you can distribute to your 

19 customers. We can send around the link.

20 MEMBER PAINE: That would be great.

21 MS. EBERLEY: They're graphics-ready. 

22 You just download and print. One designed for 
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1 retail customers, one for business customers.

2 MEMBER PAINE: That'd be great.

3 MS. EBERLEY: And we also produced an 

4 issue of our consumer news that was specifically 

5 focused to cybersecurity hygiene tips and tricks 

6 for customers of banks. So, we'll send links to 

7 both of those to all of you.

8 MEMBER PAINE: That'd be great. 

9 Thanks.

10 MS. EBERLEY: Sure.

11 MR. DAVIS: Anything else on this 

12 topic?

13 CHAIRMAN McWILLIAMS: You had 

14 something.

15 MEMBER WALKER: No, I was just going to 

16 say, add, that it's also reputational, because this 

17 text alert thing, in a rural community is very 

18 impactful because you tend to be the only bank 

19 around. So, we end up spending all of our time --

20 The message went out, and it said, your debit card 

21 transaction at First Northern Bank has been 

22 fraudulent, please click here. And so, what 
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1 happens is you're flooded with calls from customers 

2 and noncustomers, because they're picking out a 

3 whole range of area code and just sending it out, 

4 thinking that most of the customers probably bank 

5 there. So, it becomes -- you have noncustomers 

6 calling as well, and it's just, as you said, a 

7 disruption and difficult to deal with when you 

8 don't expect it, and you're just sitting there 

9 going about your normal day, and then all of a 

10 sudden, you get all these calls from customers and 

11 noncustomers.

12 MR. DAVIS: Okay. We can move on to 

13 our next panel then. We'll now have an update from 

14 Anthony Lowe, the FDIC's ombudsman. He's going to 

15 talk about a proposed annual report from his 

16 office.

17 MR. LOWE: Good morning. So, when we 

18 met back in July, I provided a brief overview of 

19 the Office of the Ombudsman, talked a little bit 

20 about our strategies, what we do on a daily basis, 

21 some of the major tenets of the office, the types 

22 and methods of contacts that we have, and 
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1 frequently-reported areas of concern from the 

2 industry.

3 And what I'd like to do today is to 

4 discuss a method of broadening the awareness of the 

5 Ombudsman Office, which is, I think, a very 

6 important goal, especially when you consider some 

7 of the comments that our chairman has made 

8 recently, in congressional testimony, and some of 

9 her public statements.

10 I will want to get some input from all 

11 of you as we go through this brief discussion about 

12 the proposed annual report that we have presented 

13 to you, and get some feedback on you, with regard 

14 to the comments that are in there, the format, and 

15 why you think it is important.

16 Why do we think it's important to have 

17 an annual report? Well, just a little bit of 

18 perspective, from 2004 through early 2014 we did 

19 issue periodic reports on the industry to our 

20 representatives. It provided some general 

21 information, a broad overview of questions that had 

22 been presented to the office, as well as some 
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1 limited elements of raw data on the number, type, 

2 and trends of contacts with the industry. And as 

3 I alluded to earlier, as you're likely aware from 

4 reading or seeing the testimony of Chairman 

5 McWilliams recently -- and shame on you if you did 

6 not see the testimony.

7 CHAIRMAN McWILLIAMS: Thank you.

8 (Laughter.)

9 MR. LOWE: The FDIC is pursuing an 

10 important agenda that promotes trust through 

11 transparency, an initiative that aims to expand 

12 transparency relative to FDIC operations. My 

13 office, in trying to commit to this initiative, is 

14 seeking to identify meaningful channels to 

15 communicate the services and activities that we 

16 provide. And it's our goal that this annual report 

17 will complement agency-wide efforts in this 

18 regard.

19 We've done a little bit of research in 

20 this regard, and we determined that there's close 

21 to 150 federal ombudsman offices around the 

22 country, with 44 different government agencies. 
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1 Of these, the FIRREAs, the bank FIRREAs, the OCC, 

2 the FRB, NCUA, all provide some type of an annual 

3 report.

4 Right now, the only agencies that 

5 provide a separate annual report are the Bureau of 

6 Consumer Financial Protection and the OCC. The 

7 NCUA does not provide a separate annual report. 

8 The FRB is in the process of developing a report. 

9 They plan to have it issued by the end of this year 

10 or early 2019.

11 There are some other reports that are 

12 out there of course, you know, from other agencies, 

13 and they do kind of run the gamut. Some of them 

14 are all narrative, some of them are nothing but 

15 data, a lot of dashboard approaches. Some of them 

16 do include trend analysis, and some are nothing 

17 more than talking about the responsibilities of the 

18 office.

19 So, the report that we provided to you 

20 in the materials for this meeting, if you thumb 

21 through it, it just -- just to tell you what's in 

22 our report right now, it includes a general 
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1 description of the office, provides some detailed 

2 information on totals and trends, relative to 

3 contacts from the industry. It talks a little bit 

4 about inquiries and complaints that do come in, the 

5 sources of those complaints. And it also talks 

6 about the common discussion themes, concerns that 

7 are raised by stakeholders, that being the bankers, 

8 the general public to some degree, the trade 

9 associations, and, you know, the other regulatory 

10 agencies.

11 So, what I'd like to do is ask you, 

12 generally, four questions about the report. First 

13 off, do you think an annual report would be of value 

14 to you and to the industry? What do you like or 

15 dislike about the proposed format of the report? 

16 Is the information that's presented of sufficient 

17 detail, or is more detailed information needed? 

18 As a stakeholder, is there anything not included 

19 in this report that you would like to see? And any 

20 thoughts on excluding any information that's 

21 currently proposed?

22 So, I will stop there and again just 
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1 open it up for your feedback, your comments, your 

2 questions.

3 CHAIRMAN McWILLIAMS: I just want to 

4 make sure everybody has a copy of the report.

5 MEMBER WILLIAMS: Just a comment on it, 

6 I think it's good, I think there's a lot of good 

7 information in there. My only question though is 

8 the completeness of it, because the ombudsman is 

9 a resource that we can certainly go through, but 

10 the other resource is directly to the regional FDIC 

11 person -- if I have an issue, I call Kathy Moe, and 

12 we tend to talk about it. And periodically, that 

13 can be information that would be on the report, but 

14 isn't because we have that relationship where you 

15 can have a direct conversation. So, I don't know 

16 if it provides you the completeness of the data 

17 you're looking for, or even if that matters.

18 CHAIRMAN McWILLIAMS: Yeah, and 

19 Anthony knows this, we're looking at our ombudsman 

20 process. And exactly for that reason, some of the 

21 agencies have the informal dispute resolution, and 

22 some have informal and formal. So, we're looking 
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1 at all of that, just to make sure we have a 

2 comprehensive picture of how we handle this, and 

3 that there's a real channel for banks to challenge 

4 whatever they want to challenge, and for us to be 

5 responsive to that.

6 MEMBER K. KELLY: I'd like to comment 

7 on that. A couple of things, one, let me commend 

8 you for the report. I think there is a need for 

9 it. It helps to communicate what the ombudsman 

10 role is and how it could work for our institutions. 

11 I would tell you, for maybe the CEOs around this 

12 table in general, we probably have the personality 

13 to have a high relationship with the FDIC at the 

14 right levels. But I see it from another 

15 perspective, which is, there are institutions that 

16 want to be able to ask and probe in the right way. 

17 And the ombudsman role, from my perspective, is 

18 duly noted and needed to do that.

19 And so, I can tell you, from having 

20 dealt with several institutions that -- in 

21 particular, say, minority institutions -- having 

22 an ombudsman allows us to really kind of probe in 
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1 a way that feels a little bit safer than normal, 

2 versus having to get hit over the head, because once 

3 you have that direct conversation, the 

4 confidentiality and how it's dealt with is just 

5 completely different.

6 And so, my point Chairlady McWilliams, 

7 is that there is definitely a need for this role, 

8 and I am in full support of it. I would say, can 

9 we continue to build out what this report 

10 represents – will help communicate the role and 

11 responsibility in a way that could be more 

12 effective.

13 MR. LOWE: And that's definitely one of 

14 the purposes of this report. Because when I do 

15 have my regional folks going out on a weekly basis 

16 visiting individual banks, I'm surprised when they 

17 send their weekly reports in to me, where they say, 

18 this is the first visit that we've had, and the bank 

19 was not aware of the services and assistance that 

20 the ombudsman can provide. So, that's part of the 

21 awareness project that we've been focusing on for 

22 the last year and a half, and plan to continue doing 
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1 into 2019, 2020. And that's part of why this 

2 report, I think, is important.

3 MEMBER MENON: Is there a process where 

4 there's feedback after you talk to the ombudsperson 

5 about some issue or something? I just wanted to 

6 ask that because we did this several years ago and 

7 never heard back from the ombudsperson. So, maybe 

8 things have changed over the years, I can talk to 

9 you about that in private. But you know, 

10 basically, it just died. We never got any 

11 feedback.

12 MR. LOWE: You know, generally, if a 

13 banker or a stakeholder brings an issue to us that 

14 they would like for us to do some kind of research 

15 on, if it's in regard to, you know, definitions of 

16 a rating, or, you know, what the general process 

17 is with an application, we'll have that discussion 

18 and try and make sure that we conclude that matter.

19 Sometimes, there will be some ongoing 

20 issues that the banker will inquire about. And we 

21 do try to do go back and close those issues out at 

22 some point in time. You know, sometimes there will 
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1 be some open-ended items that we just can't get to 

2 a full conclusion. But you know, if it is an open 

3 item, we will make sure -- we try to make sure --

4 that the banker or the stakeholder knows we're 

5 continuing to review this matter. Or if we need 

6 some additional information, we'll let you know 

7 that also.

8 CHAIRMAN McWILLIAMS: Arvind, I'm 

9 curious in your feedback, so we can talk after this.

10 MEMBER MENON: Again, it goes back 

11 several years.

12 CHAIRMAN McWILLIAMS: Sure, sure, no, 

13 not a problem. And even if it's anecdotal, it's 

14 fine. Please understand, the role of the 

15 ombudsman is very important to us because it's a 

16 channel that needs to be utilized. So, Ken, if you 

17 have some suggestions on how we can improve it, or 

18 anybody else, please give us those suggestions, 

19 either by a formal letter -- comment letter -- or 

20 just send us an email. But we want to make this 

21 position -- Anthony's fully committed -- we want 

22 to make this position as robust as possible, and 
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1 viable. So, part of the outreach is exactly that, 

2 how can we can we get to a place where banks are 

3 comfortable reaching out and expect some kind of 

4 a resolution and feedback. So, we need to come 

5 full circle on this.

6 MR. LOWE: And if I can just add one 

7 other comment, you know, the comments that we get, 

8 especially when we have meetings with bankers, that 

9 information is confidential. It's not going to be 

10 shared with any of the operating divisions, or 

11 anyone outside of the Ombudsman Office, with the 

12 exception of possibly the Chairman's Office, if we 

13 think there's an issue that needs to be addressed 

14 or brought to her attention. So, anyone that 

15 contacts our office should be very comfortable with 

16 sharing any information and a lot of candor with 

17 us, because, again, it is again maintained in a 

18 confidential manner.

19 MEMBER DONNELLY: Anthony?

20 MR. LOWE: Yes, sir?

21 MEMBER DONNELLY: Just one general 

22 comment on the report. You know, if you look at 
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1 the topics and the different things -- and I know 

2 it's a fine line between not enough information and 

3 too much information, and protection of 

4 confidentiality. But, just a comment, 

5 examination issues is pretty broad. Is there any 

6 way to layer in general topics? Because somebody 

7 may see that, hey, that's exactly what's happened 

8 to me, when examination issues, to all of us around 

9 here, are -- you would have 15 or 20 different 

10 comments. What does that mean? And I know you 

11 can't go and write 25 pages per incident, but just 

12 a way to maybe define -- That would be a suggestion.

13 MR. LOWE: Okay, great.

14 MEMBER SCULLY: So, I think it's 

15 wonderful that this is being emphasized. I would 

16 say that there's probably still a lot of residual 

17 skepticism on the part of the industry, as to 

18 whether or not you can go to somebody within the 

19 FDIC and complain about the FDIC. So, there's just 

20 that natural skepticism that has to be overcome.

21 I think the best way to overcome it is 

22 to just reiterate the message over and over again 
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1 that this is taken very seriously. And with that 

2 in mind, I'm not sure this is the vehicle to do it. 

3 If I think about limited resources and limited 

4 funds availability, that an annual report is going 

5 to have that kind of iterative effect of really 

6 making people less skeptical.

7 And I'd agree that some of the data 

8 that's here, in isolation, just as data, is going 

9 to raise a lot more questions than it's going to 

10 answer. I mean, you know, we're all bankers, so 

11 we look at these things -- you know, I look and see 

12 that the public is the primary source of contact. 

13 That really surprised me. And yet, the five topics 

14 of interest, one of the greatest ones is 

15 examination issues, which seems like a disconnect. 

16 Is the public going to the ombudsman about 

17 examination issues?

18 And, you know a total of 800 visits in 

19 two years, given the number of institutions 

20 insured, is that a message right now that we want 

21 to send, or do we want to get that number up before 

22 we advertise it.
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1 I mean, so, I'm just not sure this is 

2 the vehicle. I think it's very important, but my 

3 initial recommendation would be, I don't think this 

4 is the vehicle to get that message across.

5 CHAIRMAN McWILLIAMS: That's fair. 

6 And this is one of the vehicles we want to use. And 

7 to the extent that we use it, we want to make it 

8 a viable vehicle. So, we're not just looking to 

9 check the box. And you have my personal 

10 commitment, I will highlight this in public 

11 presentations, and encourage banks to use the 

12 ombudsman process, and make sure people understand 

13 it's truly independent from the rest of the FDIC, 

14 and what people communicate to Anthony's office 

15 does not get elsewhere, and we take those things 

16 seriously.

17 So, I will personally take an 

18 initiative, and you have my commitment that I will 

19 go and advertise this as one of the main features 

20 for banks to challenge, what they feel that hasn't 

21 been done right, vis-a-vis our examinations, et 

22 cetera.
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1 But if there are other ideas, I am very 

2 much so open to it.

3 MEMBER EDWARDS: You know, I think this 

4 is not easy, but I've been a banker for 25 years. 

5 And other than working, when we were purchasing 

6 assets of failed institutions, that's really the 

7 only time I've worked with the ombudsman. And 

8 about a year ago, Edie Fulcher in the Atlanta office 

9 called me and said, hey, I'd like to come down and 

10 see you. I just want you to know who I am, what 

11 we do, what we can do for you, and, you know, make 

12 sure you understand everything. And that was 

13 really helpful.

14 She probably took an hour and a half. 

15 We went through everything that the office does, 

16 and what they can do, what they can't do. So, you 

17 know, people deal with people. And so, I think 

18 having that kind of one-on-one relationship now 

19 would make me much more likely to reach out to her 

20 when questions arise and things.

21 I know there are a lot of banks in the 

22 country here, and that's an expensive way. But I 
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1 think -- and I will say I know that the Office of 

2 the Ombudsman really is at a number of banking 

3 functions, through ABA, and ICBA, I'm sure, and 

4 other functions. I appreciate that, and that's a

5 good way to meet folks, but that doesn't substitute 

6 for being able to sit one-on-one across the desk 

7 and have somebody in your shop do that. So, I know 

8 that's probably expensive, but I think that's very 

9 valuable time, and I appreciate the FDIC doing 

10 that.

11 MR. LOWE: And I appreciate that 

12 comment. And Mary, to your comment, you know, we 

13 do realize, getting to 400, 500 banks on an annual 

14 basis out of, you know, 3,600 or 4,000 that we 

15 directly supervise, it's going to take us, you 

16 know, six, seven, eight years before we get through 

17 the entire cycle.

18 So, one of the items that we discussed 

19 at our quarterly meetings and our annual meetings 

20 is, how can we get the outreach and the numbers up? 

21 Because I agree, the personal contacts are much 

22 more important.
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1 One thing that I'm considering -- you 

2 know, we do have some senior ombudsman specialists 

3 that are here in Washington. I've been talking 

4 with them. Some of them have not been out to visit 

5 banks in several years, and they've indicated a 

6 willingness to do that.

7 So, we are going to try to augment, you 

8 know, the outreach, the actual outreach. Because 

9 we do get much better, I think, information when 

10 we do go on site and have those on-site visits.

11 One other note, you know, in regard to 

12 those contacts that do come in from the public. 

13 Some of those are -- they're categorized as from 

14 the public, but they do come sometimes from 

15 whistleblowers that actually work at banks and 

16 maybe have an issue that has come up that they have 

17 some concerns about, and they just want to report 

18 it to us and say, hey, this may not be kosher, this 

19 may not be legal, something.

20 You know, your folks may want to look 

21 at during the course of the next examination. So, 

22 a large number of those contacts that we get from 
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1 the general public are those whistleblowers. And 

2 they do of course want to -- it has to be a 

3 confidential type of a contact.

4 MEMBER TOLOMER: I think I would echo 

5 one thought, and that is, we've all probably worked 

6 very hard with our local offices to have a strong 

7 relationship, and we've been able to resolve 

8 things. But in the off chance we're not able to 

9 resolve things, I think it's comforting to know 

10 there's another place to go to have a hearing, 

11 beyond just butting heads.

12 Now, we haven't had any issues, 

13 fortunately for us, in the 10-year existence. But 

14 it's good to know that if there was an issue, 

15 there's a place to go.

16 MEMBER HANRAHAN: So, Madam Chairman, 

17 along the lines of what John just said, I think it's 

18 a great idea to promote and educate on the 

19 Ombudsman's Office. As you're promoting it, I 

20 would respectfully suggest that the message be 

21 delivered in a way that bankers don't think that 

22 that should be their first recourse.
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1 Because whenever I've had to go to the 

2 New York Region, R.D. Vogel and his team are great 

3 at being responsive and accessible, and I've never 

4 had to go to the Ombudsman's Office because we've 

5 resolved things there.

6 So, I would hope that the message 

7 couldn't be interpreted by bankers that that should 

8 be their first place to go, because that would seem 

9 to me to be a poor use of resources.

10 CHAIRMAN McWILLIAMS: Okay, I will 

11 definitely -- and you'll see some stuff coming out 

12 from the FDIC on the role of the ombudsman, and I 

13 think you'll be pleased with an ability to provide 

14 a comment letter perhaps.

15 MR. LOWE: David, you know, when our 

16 regional folks go out, or when I go out and visit, 

17 and if a banker does bring a matter forward, one 

18 of the first questions I ask is, did you talk with 

19 the EIC, with the local management, with the 

20 regional folks? Because, I agree with you, that's 

21 usually one of the best methods for getting 

22 something resolved in a timely manner, so I always 
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1 ask that question and my staff does too.

2 MEMBER HARTINGS: Anthony, just a 

3 follow up on several of the comments that were made, 

4 they were all great. I mean, I think the report 

5 is good. I think you have to think about your 

6 audience. I mean, I guess I think this report is 

7 good if I'm your boss. It may not be quite as good 

8 if I'm a community banker, because I want to know 

9 the community bankers’ aspects. So, I want to just 

10 cut that out there.

11 And I've learned from regulators, 

12 report it and then I can hold you accountable, so 

13 I do appreciate you doing a report too, as far as 

14 that goes.

15 MR. LOWE: Maybe I should rethink this.

16 (Laughter.)

17 CHAIRMAN McWILLIAMS: I'm getting all 

18 kinds of ideas.

19 MEMBER HARTINGS: But I think you have 

20 to start somewhere and then see where it grows. 

21 Because if you want community bankers to be your 

22 audience, it needs to be a different report.
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1 And again, because you're -- you've got 

2 a lot of moving parts here. But again, I think 

3 start it, do the best you can. It's accurate, 

4 there's no doubt about it. But I want to know the 

5 specifics. When you say examination issues, that 

6 doesn't mean a lot to me because there's a wide --

7 and there's a lot of issues. But again, that's 

8 because I'm reading it as a community banker, and 

9 I really want those issues only brought up with 

10 other bankers mostly, because it gets me an idea 

11 -- you know, it just, and again, I may want the 

12 public one as well, but again, that's slicing and 

13 dicing it a little bit at that point.

14 MR. LOWE: Let me ask you, because one 

15 thing, when I was talking to my staff earlier this 

16 week, we were thinking about maybe building in some 

17 information that would differentiate among the 

18 asset size. You know, maybe up to 250, and maybe 

19 having a couple of charts that show what issues came 

20 up from different segments of asset sizes. Would 

21 that help in that regard a little bit maybe?

22 MEMBER HARTINGS: I think that would be 
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1 good. I'd go back to what I think Chris said. You 

2 know, the problem is, it's not an objective view. 

3 It's a very subjective view. It's the ones that 

4 called you that you've viewed. Unless your 

5 ombudsman is going to look at a wider number of 

6 examinations, even those that, you know, again --

7 so, it's going to be limited value because, again, 

8 it's just the ones that called you. And I 

9 mentioned saying James Meyer in Columbus. He's 

10 the one I call first. You know, so. I'm not sure. 

11 Like I said, I think you have to just 

12 do the report for a while and say where's the value? 

13 I think you've got to watch your resources. Mary 

14 Ann was exactly right. You've got to be careful 

15 what you're trying to get out of this because, 

16 number one, we want to make sure you're a line of 

17 defense for bankers, that they know they can call 

18 you without retribution, but don't call you first. 

19 You know, all those kind of things is number one.

20 Reporting is important, but let's see 

21 what we get out of the reporting. So, I mean, like 

22 I said, once you start reporting, you have to kind 
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1 of think of your audience and other things. That's 

2 my only comment. I think all the other comments 

3 have been great.

4 MEMBER EMMONS: And let me just put 

5 another perspective on this. In addition to 

6 knowing what it is and maybe going into more depth. 

7 I think it would be very helpful for you to be able 

8 to share in a very confidential way successful 

9 outcomes. So, examples of conversations that have 

10 taken place, where you have felt that you've 

11 provided a valuable service to the organization, 

12 and they would agree, that, you know, this was --

13 this process worked, it felt transparent, I feel 

14 good about the outcome. Those kinds of things I 

15 think would give us a better sense, not just what 

16 the topic was, but how the office assisted the bank 

17 in dealing with the issue.

18 MR. LOWE: Any other comments?

19 Well, we did have, hopefully at each of 

20 your locations, contact information and my 

21 personal business card. So, if you do have some 

22 additional thoughts, email me, call me. I'll be 
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1 here all day. Catch me at lunch or one of the 

2 breaks. I definitely want to get some additional 

3 input from you. So, thank y'all for your time.

4 CHAIRMAN McWILLIAMS: And thank you 

5 all. This was a great discussion. I appreciate 

6 it.

7 MR. DAVIS: And next up is lunch. 

8 We'll be back here at 1:00.

9 (Whereupon, the above-entitled matter 

10 went off the record at 12:00 p.m. and resumed at 

11 1:04 p.m.)

12 MR. DAVIS: Okay, if we could please 

13 have a seat, we will get started with the next 

14 panel. Okay, welcome back, everyone. I would 

15 start the afternoon portion of the meeting by 

16 discussing industry collaboration issues. We 

17 have Lisa Arquette from the Division of Risk 

18 Management Supervision; Lisa is an Associate 

19 Director who oversees our anti-money laundering 

20 group. Betty Rudolph, the National Director for 

21 Minority and Community Development Banking. And 

22 Jim Watkins, Senior Deputy Director of Supervisory 
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1 Examinations in the Division of Risk Management 

2 Supervision. 

3 Lisa is going to start by highlighting 

4 the Shared Resource Statement regarding the Bank 

5 Secrecy Act. Betty is going to discuss 

6 collaboration with minority depository 

7 institutions, and Jim is going to cover 

8 collaboration with de novo institutions.

9 Thank you. Lisa? 

10 MS. ARQUETTE: Thank you, Chad. And 

11 good afternoon, everybody. It's a real pleasure 

12 to be here. The slide deck that you have in your 

13 materials is what I'm going to go over; it says 

14 sharing resources to manage Bank Secrecy Act 

15 obligations. And if you were following the press 

16 releases on October 3rd we issued through a press 

17 release some guidance, a statement for the industry 

18 in considering initiatives to deal with efficiency 

19 and effectiveness. The FDIC along with the other 

20 federal banking agencies - the Board of Governors 

21 of the Federal Reserve System, the Office of the 

22 Comptroller of the Currency, the National Credit 
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1 Union - and the Financial Crimes Enforcement 

2 Network, FinCEN, we have issued a statement 

3 regarding sharing of BSA resources. But before 

4 that I would like to note just overall, there is 

5 a bigger initiative underway, and that is to deal 

6 with efficiency and effectiveness in the Bank 

7 Secrecy Act anti-money laundering area; I'll refer 

8 to it as BSA/AML regulations going forward. We're 

9 also evaluating supervision in this space, 

10 enforcement, and really is there anything that we 

11 can do in terms of our examination process while 

12 meeting the requirements of the statutes and 

13 regulations, continuing to fully support law 

14 enforcement, recognizing innovation in AML 

15 techniques and reducing the burden of BSA/AML 

16 compliance. Again, our partners are the other 

17 banking agencies as well as FinCEN.

18 Moving along to Slide 2, on October 3rd 

19 we issued our press release and it deals with the 

20 burden of BSA/AML obligations that have been raised 

21 many times by the industry as well as other parties. 

22 The cost of meeting BSA requirements and 
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1 effectively managing the risk that illicit finance 

2 poses to the broader U.S. financial system may be 

3 reduced through sharing employees or other 

4 resources and collaborative arrangements with one 

5 or more financial institutions. Collaborative 

6 arrangements involve two or more banks with the 

7 objective of participating in a common activity or 

8 pooling resources to achieve a common goal. The 

9 statement describes how collaborative 

10 arrangements can be used to pool human, 

11 technological and other resources to reduce costs, 

12 increase operational efficiency, and leverage 

13 specialized expertise.

14

15 Moving onto Slide 3; the collaborative 

16 arrangements described in this interagency

17 statement are most suitable for banks with a 

18 community focus, less complex operations and lower 

19 risk profiles for money laundering and terrorist 

20 financing. I should also point out, although it 

21 may not pertain to anybody here, that this 

22 statement does not apply to collaborative 
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1 arrangements or consortia that are formed for the 

2 purpose of sharing information under Section 

3 314(a) of the USA PATRIOT Act which is known as the 

4 voluntary information sharing, Section B, it's 

5 between banks. So there are many banks that have 

6 voluntary consortia to share information. It's a 

7 little more simple than that; as a reminder, banks 

8 are required to establish and maintain procedures 

9 reasonably designed to ensure compliance with the 

10 Bank Secrecy Act and to develop and implement 

11 BSA/AML compliance programs; those programs should 

12 be commensurate with the bank's specific risk 

13 profile. The risk profile of a bank should be 

14 based on the institution's risk assessment that 

15 properly considers all risk areas such as products, 

16 services, customers, entities, transactions and 

17 geographic locations in which the bank operates and 

18 provides services. The BSA compliance program is 

19 illustrated on Slide 4 and includes a system of 

20 internal controls to ensure ongoing compliance 

21 with the Bank Secrecy Act, independent testing of 

22 the BSA/AML compliance program, a designated 
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1 individual or individuals responsible for managing 

2 BSA compliance, training for appropriate 

3 personnel, board members all the way down to 

4 staff-level personnel, an established customer 

5 identification program, procedures for customer 

6 due diligence, which became effective in May of 

7 this year. Collaborative arrangements may 

8 provide access to specialized expertise to assist 

9 banks in meeting the BSA/AML compliance program 

10 requirements that may otherwise be challenging to 

11 accomplish without such collaboration.

12 Slide 5. I would like to provide a 

13 couple of examples to describe situations in which 

14 collaborative arrangements may be beneficial for 

15 banks. In terms of internal controls, the 

16 internal control requirement, a collaborative 

17 arrangement might be entered into by two or more 

18 banks to share resources between the respective 

19 institutions to conduct certain internal control 

20 functions such as reviewing, updating and drafting 

21 BSA/AML policies and procedures, reviewing and 

22 developing risk-based customer identification and 
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1 account monitoring processes, tailoring and 

2 monitoring systems and reports for the risks posed 

3 by each institution. In terms of the independent 

4 testing requirement, banks are also required to 

5 provide for independent testing to determine that 

6 the bank is in compliance with the Bank Secrecy Act; 

7 that can done either internally or it can be done 

8 with an outside party. Such testing should 

9 provide an evaluation of the adequacy and the 

10 effectiveness of the bank's BSA/AML compliance 

11 program. Some banks may have personnel that 

12 perform multiple job functions making it difficult 

13 to identify an employee within the bank to conduct 

14 an independent test of the Bank Secrecy Act/AML 

15 compliance program. Personnel at one bank might 

16 conduct the BSA/AML independent test at another 

17 bank with a collaborative arrangement between the 

18 two; the shared resource may, for example, be 

19 utilized in scoping, planning, and the performance 

20 of BSA/AML independent testing. With that said, 

21 appropriate safeguards should be in place to ensure 

22 confidentiality of sensitive business 
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1 information. The banks should be involved in the 

2 collaborative arrangement, the banks that are 

3 involved in the collaborative arrangement also 

4 need to ensure that the shared resource conducting 

5 the BSA/AML independent testing is qualified and 

6 not only with the BSA/AML functions, but in the 

7 materials that are being reviewed, such as training 

8 and developing policies and procedures. We want 

9 to ensure that this does not present a conflict, 

10 so the employees should be trained and should be 

11 independent. In terms of the training 

12 requirement, banks are required to ensure that the 

13 appropriate personnel are trained in BSA 

14 regulatory requirements and in internal BSA/AML 

15 policies, procedures and processes. It may be 

16 challenging to acquire personnel with BSA/AML 

17 expertise in some communities; it may also be cost 

18 prohibitive to attract a qualified, off-site 

19 BSA/AML trainer; however, in a collaborative 

20 arrangement between two or more banks, there is 

21 latitude in hiring a qualified instructor to 

22 conduct the BSA/AML training, allowing the banks 
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1 to share the costs. Examples of basic BSA/AML 

2 training topics may include alerting - the alert 

3 analysis in investigative techniques, alert trends 

4 in money laundering methods, as well as regulatory 

5 updates.

6 Other considerations; when considering 

7 a collaborative arrangement for a BSA officer, we 

8 think that there might be many challenges that 

9 community banks might face. The sharing of a BSA 

10 officer among banks could be challenging due to the 

11 confidential nature of suspicious activity reports 

12 filed and the ability of the BSA officer to 

13 effectively coordinate and monitor each bank's 

14 day-to-day BSA/AML compliance. In addition, the 

15 sharing of a BSA officer may create challenges with 

16 effective communication between the BSA officer 

17 and each bank's Board of Directors and senior 

18 management. Accordingly, it may not be 

19 appropriate for banks to enter into collaborative

20 arrangements to share a BSA officer; in certain 

21 circumstances it may be appropriate to share an 

22 officer but we do think that you should raise the 
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1 issue with your regulator, the FDIC, before doing 

2 that.

3 I would like to move onto Slide 9, Risk 

4 Considerations and Mitigation; the use of 

5 collaborative arrangements to manage BSA/AML 

6 obligations requires careful consideration, 

7 collaborative arrangements should be consistent 

8 with sound principles of corporate governance. A 

9 bank's Board of Directors should provide for 

10 appropriate oversight of BSA/AML collaborative 

11 arrangements in advance of entering into these 

12 arrangements. Reasonable systems should be 

13 established to ensure that bank management 

14 adequately oversees the activities of the shared 

15 resources, banks should devote sufficient 

16 resources for monitoring the services performed 

17 under the collaborative arrangement. Another 

18 standard practice is to support the collaborative 

19 arrangement with the contractual agreement between 

20 the parties. A collaborative arrangement for 

21 sharing employees or other resources to manage 

22 BSA/AML obligation is similar to using dual 
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1 employees. Periodic reports related to BSA/AML 

2 collaborative arrangements should be provided to 

3 senior management and reported to the Board of 

4 Directors as appropriate in conjunction with 

5 regular oversight of bank activities. Banks must 

6 also comply with all applicable legal 

7 restrictions, including limitations on the 

8 disclosure of confidential supervisory 

9 information, confidential and business 

10 information, individual customer data, and trade 

11 secrets, as well as restrictions governing 

12 collaborative arrangements among competitors. A 

13 collaborative arrangement should be appropriately 

14 documented to define the nature and type of 

15 resources to be shared, define each institution’s 

16 rights and responsibilities, establish procedures 

17 for protecting customer data and confidential 

18 information, and develop a framework to manage 

19 risks associated with sharing resources.

20 That concludes my comments. I'd be 

21 happy to either take questions now or at the end 

22 of the presentation. 
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1 MEMBER K. KELLY: Lisa, is there data 

2 that suggests a range of anticipated savings for 

3 looking at this level of collaboration? I think 

4 many of us probably have an idea of what it costs 

5 us, but is there any research on that?

6 MS. ARQUETTE: We don't currently have 

7 research. I mean, we know that some banks are 

8 already engaging in collaborative arrangements 

9 whether by contract or otherwise. We know that 

10 banks share resources for training purposes, 

11 independent testing – it’s similar to a third 

12 party, commitment with an outside party, but we do 

13 not have the data right now on what the cost savings 

14 would be.

15 MEMBER K. KELLY: I understand.

16 MS. ARQUETTE: Thank you.

17 MEMBER K. KELLY: Thanks, Lisa.

18 MEMBER PAINE: We actually have been 

19 doing this for over six years, and it's not just 

20 BSA; we have some banks that are $25 million and 

21 they just don't have the expertise in-house, or the 

22 ability to have independent testing of much. So 
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1 we actually have been helping them with internal 

2 audits, like I said, for over six years, and 

3 ultimately we put together an engagement letter and 

4 we do it at a discounted rate basically to cover 

5 the training of our employees and allow for 

6 redundancy on our end. It's worked out well; it's 

7 been a good benefit for both.

8 MS. ARQUETTE: Yes, we think that it's 

9 a good practice and we wanted to really highlight 

10 the benefits of doing that.

11 MEMBER PAINE: We work with six other 

12 banks -- seven other banks, I'm sorry.

13 MS. ARQUETTE: That's good to know.

14 MEMBER DONNELLY: Just a question for 

15 -- how do you see bank or state bank associations 

16 being involved? We use a state bank association 

17 to do some audits and some back testing, but this 

18 is more forward-looking than looking from your rear 

19 view mirror. So have you thought how that would 

20 come into play as to contractually for the front 

21 end or -- I hope I'm making sense, because when I 

22 read this I was intrigued by it when it came out 
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1 because it is a large cost for us.

2 MS. ARQUETTE: Absolutely. Well, I 

3 guess it would be like any third party, right; 

4 somebody not in the bank conducting different types 

5 of BSA compliance obligations, regardless of the 

6 third party, just knowing what the 

7 responsibilities are of each party, monitoring to 

8 make sure that what you've contracted for, what 

9 you're paying for is what you're getting. So I 

10 would view that as any third-party relationship, 

11 if that makes sense.

12 MEMBER DONNELLY: Mm-hmm.

13 MEMBER SHETTLESWORTH: This seems like 

14 a proactive solution that I'd not been aware of and 

15 not even thought about, and I can assure you we'll 

16 bring it up at our state association meetings in 

17 the following years. So this is fascinating to me, 

18 but I hope it doesn't just necessarily stop here 

19 from the FDIC's standpoint because over the number 

20 of years, over the last three to four years this 

21 concept has been brought about concerning 

22 mortgages, residential mortgage loans having some 
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1 type of shared originator and compliance function 

2 within the state that state member banks can 

3 participate in. And so, this is proactive, I'm 

4 very curious about it, but hopefully this kind of 

5 proactive thinking continues because this is 

6 fascinating.

7 MS. ARQUETTE: Well, you'll see more in 

8 the BSA/AML space, but I can't speak to anything 

9 beyond that.

10 MEMBER SHETTLESWORTH: Okay. 

11 MR. WATKINS: I do think it's probably 

12 fair to suggest, though, it could have implications 

13 more broadly for other operations of the bank and 

14 we would encourage that as well.

15 MS. RUDOLPH: Excuse me. Okay, good. 

16 So as Chad mentioned, my name is Betty Rudolph and 

17 I am responsible for mission-oriented banks, 

18 minority banks and community development banks. 

19 And that's a portfolio of approximately 155 banks 

20 across the country; half of them serve Asian 

21 communities, about 25 percent Hispanic, about 15 

22 percent African American, and 12 percent Native 
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1 American banks. And this program is supporting 

2 five statutory goals that we have to preserve and 

3 promote minority institutions and an FDIC policy 

4 statement in that regard as well. And so the 

5 initiative I'm going to talk about today is a 

6 collaborative initiative similar to what Lisa 

7 talked about for minority banks to collaborate 

8 either with other minority banks or with 

9 non-minority banks in a variety of areas. And to 

10 support this initiative we published a resource 

11 guide late last December and we've been sort of 

12 promoting that this year, and so I'm going to go 

13 through that, and it's also in your packet called 

14 Resource Guide for Collaboration with Minority 

15 Depository Institutions.

16 So one of the impetuses behind it is 

17 that both MDI, minority depository institutions, 

18 and non-minority banks can receive regulatory and 

19 business benefits from collaboration and 

20 partnering, and that MDIs are often more familiar 

21 with the economic development needs in their 

22 communities, and non-MDIs can benefit from sound 
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1 and profitable lending and other relationships, 

2 and investments in under-served communities. And 

3 so the remaining slides I'm going to go through what 

4 some of those collaborative opportunities might 

5 look like. So on Page 3 just the four 

6 collaborative arrangements could include direct 

7 investment in an MDI, loan participations or other 

8 lending arrangements, sharing of bank staff and 

9 other resources similar to what Lisa talked about, 

10 and information networking. So I'll describe each 

11 of those a little bit more in detail. So direct 

12 investments would include placing deposits in an

13 MDI, making a direct capital investment or 

14 participating in a fund that makes direct 

15 investments in an MDI.

16 On Page 5 with respect to loan 

17 participations; some of the benefits of that are 

18 expanding MDI capacity so they are able to engage 

19 in larger loan transactions. So we have examples 

20 of a very large bank in Texas, a $25 billion bank 

21 that's doing loan participations with an MDI sort 

22 of at a $2 million, $1 million level rather than 
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1 the $10 to $15 million level which that bank 

2 normally engages in. The collaboration through 

3 loan participations also provide access to special 

4 resources or unique skill sets that the 

5 collaborating institution may have that the MDI may 

6 not have. And they create opportunities on both 

7 sides of the partnership to diversify loan 

8 portfolios, enhance liquidity and interest rate 

9 risk management and serve the credit needs of a 

10 wider range of customers.

11 So in terms of the loan participations, 

12 partnerships could take the form of lending 

13 consortia, community development financial 

14 institution, CDFI, community development 

15 entities, loan funds or special purpose entities 

16 that might be created, limited liability 

17 corporations to manage troubled loans or other real 

18 estate owned. And we have some examples of where 

19 MDIs have collaborated in this space as well, some 

20 of them using new markets, tax credits to engage 

21 in much larger projects that the MDI might not have 

22 been able to engage in on their own.
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1 Turning to sharing bank staff or other 

2 resources; examples include providing access to 

3 specialized skill sets through bank staff or 

4 consultants; these could include human resources. 

5 We have a number of institutions that have lent 

6 talent management services to MDIs, internal 

7 audit, asset valuation, or managing problem 

8 assets, expertise in niche lending - for example 

9 SBA lending, as well as waiving ATM fees for MDI 

10 customers. Citibank has made available their 

11 ATMs, about 2,400 nationwide for a group of about 

12 27 minority banks and low income credit unions to 

13 use without out-of-area fees.

14 In terms of information networking, 

15 trade organizations that focus on underbanked or 

16 unbanked consumers provide training information on 

17 the availability of MDI investment opportunities. 

18 And the FDIC also provides a number of networking 

19 opportunities, including regional roundtables for 

20 MDIs once a year and an interagency conference 

21 every couple of years for opportunities to network.

22 MEMBER TURNER: Is that opportunity 
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1 for them to network among themselves or with 

2 potential people to partner with as well?

3 MS. RUDOLPH: Yes, we have had 

4 instances where we've brought together MDI trade 

5 groups with CEOs of non-MDI institutions to explore 

6 those opportunities. The last one we did was in 

7 Salt Lake City with a number of the ILCs and they 

8 kind of made their pitch for the ILCs for what their 

9 needs might be in that case; they were looking for 

10 Community Reinvestment Act consideration. There 

11 weren't as many opportunities in Salt Lake and so 

12 we brought MDI trade groups to share what they were 

13 looking for as well.

14 MEMBER TURNER: I think those will be 

15 helpful to involve a broader audience, so maybe 

16 some networking could be done and relationships 

17 established.

18 MS. RUDOLPH: That's a great idea, yes. 

19 The other -- and I was going to get to this at the 

20 end but we can talk about it now -- a number of state 

21 associations as well, MDIs have brought forward 

22 this actual resource guide as we've been promoting 
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1 it to other state associations and looking for 

2 potential partners and had some receptivity to that 

3 as well. So there are a number of different 

4 channels for doing that.

5 So turning to Slide 9 on community bank 

6 benefits; enables partners to serve bank customers 

7 that neither institution could serve alone, has the 

8 potential to reduce operating and compliance costs 

9 by sharing back office operations and specialized 

10 expertise, and jointly developing products and 

11 services at reduced costs.

12 So turning now to Slide 10 which is 

13 opportunities for CRA consideration. So all 

14 banks, including everyone sitting at this table, 

15 receive consideration under the CRA for activities 

16 in their assessment areas and the broader 

17 state-wide or regional area if it's responsive to 

18 the community development needs in their 

19 assessment area. And non-MDIs can also receive 

20 consideration if they partner with a minority 

21 institution outside of their geographic area. So 

22 when we had that roundtable in Salt Lake City, for 
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1 example, those institutions were looking with 

2 partnering with MDIs across the country and had the 

3 potential to earn CRA consideration for those 

4 partnerships.

5 MEMBER TURNER: So the CRA credit you 

6 earn, you don't have to partner with a MDI located 

7 in one of your --

8 MS. RUDOLPH: Assessment areas, that's 

9 correct.

10 MEMBER TURNER: Assessment areas.

11 MS. RUDOLPH: And the consideration is 

12 that it benefits that MDI in a location where 

13 they're chartered. So some examples of that 

14 making a deposit or capital investment like we 

15 talked about, purchasing or selling a 

16 participation in an MDI's market areas, so, Joe, 

17 some of those examples included MDIs looking for 

18 earning assets from a bank outside of its local 

19 area. So those would qualify as well. Loaning an 

20 officer or providing other technical expertise, 

21 providing free or discounted data processing 

22 systems, and contributing -- the value of the 
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1 contribution or the loss incurred by donating, 

2 selling below market rate or renting for free a 

3 branch that's located in a minority neighborhood. 

4 And that has occurred as well.

5 So just turning to the last slide, Slide 

6 12, just some points on finding MDI partners; FDIC 

7 has regional MDI coordinators in each of our six 

8 regional offices. We also have community affairs 

9 regional managers that are familiar with their 

10 area, state or regional trade associations, 

11 community development or CRA associations in the 

12 states are a good place also to look for

13 collaborative opportunities, and then MDI trade 

14 associations.

15 MR. WATKINS: I'd like to also just 

16 follow up a little bit; this suggests that each of 

17 our regions has CRA specialists and they would be 

18 available too to help ensure that you're getting 

19 attention or the investment interests that you 

20 would want in such an investment. So reach out to 

21 them as well.

22 MEMBER TURNER: So if we're interested 
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1 in some of these opportunities or at least finding 

2 out about them, that's who you would suggest we call 

3 first?

4 MR. WATKINS: I think you have two 

5 choices; you can work through our MDI coordinators 

6 in concert with a CRA specialist who really are the 

7 experts in CRA matters.

8 MS. RUDOLPH: And we maintain a list of 

9 these minority banks on our website, so it's 

10 fdic.gov/mdi and there's a whole website there. 

11 And I'm also available here in Washington if you 

12 have some questions about that as well.

13 MEMBER K. KELLY: I'd also like to 

14 offer, I'm serving as a new chairman of the Minority 

15 Banking Association and would be happy to speak 

16 with any of my colleagues here in looking at 

17 potential loan participations, et cetera that 

18 could help strengthen those institutions while 

19 you're also getting CRA credit. We'd love to make 

20 ourselves available for that.

21 MS. RUDOLPH: Thanks, Ken.

22 CHAIRMAN McWILLIAMS: And we're also 
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1 looking to increase the participation of MDI 

2 members on this committee as well, so you'll have 

3 a broader audience for the engagement and pursue 

4 some of these ideas as well.

5 MR. WATKINS: So next I'd like to 

6 discuss a little bit on the efforts the FDIC is 

7 taking for de novo bank formation; so that's new 

8 banks, if you will; we call them de novo 

9 institutions. And to promote and encourage the 

10 formation of de novo banks; in 2016 and in 2017 FDIC 

11 staff participated in day-long sessions at each of 

12 our regional offices, meeting with potential new 

13 organizers for de novo institutions and other 

14 parties that have interests in forming de novo 

15 institutions. And so we had our day-long agenda 

16 where the regulators, we had both state regulators, 

17 the Office of the Comptroller of the Currency for 

18 national banks, the Federal Reserve was there, of 

19 course FDIC officials were there. We walked 

20 through the application process, we talked about 

21 the statutory factors, we described business plans 

22 and how to develop business plans and what's 
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1 expected there. And there was another session on 

2 Community Reinvestment Act and how to complete that 

3 part of the application, if you will. But without 

4 a doubt, the highlight of the day, and we get this 

5 from the feedback after the session, was a session 

6 that bankers participated in, so there was a panel. 

7 So this wasn't the regulators; this was a panel of 

8 bankers that described their experiences and kind 

9 of lessons learned in forming de novo banks, and 

10 some of the lessons that came out of that was the 

11 level of cooperation and collaboration that 

12 bankers achieved. And in fact, some members here 

13 I know today participated on those panels, and I 

14 hope you speak up. For example, every bank will 

15 need a loan policy, right? So every bank will need 

16 a loan policy and organizers found a lot of success 

17 in just reaching out to other bankers, existing 

18 banks, that provided them copies or drafts of loan 

19 policies. And they can use it as kind of an 

20 outline, at least, in developing their own 

21 policies. And there was a lot of policies that 

22 bank regulators happened to like; loan policies 
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1 would be one; there's also an interest rate risk 

2 policy, funds management policy, and CRA policy. 

3 So this level of interest in collaboration, I 

4 think, was informative to those interested in 

5 organizing a bank that they could actually reach 

6 out to other existing bankers, and they were very 

7 helpful in providing suggestions and useful tools 

8 in consideration of formation of a business plan, 

9 for example.

10 Another issue that any time you form a 

11 new business, it's a very difficult, delicate 

12 period and it takes a while to achieve 

13 profitability. And so there was some success 

14 achieved through loan participation. So this is 

15 where one bank will help provide initial credit, 

16 if you will; you can buy a loan participation, so 

17 you're building up a relationship, and also 

18 existing banks will readily provide, in many cases, 

19 correspondent banking relationships. So if you 

20 can't serve all of a particular customer's needs, 

21 maybe through the relationship you can establish 

22 from a correspondent bank, it can provide those 
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1 services until this new bank is able to build up 

2 its staff and expertise and systems in place.

3 Another lesson I think that came out of 

4 this quite strongly was information technology, so 

5 that's a huge challenge for all of us, and is 

6 particularly a challenge when you're forming a new 

7 company or a new bank in particular. And some of 

8 the lessons that came out of this kind of around 

9 this collaboration and cooperation was the fact 

10 that you can share experiences in developing your 

11 contracts, and probably the best time to negotiate 

12 the things you want in that contract is when you 

13 first sign an original, initial contract for 

14 services. So it was a remarkable amount -- in my 

15 sense anyway -- there was a remarkable amount of 

16 interest by other banks, existing banks in 

17 supporting the formation of new banks, and it’s an 

18 extraordinary resource that can be made available 

19 for de novo institutions. So that was a big lesson 

20 that came out from our day-long sessions around the 

21 country; clearly the feedback forums was much 

22 better than what the regulators provided, if you 
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1 can believe that. And I think the organizers that 

2 were considering forming new institutions really 

3 gained a lot of insight from that, and we are 

4 starting to see revised interest in forming new 

5 banks, and so we're very much encouraging that. 

6 And anything you could do to help support that we 

7 would appreciate. So I'm hoping, John, maybe you 

8 can add to that if you had any other comments in 

9 regards to your sessions and the collaboration that 

10 you thought might be useful, for example. 

11 MEMBER HANRAHAN: You summarized it 

12 very well, Jim. I think one of the biggest 

13 takeaways for me from that outreach effort was 

14 there had been, and to some degree still exists a 

15 perception that the regulators have constantly 

16 ratcheted up the capital levels required for a new 

17 bank, and not only ratcheted them up but made a 

18 mysterious black box that organizers just weren't 

19 told how much capital had to be raised. And if I 

20 recall correctly, it was Doreen who explained at 

21 the New York meeting that I attended is that, 

22 look, we don't have a minimum capital level, other 
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1 than you've got to maintain a 8 percent leverage 

2 ratio for your first three years, on your first 

3 capital raise, and show you can turn a profit inside 

4 those three years. You tell us how much capital 

5 you need to fulfill that business plan. I thought 

6 it was logical and elegant the way it was stated, 

7 and from the de novo approvals that I've seen so 

8 far, I've seen a varied range of capital levels 

9 approved depending upon what that business plan 

10 was. And I commend the FDIC for taking that 

11 approach too.

12 MR. WATKINS: That's the first time 

13 I've ever heard eloquent in relation to capital.

14 (Laughter.)

15 CHAIRMAN McWILLIAMS: No, they told us 

16 to describe somebody else.

17 (Laughter.)

18 MR. WATKINS: Fair enough.

19 MEMBER TOLOMER: I think, Jim, just to 

20 get to your point and I think David's, we were in 

21 the New York session together, and I think one of 

22 the things we were able to do is to try to explain 
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1 to potential board members, to potential CEOs what 

2 some of the challenges are to actually starting; 

3 it's great to build a business plan, it's great to 

4 say that you’re going to have 8 percent capital in 

5 the next three years and be profitable, but how do 

6 you get to it, and how do you utilize, we talked 

7 a lot about technology and utilizing technology to 

8 reduce the number of people, but be able to increase 

9 the size of your business and customer base. So 

10 I think there was a good exchange for people to 

11 understand -- and David is right; they were very 

12 anxious, they wanted to put up as little capital 

13 as possible, but the reality is it's all about the 

14 business plan and trying to understand what is it 

15 you're trying to do with this bank that you're 

16 starting, what is your niche, who's your customer 

17 and how do you go about being successful. So I 

18 think we were trying to help focus where they were 

19 going to go with their business and with their bank 

20 and recognizing it's all well and good to have 

21 capital but can you turn a profit. And if so, how 

22 do you continue to build. So I think the feedback 
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1 I received in the two sessions I went to was that 

2 they found it very helpful to hear someone whose 

3 gone through the process and lived with it, and the 

4 other thing I think we made pretty clear was that 

5 we didn't view the regulators as the enemy; we 

6 viewed the regulators as partners, and we viewed 

7 the fact that being able to tell the regulators what 

8 we were doing as we were doing it I think was very 

9 beneficial certainly for our bank when we did it, 

10 and I think although what we started in 2008 and 

11 the first time I called to have a joint meeting, 

12 a lot of people showed up thinking that we were 

13 throwing keys back in 2009.

14 But the reality was I think that started 

15 a strong relationship in working and encouraging 

16 new banks to be able to -- they have nothing to hide, 

17 be open and honest and forthright, and in the end 

18 that would help them. So that was kind of the 

19 message that I think we were bringing forward. And 

20 the feedback that I got from the potential 

21 investors was very positive.

22 MEMBER HANRAHAN: Related to our 
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1 ombudsman conversation earlier, one of the 

2 comments I made on that panel was the importance 

3 of maintaining open face-to-face communication 

4 with your original office, and it's funny you're 

5 making this presentation because the anecdote that 

6 I gave was, oh, yeah. I'm telling it.

7 (Laughter.)

8 MR. WATKINS: So we can move on, Chad, 

9 at any time.

10 MEMBER HANRAHAN: Early on in our 

11 history I inadvertently violated our business plan 

12 that had been approved. And so I decided not to 

13 try and resolve it over the phone or via letters, 

14 but I went hat in hand to the regional director of 

15 the New York office who at the time was Jim Watkins 

16 and sat with him and his staff and we worked it out. 

17 And I didn't get everything I wanted, he probably 

18 didn't get everything he wanted, but we reached a 

19 middle ground that worked for us and got it through 

20 an issue related to brokered deposits.

21 CHAIRMAN McWILLIAMS: But David, was 

22 he eloquent?
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1 (Laughter.)

2 MR. WATKINS: We don't have to worry 

3 about that. 

4 MEMBER DONNELLY: Well, this is 

5 important to me and I appreciate the comments --

6 it's good stuff -- the devil's always in the detail. 

7 So as you start to work through that, where do you 

8 find that detail? There's a lot of little pieces 

9 that need to be input. And is there a place -- so 

10 it's not continually back and come back and come 

11 back and come back with more and more information 

12 that -- what would your recommendation be? 

13 MR. WATKINS: So we very much encourage 

14 banks to work with other banks. In the formation 

15 of a de novo institution, really the business plan 

16 is extraordinarily important, and the concept of 

17 the business plan. Where banks have run afoul, if 

18 you will, is when they deviated sharply from the 

19 original business plan. Usually the business plan 

20 is a pretty good road map of a path to successful 

21 operations for a financial institution. And you 

22 can have deviations from the business plan as long 
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1 as they're well-informed and thought through, and 

2 structured in such a way that it will lead to 

3 sustained profitability. So if an institution 

4 needs to change its business plan or add new 

5 products or something of that nature, it's good to 

6 get that discussed early on -- not after the fact 

7 -- early on with your friendly regulator to ensure 

8 that everyone's on the same page and the 

9 expectations are pretty clear. So I think that's 

10 an important environment. And frankly where we've 

11 seen banks run into trouble is when they 

12 substantially deviate and they grow rapidly, far 

13 more rapidly than they had originally anticipated. 

14 And without the control systems in place early on, 

15 it can end up leading to kind of excess risk and 

16 that sort of thing. So I think that is an important 

17 initiative and I think when banks enter into 

18 relationships with other parties, the third-party 

19 guidance is valuable and should be considered as 

20 you're forming those relationships, and consider 

21 all of those factors. 

22 MEMBER MENON: So when we were a de novo 
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1 back in '08 any variations we were looking for from 

2 the plan had to be approved by Washington. Is that 

3 still the case or has that been delegated back to 

4 the regional offices? 

5 MR. WATKINS: So almost all deviations 

6 from a plan, first of all, it has to be substantial 

7 like 25 percent or something of that nature, a 

8 substantial deviation from a plan, before it would 

9 require regulatory prior approval, and I believe 

10 the regions can pretty much do that on their own 

11 now at this point.

12 MR. DAVIS: Any other additional 

13 questions? I see our next presenters are here, so 

14 we're a little ahead of schedule, but we'll move 

15 to the next panel.

16 Thank you very much to this panel.

17 CHAIRMAN McWILLIAMS: This may be the 

18 only thing ahead of schedule in D.C., so enjoy.

19 (Laughter.)

20 MR. DAVIS: Our next session is 

21 something that came up at our July meeting and we 

22 committed to provide a briefing on assessment 
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1 pricing for small institutions. From the FDIC's 

2 Division of Insurance and Research we have Diane 

3 Ellis, the Director and Patrick Mitchell, Deputy 

4 Director of Risk Analysis and Pricing.

5 MS. ELLIS: Okay, thanks. Happy to be 

6 here to talk about deposit insurance pricing. Pat 

7 will -- we've got a few slides in your folder, not 

8 many -- and Pat will walk through those which is 

9 designed to give you some context for overall 

10 assessment rates, overall assessment burden and so 

11 forth, and then also some of the particulars of the 

12 small bank deposit insurance pricing system, which 

13 just by way of background, has been in place for 

14 a couple years now, and it replaced a system that 

15 looked and felt sort of like the current system. 

16 But the underlying methodology was different, the 

17 underlying methodology of the old system was put 

18 in place in early 2000's and was essentially a 

19 CAMELS downgrade, a prediction of a CAMELS 

20 downgrade. And that's what drove the factors that 

21 were chosen and the weight given. With 500 plus 

22 failures of the most recent banking crisis it
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1 presented sort of an opportunity to see if we 

2 couldn't do a better job of having a better model 

3 to better differentiate risk. So the underlying 

4 model that drives the small bank pricing system now 

5 is a failure prediction model and it uses data going 

6 all the way back to the mid-1980's, so it's a very 

7 long period of time, many, many failures, and 

8 that's essentially what drives the ratios that are 

9 chosen and the weights placed on those different 

10 ratios.

11 So with that as background, now I'll let 

12 Pat walk you through some of these slides. And 

13 there should be plenty of time for questions 

14 afterwards. Please don't hesitate to stop us 

15 along the way if you'd like.

16 MR. MITCHELL: Thanks, Diane. So 

17 sure, any time questions along the way, happy to 

18 answer them; if you want to stop me along the way, 

19 feel free. I know you typically do.

20 So I'm going to walk through the slides 

21 and I'll start with the average assessment rate 

22 over time. And so this slide starts in second 
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1 quarter of 2011, and the reason why it started there 

2 was that was when the assessment base was changed, 

3 and so the rates wouldn't have been comparable if 

4 we would have gone further back. So this shows the 

5 average assessment rate over time has declined from 

6 11.8 basis points -- this is in basis points -- down 

7 to the current 3.7 basis points. So that's been 

8 a combination of a couple things; one is obviously, 

9 it's been a significant improvement in the 

10 financial performance across the industry, but 

11 also you can see here one contributing factor was 

12 almost a two basis points decline across the 

13 industry when the rate schedule changed when we hit 

14 1.15, so that was when the rate schedule changed 

15 from 5 to 35 basis points to 3 to 30 basis points.

16 So this is really, I mean, quite a 

17 remarkable story and quite a strong story to show 

18 the decline over time. So now --

19 MEMBER TURNER: And that's against 

20 insured deposits is that right? Or assets?

21 MR. MITCHELL: So this is actual the 

22 assessment rate that gets applied against your 
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1 assessment base, which is effectively your 

2 liabilities.

3 MEMBER TURNER: Okay.

4 MR. MITCHELL: So the next one I'm 

5 going to put it in context of income, which I think 

6 is probably the most relevant. The next slide 

7 shows the -- it's the same, similar slide; it shows 

8 the effective assessments on bank income, and this 

9 is again, using that same time frame, and this 

10 shows, again, the burden if you will has gone from 

11 7-1/2 percent down to 2.1 percent of pre-tax income 

12 that we actually add back assessments because 

13 otherwise it gets a little odd, but I think the key 

14 point here is that this is, again, a multi-factor 

15 process; one is incomes, income has increased 

16 across the industry, so that's actually 

17 contributed to this. But also, of course, on the 

18 preceding slide you saw the lower assessment rates 

19 overall. So again, a strong story and with a 

20 significant decline here from 2016 -- this is 2017 

21 -- I would anticipate this to really flatten; as 

22 you saw the 3.7 basis points on average, it appears 
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1 to be it's still declining a little bit, but we 

2 expect it to flatten more as opposed to continuous 

3 declining, absent of course, increased income 

4 growth on this page.

5 So on the next page we put assessments, 

6 and this shows the percentage of small bank 

7 assessments as a percentage of total assessments, 

8 and so what this is really intending to show are 

9 a few inflection points here; in particular the 

10 change in the assessment base that I mentioned, so 

11 that was a result of Dodd-Frank, and so Dodd-Frank 

12 required us to effectively go to total liabilities. 

13 It's total assets minus tangible equity, but in

14 short term we'll call that liabilities. And the 

15 intention of that was really to have assessments 

16 be closer related to the overall assets -- I mean, 

17 that was the intention of the Congress, and so you 

18 can see that change from 30 percent of assessments 

19 in small banks down to 20 percent, which was roughly 

20 in line with the amount of assets in the industry. 

21 So that was a big shift from small banks to large 

22 banks in terms of the overall assessment burden.
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1 You can see it really kind of, I'll call 

2 it treaded water along the 20 percent over time 

3 until the decline in the rate schedule, and this 

4 declined down from 20 percent to approximately 

5 we'll call it 11-12 percent, and now down to 10 

6 percent was a result -- that's including the large 

7 bank surcharge that's been placed on them to grow 

8 the fund from 1.15 percent to 1.35 percent. So 

9 there's a surcharge on the large banks of 4-1/2 

10 basis points and that reflects that. Now, what we 

11 expect when we hit 1.35 which we expect to hit later 

12 this year, we possibly could have already hit it 

13 today, we just don't know it -- we need to see the 

14 reported amount of insured deposits and so on and 

15 so forth -- so we'll report those with the quarterly 

16 banking profile. But we expect that 10 percent to 

17 increase back up and around the 20 percent level 

18 again.

19 MEMBER K. KELLY: Can you explain that, 

20 why is that again?

21 MR. MITCHELL: So right now there's 

22 large bank surcharges that are in place to grow the 
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1 fund from 1.15 to 1.35 percent, so that was again 

2 part of the required by Dodd-Frank with the 

3 increase for our minimum reserve ratio from 1.15 

4 to 1.35. Once we hit 1.35 the surcharges will 

5 terminate. And so now you won't pay any -- the 

6 small banks won't be paying any larger, but as a 

7 percentage that will be gone and so now it will be 

8 closer to the assessment base. Does that make 

9 sense?

10 MEMBER K. KELLY: It does.

11 MR. MITCHELL: Okay. The next page 

12 shows the distribution of assessment rates, and 

13 this is for all small banks, for those $10 billion 

14 or less. And so the rate schedule is currently 3 

15 to 30 basis points, so that's the minimum assessment 

16 rate without what we call the below the line 

17 deductions, so if you issue unsecured debt you can 

18 go below 3 basis points. But what you can see here 

19 is over 60 percent of small banks pay 3 basis points 

20 or lower, so over a majority pay 3 basis points or 

21 lower and then the distribution is spread out as you 

22 can see.
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1 I don't know where each of you all fit 

2 in this but you might find yourself here.

3 The next page goes into the factors used 

4 in small bank pricing, so they're actually pretty 

5 straightforward; you have CAMELS ratings and I'm 

6 not showing the weightings here because they're 

7 really not super intuitive. I'm going to talk on 

8 the next page about what the largest drivers are in 

9 the pricing, but if you just look at the weightings 

10 per se, it's a coefficient; they're not really 

11 intuitive; but weighted-average CAMELS, leverage 

12 ratios, capital measure, the net income before 

13 taxes, again an income measure, non-performing 

14 loans and other real estate owned, those are both 

15 asset quality measures. The brokered deposit 

16 ratio, again, that's only for brokered that are 

17 greater than 10 percent, and again reciprocals are 

18 currently excluded for being well-rated –

19 well-rated and well-capitalized institutions. 

20 And then the Loan Mix Index and the one-year asset 

21 growth; I think the point of this, these are all 

22 statistically derived, and so they are all used, as 
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1 Diane had mentioned, as a predictor using the 

2 statistical model to come up with the 

3 predictability of failure than the non-funding 

4 ratios. They were all statistically significant 

5 and the weightings were derived and such.

6 So the next page shows the greatest 

7 factors in terms of what's driving pricing in small 

8 bank pricing. So the first is the leverage ratio 

9 -- this is on average, so I want to talk about this 

10 on average -- then we'll talk about how varied it 

11 can be depending on your institution -- the leverage 

12 ratio is the greatest contributor -- the Loan Mix 

13 Index is the second largest, and the third is 

14 weighted average CAMELS -- and these three are on 

15 average by far the largest contributors to 

16 determining the price of deposit insurance.

17 MEMBER SHETTLESWORTH: Patrick?

18 MR. MITCHELL: Sure.

19 MEMBER SHETTLESWORTH: Can you explain 

20 the Loan Mix Index?

21 MR. MITCHELL: Sure. So the Loan Mix 

22 Index, what we did, is we actually looked at 
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1 charge-off rates across almost every category of 

2 loan that's on the Call Report, so we have data for. 

3 And we looked at the charge-off rates and they were 

4 weighted by the number of failures in that year. 

5 And so what's come out of that is there's weightings 

6 each type of loan, so C&D has the highest weight, 

7 C&I is the second highest -- I'm going to lose myself 

8 after that in terms of rank ordering -- but they're 

9 all based upon what we looked at, charge-off rates 

10 during the time of stress, and that's how it's 

11 determined. And then what it does is simply take 

12 a look at your proportion of loans that are in those 

13 types of assets and it uses that multiplier to come 

14 up with a number that in and of itself isn't going 

15 to make sense if you just look at it. It has to be 

16 multiplied by the coefficient. It's not an 

17 intuitive number in terms of C&D loans relative to 

18 capital.

19 MEMBER SHETTLESWORTH: Can you share 

20 with us our specific ratings on all these ratios or 

21 is that all just inclusive of the overall assessment 

22 rate?
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1 MR. MITCHELL: Could you repeat the 

2 question?

3 MEMBER SHETTLESWORTH: The leverage 

4 ratio is weighted, there's a certain category for 

5 that; I'm just curious if your model will tell you 

6 or you can share with us what our banks or other 

7 insurance divisions what their rating is in each one 

8 of these categories.

9 MR. MITCHELL: Oh, absolutely. So 

10 it's all on the public website where you can punch 

11 in your actual certificate and it will pre-populate 

12 every one of these factors.

13 MS. ELLIS: Everything but CAMELS.

14 MR. MITCHELL: Oh, true. Good point. 

15 Yes, you can do your own CAMELS.

16 MS. ELLIS: Yes, you can go to our 

17 website and you can download our calculator and 

18 it'll put all the Call Report data and you have to 

19 insert your own CAMELS. If you want to look at 

20 another bank, you can download all their public data 

21 and pretend what their CAMELS might be.

22 (Laughter.)
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1 MR. MITCHELL: You can speculate.

2 MS. ELLIS: Yes, you can speculate and 

3 whatever, play around.

4 MEMBER TURNER: Do you know what 

5 weighted average CAMELS means? I understand 

6 CAMELS obviously, but weighted average?

7 MR. MITCHELL: Right, each one of the 

8 components is weighted; it's going to have a 

9 different weight. So management has a higher 

10 weight than liquidity. I'm forgetting asset 

11 quality has a higher and capital --

12 MS. ELLIS: Capital assets -- capital 

13 and management I think have the highest weight and 

14 then asset quality and liquidity.

15 MR. MITCHELL: Right, and asset 

16 quality, liquidity.

17 MS. ELLIS: It was a way of rather of 

18 using -- and this was in the old system too -- rather 

19 than just using a composite, it was a way to get a 

20 little more granularity, because you know, 

21 composite two -- I don't know, a great degree of 

22 difference sometimes in one composite two, versus 
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1 another -- so using the components was another way 

2 of teasing out some of those differences in risk, 

3 and then weighting management and capital and 

4 assets heavier than the other is another way of 

5 getting more granularity.

6 MR. MITCHELL: Those weightings are the 

7 same that were in the previous rule, so those 

8 ratings have been pretty consistent over time.

9 Sure.

10 MEMBER HARTINGS: The leverage ratio, 

11 what's the tiering of that? Do you know where it 

12 affects you -- is that at 4 percent, 6 percent?

13 MR. MITCHELL: So assuming you're 

14 well-capitalized -- actually, it doesn't matter --

15 anyways, let's assume it doesn't matter -- assume

16 you're well-capitalized, it really is every 

17 incremental dollar of capital or incremental 

18 improvement in the leverage ratio will result in a 

19 lower assessment, all else equal.

20 MS. ELLIS: But don't we have a floor? 

21 I thought it was like 8 percent. If you're below 

22 well -- all right, you're saying if you're below 
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1 well-capitalized --

2 MR. MITCHELL: No, right. So --

3 MEMBER HARTINGS: So once you're 

4 well-capitalized you're at the minimum? 

5 MS. ELLIS: Yes, once you're 

6 well-capitalized.

7 MEMBER HARTINGS: And then anything 

8 below well-capitalized is dollar for dollar?

9 MR. MITCHELL: So they all work 

10 together. And so it simply takes, if you're 8 

11 percent -- let's say you increase your capital to 

12 9 percent -- you hold everything else equal and 

13 let's assume you're not in the floor or the ceiling 

14 in terms of 3 or 30 -- so let's assume you’re 5 basis 

15 points and you went from 8 percent to 9 percent, that 

16 will result in a lower assessment rate, all else 

17 equal. The same if you were at 8 percent and your 

18 capital lowers to 7 percent and nothing else 

19 changes, it will result in a higher assessment rate. 

20 So it is a multiplier. The interesting thing about 

21 -- if you want to look at it and do a pro-forma, you 

22 can actually change yours online; you can say what 
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1 if I change my capital, how would my assessment rate 

2 change, you could actually show what that would do.

3 If it doesn't make sense --

4 MEMBER SCULLY: Jack, was your 

5 question, like if you're at 12, do you get a lower 

6 assessment than if you're at 10?

7 MR. MITCHELL: You do all else equal.

8 MEMBER SCULLY: Yes, all else equal.

9 MR. MITCHELL: But it doesn't mean 

10 you're at 3 basis points because it's going to look 

11 at all the other factors. If you had really high 

12 growth and/or you have low income and you have a 

13 risky loan mix, that doesn't mean you're going to 

14 be at the floor of those. It's just one component.

15 MEMBER HARTINGS: Well, if I'm at 12 

16 and I go to 14, that will lower my --?

17 MR. MITCHELL: Yes, assuming, again, 

18 you're at a 3, assuming you're at a 4.

19 MEMBER SCULLY: Your shareholders may 

20 not like it...So Diane knows I'm going to say this 

21 is my last meeting and I'll beat this dead horse one 

22 more time.
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1 MS. ELLIS: Yes.

2 MEMBER SCULLY: But the fact that the 

3 Loan Mix Index is the second most important 

4 variable, even above CAMELS, just suggests to me 

5 that at some point if you ever reconsider the 

6 weighting, I mean you're penalizing banks that have 

7 a certain business model, because it is ADC, C&I and 

8 I think CRE is --

9 (Simultaneous speaking.)

10 MEMBER SCULLY: If you're a commercial 

11 bank, my concern has always been since the first 

12 time I saw this formula, poor Diane has to listen 

13 to this every time.

14 MS. ELLIS: That's okay. You're not the 

15 only one.

16 MEMBER SCULLY: But this proves if it's 

17 the second largest factor that banks with certain 

18 business models, despite how well they execute on 

19 that business model, vis-a-vis their CAMEL ratings, 

20 are being penalized versus banks that have 

21 different business models. And I understand the 

22 history during the recession and so on, but I just 
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1 want to go on record as saying it's a penalty for 

2 having a certain business model.

3 MR. MITCHELL: All else equal, I think 

4 that's true. I mean, you might also have 

5 additional -- you might also hold/retain additional 

6 capital or other things that would get reflected, 

7 and leverage ratio, and also non-performing loans.

8 MEMBER SCULLY: I shouldn’t have to do 

9 that unless you tell more openly that's what I 

10 should have to do. 

11 MR. MITCHELL: Well, okay.

12 MEMBER SCULLY: And given that they're 

13 all 100 percent risk ratings, I would argue that if 

14 you're suggesting I should have a different 

15 leverage ratio because I'm a commercial bank, then 

16 why are they at 100 percent risk rating rather than 

17 125 percent risk rating, which would be more 

18 consistent with that theory that business banks are 

19 always riskier than others. So I just --

20 MR. MITCHELL: Sure, okay. I mean, I 

21 think one of the challenges always, always true of 

22 coming up with a pricing system that is pricing over 
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1 5,000 banks and using statistical analysis.

2 MEMBER SCULLY: But look at -- and I'm 

3 going to just keep it up, I'm sorry -- there are 

4 eight majors here, and first of all, there's the 

5 CAMELS rating which to me is your opportunity, you 

6 finding you've really hit a granular level, 

7 examined a bank, you've give management a certain 

8 weighting; that's lower than Loan Mix, it's lower 

9 than non-performing loans, it's lower than OREO. I 

10 mean, intuitively it would seem to me that when you 

11 see the results of the formula and they suggest that 

12 that's the second most important thing, it might 

13 cause you to think do we have the factors weighted 

14 correctly. That's all.

15 MEMBER K. KELLY: I'll try to add a 

16 little color, if I'm hearing you correctly, Mary; 

17 she's basically saying if I -- and I'm going to put 

18 it in automobile speak -- if I buy a corvette at 18, 

19 let me know the insurance is going to be much higher 

20 than if I buy a Crown Victoria, regardless if I'm 

21 50 or 18. So the point I'm trying to make is, I 

22 think the question is if my business model is more 
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1 of a Corvette, I pay a little bit more of a premium 

2 versus if it's a Crown Vic, meaning a slower pace. 

3 And relative to those other factors that I think I 

4 have control over when I get behind the wheel, maybe 

5 my insurance rates deal is not reflected even though 

6 I'm a more conservative driver. It's kind of what 

7 I'm hearing you say; if not, tell me now. 

8 MEMBER SCULLY: Yes, it's a basic premise 

9 that I have that there are certain things that 

10 indirectly will cause a reallocation of capital 

11 because these obviously, ultimately affect your 

12 profitability; therefore, it affects your 

13 attractiveness to investors. 

14 MEMBER K. KELLY: That's right.

15 MEMBER SCULLY: So it is an implicit 

16 reallocation of the capital to banks that have a 

17 certain, or away from banks that have a certain 

18 business model.

19 MEMBER K. KELLY: That's correct. And 

20 so the question that I would have in following up

21 Mary here, is to help us to understand which of those 

22 business models is a Vette versus which one looks 
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1 more like a Crown Victoria.

2 MS. ELLIS: Well, I think this is sort 

3 of doing that, right?

4 MR. MITCHELL: I think so. I mean, 

5 that's one thing we hope to have very transparent. 

6 Again, you can disagree, but I mean even in the 

7 Loan Mix Index it shows to your point right or wrong, 

8 we can agree whether we should or not, but it shows 

9 that C&D is going to contribute more. We actually 

10 rank order them in terms of loans and then we also 

11 show the effect of increasing leverage, either 

12 increasing or decreasing your leverage. Your 

13 asset quality is a little more reflective of 

14 previous decisions, so that's going to just get 

15 reflected, but --

16 MS. ELLIS: I think if you fill out that 

17 profile, you would find that a bank heavily loaned 

18 up in C&D loans with thinly capitalized, growing 

19 rapidly with brokered deposits, they're going to be 

20 way -- that's the model that's going to get charged 

21 a lot in this system.

22 MEMBER K. KELLY: Got it, thank you.
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1 MEMBER DONNELLY: Just a question on 

2 the modeling you have on the website, and before I 

3 throw rocks from this side of the table. Now, is 

4 that model -- because I played around with it -- is 

5 that model going to be something that I use as a tool 

6 or is it just something that's out there? I hate 

7 to be so direct but I'm going to be, because this 

8 is a pretty important piece, I think for everybody 

9 up here, it's an important piece to calculate, and 

10 if the rules are the rules, we need to know what they 

11 are. And go into budget, can I take that calculator 

12 online and I can depend on that other than the 

13 subjective -- well, management is subjective.

14 MR. MITCHELL: Yes, I think that's the 

15 primary purpose for this is so that you can plan --

16 MEMBER DONNELLY: Planning, you're 

17 going to have to get me with 95 percent of my -- I'm 

18 using that number, I don't want to pin you -- or 

19 maybe I do want to pin you down -- but to 95 percent 

20 accuracy on what my --

21 MR. MITCHELL: I mean, to the extent you 

22 were able to project accurately what your balance 
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1 sheet and these components are going to look like, 

2 it's 100 percent accurate, because you know your own 

3 CAMELS rating. So it's only subject to that 

4 uncertainty; otherwise, it's completely 

5 transparent and you can see the absolute --

6 MEMBER SCULLY: And I would vouch for 

7 that; it is totally transparent, totally 

8 predictable, but what this does is it says it's not 

9 just me, it's saying that in the entire industry 

10 that has a very significant impact.

11 MR. MITCHELL: So I do want to talk 

12 about that a little bit, this is on average, and to 

13 your point there are some institutions where there 

14 are other factors that are a greater weight. So if 

15 you're a rapid -- if you have really rapid growth 

16 and you're 50-60 percent, that very well may be your 

17 top factor. Meanwhile, if you're making loans or 

18 you're less loaned up and you're making loans that 

19 we view as lower risk in the Loan Mix, then that Loan 

20 Mix Index may be lower than your contribution from 

21 your CAMELS and others.

22 MEMBER SCULLY: But on average.
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1 MR. MITCHELL: This is on average rank 

2 order.

3 MEMBER SCULLY: On average business mix 

4 is the second greatest factor, above CAMELS 

5 ratings.

6 MS. ELLIS: Correct.

7 MEMBER SCULLY: Counterintuitive.

8 MS. ELLIS: Very correct.

9 MEMBER WILLIAMS: You know, I 

10 understand what you're saying here, but is there --

11 apparently there isn't any granularity, you don't 

12 get any more granular into that mix. For example, 

13 we talk about management's piece in this being an 

14 important factor, and management's piece in 

15 controlling and managing loan portfolios is an 

16 issue as well. Example, ADC; now, I can speak to 

17 some specifics, but you look at a company or a bank 

18 that has ADC, that's a category, but if you 

19 internally manage it to where they have a maximum 

20 of 7-1/2 percent of that is acquisition, another 

21 7-1/2 percent maximum development, and the rest is 

22 vertical construction with a 6-month tenor and 
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1 you're carrying extra capital; to me that's a 

2 portfolio risk factor that's a lot less than an ADC 

3 typical number you're using. So is there any way 

4 to take into consideration the management controls 

5 on the loan portfolio for those who have a business 

6 plan -- ours is the same way, it's a business bank 

7 -- but the controls are tighter than I've seen with 

8 a lot of large national banks that we've worked at. 

9 So I'm just saying granularity is an issue too; I 

10 don't know how you take that into consideration as 

11 you put these prices together.

12 MR. MITCHELL: One of our biggest 

13 challenges, and we try to remove effectively 

14 subjectivity from this, we try and use the data that 

15 we have, and we're limited by the granularity of the 

16 Call Report. I'm sure you're not suggesting we get 

17 more granular on that.

18 (Laughter.)

19 MR. MITCHELL: So it's a challenge, 

20 admittedly; and this is where I said we're pricing 

21 over 5,000 banks with one model. It's really 

22 required and it goes back to as an insurance company 
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1 sometimes you're looking for certain predictors 

2 that -- I mean, could you have false positives, yes, 

3 could you have false negatives, absolutely -- but 

4 what we have seen is this, the pricing model that 

5 we put in place was a significant improvement over 

6 the CAMELS model. And part of that, one of the new 

7 components, one of the significant new components 

8 was the Loan Mix Index. I mean, one of the other 

9 things we're trying to do, and again, we can argue 

10 whether it's good or bad, is to look more forward 

11 and make sure we're pricing for risks as they're 

12 incurred. Those risks may or may not be realized, 

13 but as they're incurred we want to make sure as an 

14 insurance company we're charging for those risks as 

15 best we can.

16 MEMBER TURNER: I do think -- and at the 

17 risk I get shut down by my colleagues -- I do think 

18 the Call Report is overly broad in a couple of 

19 categories and you miss the risk a little bit -- and 

20 as I've said, we acquired five banks -- we probably 

21 from the FDIC we looked at, I don't know, 30 or 40 

22 of them, so we have a fairly good feel of the kind 
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1 of problems that cause that created failure in those 

2 cases. And not all ADC loans are created equally. 

3 If you're financing a senior care facility or an 

4 office building that's pre-leased, or a 

5 multi-family project that's got 30, and those 

6 things have 30-35 percent equity, that's a totally 

7 different risk profile than financing a piece of 

8 ground 100 percent for somebody that's hoping to 

9 sell it down the road. And those are the problems, 

10 at least in the banks that we ultimately acquired, 

11 those are the kind of loans that created big losses; 

12 it wasn't the former loans. And I agree with Mary 

13 Ann to a large extent, I think you're not taking --

14 as you weight the loan mix so heavily you're not 

15 taking differences in underwriting into account, 

16 too, and you have the ability to do that because you 

17 come in and examine us every year. And so if you 

18 have a loan mix that by this formula would indicate 

19 a little higher risk, but you come in and you have 

20 no bad comments about the bank's asset quality, 

21 they're one rated asset quality, it seems like you 

22 have an ability to maybe get a little bit more 
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1 granular and a little bit more specific to a given 

2 institution. So I kind of agree, I think that's 

3 what you were saying, Mary Ann; I kind of agree. 

4 And it may be a question of whose ox is being gored 

5 because we have the wrong kind of loan mix, I can 

6 tell you that for sure. And so I'm sure we're 

7 paying a little bit higher assessment as a result.

8 MR. MITCHELL: So I would say -- and I 

9 understand your point -- I mean, I would say at the 

10 very least your asset quality rating certainly is 

11 included in there and is weighted. 

12 MEMBER TURNER: Right, yes.

13 MR. MITCHELL: While it's third, it's 

14 not insignificant. These three all on average 

15 apply.

16 MEMBER TURNER: We just wish it was 

17 first.

18 (Laughter.)

19 MEMBER HARTINGS: Can I just ask one 

20 other question about the small bank assessment 

21 graph you showed us? You talked about once the $10 

22 billion and over assessment falls off and goes back 
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1 to about 20 percent, that's your best estimate 

2 today, is that the percentage of liabilities that 

3 those small banks have in the -- and is it 20 percent 

4 today?

5 MR. MITCHELL: It's close, it's roughly 

6 close. 

7 MEMBER HARTINGS: Like close more or 

8 roughly close less?

9 MR. MITCHELL: No, I think it's 

10 actually a little bit higher right now. But it 

11 hasn't always. I mean, a couple percentage. I 

12 don't have exact so I don't want to --

13 MEMBER HARTINGS: So it pretty much 

14 runs that liability --?

15 MR. MITCHELL: It stayed roughly in 

16 line with the intention.

17 MEMBER HARTINGS: Okay, thanks.

18 MR. MITCHELL: So the last slide --

19 maybe this will be positive, we'll see.

20 (Laughter.)

21 MS. ELLIS: I think it's an act of 

22 goodness.
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1 MR. MITCHELL: Right, exactly. Is 

2 again, talking about credits. So when the reserve 

3 ratio hits 1.35, then as I noted, then the large 

4 banks will stop paying surcharges. And once we hit 

5 the 1.38, credits will be applied to small banks. 

6 And those credits will offset to the extent whatever 

7 credits you receive, will offset in whole any of 

8 your assessments until they're exhausted. So we 

9 expect depending on your situation two to four 

10 quarters where you'll have your entire assessment 

11 offset. And it also depends on when we hit; we do 

12 expect either third or fourth quarter this year we 

13 will hit 1.35. And then you will receive -- you'll 

14 either see the amount of credits applicable to your 

15 institution on your invoice or we will separately 

16 notify; it all just depends a little bit on timing. 

17 Obviously, we need to get invoices out, but we need 

18 to make sure we're also, we're accurately and 

19 closely calculating the amount of credits. So 

20 you'll either receive it in your invoice or you'll 

21 receive it shortly after showing the amounts that 

22 are due to your institution.
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1 MEMBER TURNER: That's positive.

2 MR. MITCHELL: It is positive.

3 MEMBER TURNER: So is that where you 

4 hope to keep it at 1.35, the fund?

5 MR. MITCHELL: Well, that's our minimum 

6 reserve ratio, so right now our designated reserve 

7 ratio, the long-range target is 2 percent. But 

8 what we anticipate after we hit 1.35 with the rates 

9 that I've shown you, we expect very slow but steady 

10 growth. And that's why we have to get above 1.3 --

11 well, in the rule we placed it at 1.38 to allow a 

12 little bit of breathing room. If we were to -- for 

13 some reason there were a high amount of insured 

14 deposit growth and/or combined with a failure and 

15 we were to go below 1.35, we would actually go back 

16 -- we would have to go back into a restitution plan 

17 once we go below 1.35. So it's important for us to 

18 hit 1.35, grow a little bit, provide ourselves some 

19 cushion, and that's why the delay until 1.38.

20 MEMBER HANRAHAN: Patrick and Diane, 

21 thank you for the explanation. At the risk of 

22 minimizing some of my colleagues' comments about 
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1 potential model imperfections, which they're 

2 always in debate in any model, right?

3 MR. MITCHELL: Absolutely.

4 MEMBER HANRAHAN: I think this is 

5 overwhelmingly good news. Don't mistake me for a 

6 full-fledged fan of the Dodd-Frank Act, but I was 

7 really happy that the assessment base got changed 

8 from deposits to liabilities. I was really happy 

9 that the increase from 1.15 to 1.35 got put on the 

10 backs of the big banks. And any way you look at 

11 these numbers our cost of insurance has plummeted 

12 over the last several years. So I think it's 99 

13 percent good news and I appreciate the explanation. 

14 Thank you.

15 MEMBER K. KELLY: I'll conclude my 

16 comments by saying good job in what you presented. 

17 I think it's apparent that you stated that there are 

18 statistical analysis that have come up with this 

19 model – you've done regressions on it in a way that 

20 you can clearly identify it to do more granularity 

21 and probably not get the same level of correlation. 

22 But what I thought I heard you say at the very end 
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1 is there's kind of the Allstate model – we’re

2 getting cash back.

3 (Laughter.)

4 MR. MITCHELL: That's right; I hadn't 

5 thought about it. I'm going to have to remember 

6 that one.

7 CHAIRMAN McWILLIAMS: But only if 

8 you're a good driver.

9 (Laughter.)

10 MR. MITCHELL: Actually, in this case 

11 we're indifferent as long as you're still 

12 surviving.

13 (Laughter.)

14 MEMBER K. KELLY: Thank you.

15 MR. MITCHELL: And again, I just 

16 reiterate, there's assessment hotline if you have 

17 any questions, if you want to go through any of your 

18 specifics or any specific questions, please reach 

19 out. We have people that this is what their job is 

20 to do, to make sure you're clear on what's driving 

21 your institution's rates.

22 MR. DAVIS: Great. Well, that brings 
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1 us up to another break. So we are scheduled to 

2 break from 2:30 to 2:45. We're about ten minutes 

3 ahead. My suggestion would be, if folks don't 

4 disagree, to come back at 2:35 instead of 2:45; that 

5 way either we wrap early or you have more time for 

6 the last session that a lot of people have talked 

7 about.

8 So we'll have a 15-minute break, be back 

9 here at 2:35.

10 (Whereupon, the above-entitled matter 

11 went off the record at 2:20 p.m. and resumed at 2:37 

12 p.m.)

13 MR. DAVIS: Okay, I think we're ready 

14 for our last session of the day. For this session 

15 it is apparently the most anticipated session from 

16 what I gathered earlier.

17 We're going to discuss the interest rate 

18 restrictions applicable to less than 

19 well-capitalized banks. We have Associate 

20 Director Rae-Ann Miller back and joining her is 

21 Vivek Khare, counsel from our Legal Division. And 

22 I'll turn it over to Rae-Ann to start.
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1 MEMBER TURNER: They brought a lawyer.

2 MS. MILLER: Given the level of 

3 excitement I thought it was the safest approach.

4 CHAIRMAN McWILLIAMS: Patrick is 

5 bringing a bodyguard.

6 MS. MILLER: Vivek and I are both from 

7 New Jersey as is David. There's a saying there you 

8 can't win for losing so we'll start the presentation 

9 with that.

10 So we wanted to talk to you guys today 

11 about interest rate restrictions, statutory 

12 interest rate restrictions. We touched on it a 

13 little bit this morning. I will say that the 

14 conversation was very helpful to us and I have taken 

15 down some notes about what the market is doing and 

16 really how it's changed.

17 And it's changing right now. I found 

18 that Joe's conversations about -- I think it was Joe 

19 -- mentioned doing a special and how you haven't 

20 done it in a long time. Was that you or was that 

21 Danny?

22 MEMBER TURNER: We have done specials. 
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1 But you know, I think what I was talking about was 

2 we hate to reprice our entire portfolio where you 

3 can be a little more targeted with a brokered 

4 offering.

5 MS. MILLER: So anyway, so as we go 

6 through I think a lot has changed and is changing. 

7 I mentioned this morning that we're going to be 

8 doing a broader rulemaking on brokered deposits in 

9 general and rate restrictions and so this 

10 conversation will be helpful for us there. And 

11 certainly when we do that we would welcome your 

12 comments.

13 So, in looking at the statutory interest 

14 rate restrictions and we put in your package a few 

15 things. We have the last time we changed the 

16 methodology in 2009 for calculating the rate 

17 restrictions. An article we did a couple of years 

18 ago.

19 And then I just put a little chart that 

20 I'll refer to later tracking over time what the rate 

21 restrictions have done.

22 So, just a little background as to why 
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1 we have statutory rate restrictions to begin with. 

2 So going back in time one of the things we do when 

3 we look at exam policy is how did we get here. And 

4 so we go back in time all the time and look and see 

5 why things were put in place.

6 And I have old manuals in my office and 

7 we have them in the library. I kind of go 

8 downstairs every now and again and look at our 

9 history. 

10 And you start seeing references to 

11 brokered deposits and high rate deposits, rate 

12 sensitive deposits probably around in the nineteen 

13 seventies.

14 And if you remember right around late 

15 sixties, early seventies negotiable certificates 

16 of deposit were a new product at that time. And 

17 people, globalization in financial markets in 

18 general and people were seeking out rates and 

19 seeking out ways to park excess funds at the highest 

20 rate possible.

21 That was really the first time you 

22 started seeing people going outside of their local 
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1 bank to take cash balances and invest them. And at 

2 the same time there was really a democratization of 

3 the brokered dealers and people having brokerage 

4 accounts and not just for the rich people.

5 You saw a lot of disintermediation, a 

6 lot of globalization in money management. And you 

7 start seeing that in exam instructions and annual 

8 reports about the flow of funds.

9 So, along with that you started seeing 

10 some issues. And I would agree with Joe that 

11 certainly not all banks that have brokered deposits 

12 are high rate deposits. In fact most manage those 

13 just fine and it's part of an overall strategy.

14 But throughout time there is a linkage 

15 between institutions that have used brokered 

16 deposits and use high rate deposits for excessive 

17 risk taking, excessive growth and those 

18 institutions have cost us a lot of money on the back 

19 end.

20 When you start going into the nineteen 

21 eighties we had the banking and thrift crisis as you 

22 know. Looking at the annual reports and some of the 
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1 other reports that were produced regarding the 

2 crisis as that was unfolding many of the failures 

3 and problem institutions had heavy levels of 

4 brokered deposits.

5 If you remember Penn Square was a famous 

6 large spectacular failure. Over 80 percent of its 

7 deposit base was basically brokered and high rate 

8 funds.

9 And what would happen was there was a 

10 pattern. The institution would basically call up 

11 and get all the funds it wanted, do high risk deals 

12 with those funds, get in trouble and then get more 

13 funds to try and grow out of its problems.

14 And at the end of the day those were 

15 very, very costly to us. Acquiring banks typically 

16 don't pay at all for brokered deposits and in some 

17 cases we actually do not even pass those. We have 

18 to pay those off. So that was sort of the history 

19 of the problems.

20 So, in 1989 with FIRREA, Congress 

21 basically instituted restrictions on brokered 

22 deposits and high rate deposits. And at the time 
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1 when you look -- and Vivek has looked a lot more at 

2 the congressional history than I have, but the issue 

3 with the high rate deposits was that banks were 

4 basically serving as their own money desks.

5 Even if you had brokered deposit 

6 restrictions the concern there was well the bank 

7 will just assign some employees to just dial for 

8 dollars basically and call and get as many deposits 

9 as they want. 

10 So they instituted two restrictions, 

11 brokered deposits and high rate deposits.

12 So those have been in place since 1989. 

13 And then in 1991 with FIRREA the restrictions were 

14 then linked to the prompt corrective action 

15 framework. 

16 So you had automatic restrictions kick 

17 in. And it's one of the first things that kicks in 

18 basically when an institution falls below 

19 well-capitalized.

20 So the purpose of the restrictions 

21 basically are threefold. I think somebody 

22 mentioned our report that we had done after the 
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1 Dodd-Frank Act was passed on -- it's called the Core 

2 and Brokered Deposit Study and we talk about 

3 basically three things that the brokered deposit 

4 restrictions and the rate restrictions are there 

5 for.

6 Number one is to prevent rapid growth on 

7 the upswing. Rapid growth that's not well absorbed 

8 by the institution. 

9 So what we saw in this last crisis was 

10 institutions growing very, very fast with brokered 

11 deposits, with high rate deposits and imprudently 

12 investing those funds in mostly CRE but oftentimes 

13 CRE and out of area CRE and things that it probably 

14 didn't have experience in.

15 The second thing is volatility. This 

16 is what we hear often as well. It's hot money. 

17 This money is not hot. How can it be a brokered 

18 deposit if it's not hot money? 

19 Well, especially with the deposit 

20 insurance limit at $250,000 not all brokered 

21 deposits are necessarily hot money or high rate 

22 deposits or hot money. They might not be volatile 
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1 because the person might just be seeking deposit 

2 insurance. But again how did they use them on the 

3 way up.

4 And then the third piece and the reason 

5 brokered deposit and high rate restrictions are in 

6 place is franchise value. What are those deposits 

7 worth if the bank fails? And brokered deposits and 

8 high rate deposits really don't fetch the same type 

9 of -- if anything the same type of money when the 

10 bank fails.

11 So I was going to turn it over to Vivek 

12 to talk a little bit about the legal framework and 

13 how the law and the regulations that we have 

14 interact.

15 MR. KHARE: Thanks, Rae-Ann. Yes, I'm 

16 going to get into the legal framework around the 

17 rate restrictions and hopefully that will provide 

18 you with some context when we get into our 

19 discussion.

20 So as Rae-Ann mentioned the statute, the 

21 first thing I'll talk about, section 29 of the FDI 

22 Act was enacted in 1989 via FIRREA and it set forth 
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1 two types of restrictions. The first restriction 

2 is that less than well-capitalized institutions may 

3 not accept, renew, or roll over brokered deposits 

4 unless they receive a waiver if they're adequately 

5 capitalized.

6 And the second restriction which is 

7 going to be our focus here today is that less than 

8 well-capitalized institutions are limited or 

9 restricted on the amount of interest that they may 

10 pay.

11 So the statutory interest rate 

12 restrictions are based upon capital category and 

13 can be summarized as follows. 

14 Well-capitalized institutions can pay 

15 any rate they wish on any sort of deposit. 

16 Adequately capitalized institutions generally may 

17 not pay rates of interest that are significantly 

18 higher than the rates offered in the institution's 

19 normal market area or the national rate.

20 And undercapitalized institutions 

21 similarly may not pay rates of interest that are 

22 significantly higher than either of the following, 
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1 the rates in the institution's normal market area 

2 or the rates in the institution's market area from 

3 which deposit is accepted.

4 So as you can see the statute sets a 

5 general framework but it really doesn't provide 

6 some key details. For example, it doesn't define 

7 some of the terms that I just mentioned such as what 

8 does it mean to provide a rate that is quote, 

9 "significantly higher," and what exactly is an 

10 institution's market area. 

11 And of course most importantly what is 

12 the methodology that gets you the national rate. 

13 So this brings us to our rulemaking and 

14 then through two regulations -- one in 1992 and 

15 again in 2009. The FDIC has implemented these 

16 statutory requirements and defined these key terms 

17 after engaging with the industry and other key 

18 stakeholders.

19 I'll start in 1992 the FDIC defined the 

20 term “significantly exceeds” as 75 basis points. 

21 This would provide IDI subject to the rate caps an 

22 opportunity to compete for funds within markets by 
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1 paying 75 basis points over the national rate for 

2 their local market rate while also restricting 

3 their ability to attract funds by paying rates 

4 significantly higher in accordance with the statute 

5 than prevailing rates in their respective markets.

6 As part of that '92 rulemaking, the FDIC 

7 after review of multiple options during the 

8 rulemaking process calculated the national rate as 

9 120 percent of the Treasury yield curve and 130 

10 percent of the yield curve for wholesale deposits.

11 The FDIC at the time decided to couple 

12 the national rate with the Treasury yield curve 

13 because it allowed for greater flexibility should 

14 the spread to Treasury securities widen in a rising 

15 interest rate environment. And most notably at the 

16 time we just didn't have the data. We didn't have 

17 reliable accurate data that was timely whereas 

18 Treasuries were being provided on a daily basis.

19 And so for many years the definition 

20 functioned reasonably well. The Treasury rates 

21 tracked closely with the rates on deposits so 

22 troubled banks could generally pay up to 75 points 
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1 above the Treasury yield curve.

2 However, leading up to the recent 

3 financial crisis the rates on certain Treasury 

4 obligations lowered significantly compared to 

5 deposit rates and consequently the national rate 

6 that was pegged to the Treasury yield was 

7 artificially low thereby restricting access to even 

8 market rate funding for less than well-capitalized

9 banks.

10 In response to this issue and as part of 

11 the 2009 rulemaking the FDIC redefined the national 

12 rate as what it is today, a simple average of rates 

13 paid by all IDIs and branches for which data are 

14 available.

15 This was done again primarily because 

16 data was finally readily available to provide a true 

17 objective national rate.

18 Today the FDIC gathers national rate 

19 information from up to 80,000 main office and branch 

20 locations and publishes specific product rates 

21 weekly on its website.

22 The published account types and 
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1 maturities are those most commonly offered with two 

2 rates provided for each maturity, one jumbo, one 

3 non-jumbo.

4 In addition and as part of that 2009 

5 rulemaking the FDIC developed a presumption that 

6 the prevailing rate in any market would be the 

7 national rate.

8 This approach recognized with the 

9 increasing prevalence of internet deposits and 

10 internet advertising of deposit rates, price 

11 competition for deposits has become more national.

12 Moreover, this approach recognized and 

13 avoided the considerable practical difficulties 

14 that can exist with trying to figure out the 

15 boundaries of a larger institution's normal market 

16 area and then attempting to dissect the prevailing 

17 rates paid within that area.

18 While the 2009 rulemaking presumed the 

19 national rate applied across the board for less than 

20 well-capitalized banks, the FDIC also provided a 

21 rebuttable presumption for banks that sourced 

22 deposits solely from their local market area. 
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1 This was known kind of as a community 

2 bank exception. So if an IDI believes that the 

3 prevailing rates in its local market area are higher 

4 than the national rate they could come to our FDIC 

5 regional office, provide evidence to the regional 

6 office that the local rates are higher than the 

7 national rate and then the institution will be able 

8 to pay 75 basis points over their prevailing local 

9 market rate.

10 In evaluating this evidence that the 

11 banks provide, the FDIC can use segmented market 

12 rate information and also can consider evidence as 

13 to the rates offered by credit unions if the IDIs 

14 are competing against credit unions in their local 

15 market area.

16 Finally, the FDIC may consider evidence 

17 that the rates are based on certain deposit 

18 products, such as NOW accounts, and whether those 

19 accounts differ from rates on other products such 

20 as MMDAs.

21 So this option has given some 

22 flexibility to community banks that are competing 
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1 in a local market area and particularly now because 

2 we see a little bit of a crunch with the national 

3 rate.

4 So that's where we are today. We have 

5 undertaken these two rulemakings to try to clarify 

6 and update our restrictions but with that we still 

7 see some new issues and see some reemerging issues 

8 which Rae-Ann's going to talk about.

9 MS. MILLER: So yes. We put a chart in 

10 here on the last page of your packet for our 

11 presentation. I just want to refer you to that.

12 And what this depicts here, this is a 

13 wholesale CD, a 12-month CD product. And what we 

14 tried to do was show you what the rate caps look like 

15 under the old methodology which is the red dotted 

16 line if we were to have maintained that.

17 The new methodology that we instituted 

18 effective in 2010 is the green dashed line. 

19 And then the blue line depicts sort of 

20 a proxy for high rate payers. And this is from a 

21 listing service that you've probably heard of, just 

22 the top 10 payers. To stay competitive and to get 
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1 wholesale funds you really have to be one of the 

2 first names that folks see.

3 So you can sort of see how we -- the high 

4 rates CDs sort of tracked for a long period of time 

5 the Treasury rate. We didn't shade recessions, we 

6 probably should have, but in the early two thousands 

7 you'll see that Treasury dips down below a little 

8 bit. That's probably a rush to safety.

9 And then we kind of track again the shape 

10 of the Treasury until the 2007 disruption when a 

11 huge rush to safety really drove yields down on 

12 Treasuries. 

13 So at that time I didn't have this job 

14 but at the time we were processing hundreds of local 

15 rate determinations, the community bank 

16 presumption that Vivek talked about.

17 Banks were running -- that were less 

18 than well-capitalized that may have had some 

19 viability issues were running out of options 

20 because they were running into a liquidity crunch 

21 because when the rate restrictions crunch you they 

22 will crunch you fast and that was what was 
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1 happening.

2 So we went out, made this change and as 

3 you can see the green dotted line which is the 

4 national rate based on this survey. And we get this 

5 survey from a company. We talk about the name of the 

6 company on the website and publish it weekly.

7 And it is indeed -- it's a survey of all 

8 banks and branches that offer the particular 

9 product. So a one-year CD is probably one of the 

10 most common products. I think it has something 

11 like 60,000 votes if you will about banks and 

12 branches that offer them in order to hit the 

13 national rate.

14 So you'll see here this green line for 

15 a number of years after the crisis was above the blue 

16 line. So banks that were less than 

17 well-capitalized were able to access funds from 

18 listservs or other high rate sources without much 

19 problems. 

20 They might have been shut out from the 

21 brokered deposit market, but they could still get 

22 high rate deposits.
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1 Well, that changed in 2015 when the Fed 

2 started raising rates. And what happened at that 

3 time was institutions could no longer compete. The 

4 rate restrictions started -- the rate caps started 

5 becoming binding on those institutions.

6 And so we did have a few failures and 

7 problems of institutions that sort of caught them 

8 suddenly. We hadn't been dealing with rate 

9 restrictions for a number of years.

10 So we certainly -- one of the things Dave 

11 said early in the presentation was and maybe some 

12 others did was, “Gee, we have started focusing on 

13 the right side of the balance sheet.”

14 Well, as examiners we had not focused on 

15 the right side of the balance sheet. We were 

16 dealing so much with the left side and with the 

17 hangovers of CRE and other problem loans that we 

18 sort of lost our evaluative focus on the right side 

19 of the balance sheet.

20 But we had these few institutions that 

21 sort of be-bopped along and were able to stay alive 

22 this way but really did not have prospects. And a 
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1 few failed and cost some money and we were lucky with 

2 a few others. 

3 Sort of reinvigorated our training of 

4 examiners. Remember that this is an issue when 

5 you're talking with bankers you need to make sure 

6 they understand that this is an issue.

7 We did this article as well to remind 

8 institutions.

9 So flash forward, that's sort of 2015, 

10 2016. As the market has continued to rise, the 

11 national rate has come up a little bit but not very 

12 much. And so we are thinking of ways, things that 

13 we could do and questions that we could ask to see 

14 whether the methodology that we're using is still 

15 the appropriate one.

16 It's certainly not the only one. I keep 

17 picking on you but I would disagree with you that 

18 there's something wrong with it. I think it's a 

19 mathematically accurate calculation. Now whether 

20 it's the only one or the most appropriate one 

21 remains to be seen. So something certainly that 

22 we're looking at and would be interested in with our 
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1 rulemaking later this year.

2 So I think with that maybe we'll pause 

3 and see where you guys are.

4 MEMBER SHETTLESWORTH: From an impact 

5 standpoint, do you see this rate cap impacting 

6 larger institutions or is this more the smaller 

7 institutions? I'm concerned that there's a 

8 potential of unfairness out here.

9 I understand why we're managing this,

10 but the large banks have a lot more access to a lot 

11 different types of liquidity than I do. So I'm just 

12 wondering if this is overly penalizing the small 

13 banks.

14 And I also realize it's based on what the 

15 deposit insurance fund lost with small banks. But 

16 if the largest banks wouldn't have had a capital 

17 injection we would have had -- their losses would 

18 have wiped out.

19 MS. MILLER: There is a reason for the 

20 rate restrictions. Failures are costly. We don't 

21 want banks trying to grow out of their problems.

22 But that being said the reason why 
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1 there's not significantly over the prevailing rate 

2 is those banks do have a chance to compete if they 

3 are having a problem to try and find capital, to try 

4 and work out of their problems without aggressively 

5 growing.

6 I don't know that it necessarily 

7 penalizes small institutions. But the way it has 

8 been calculated has certainly not been helpful if 

9 that's any. 

10 MEMBER SCULLY: I think one of the 

11 concerns, maybe two of the concerns is what are the 

12 appropriate indices. And is it really possible to 

13 say there's a national cap as opposed to putting 

14 institutions into regions where there are great 

15 differences that can be impacted by competition.

16 But I think the reason that so many 

17 people are focused on this right now -- because if 

18 everybody thought this was only going to apply to 

19 less than well-capitalized institutions I think 

20 most people would say, “Oh well, that's never going 

21 to be me, I'm not worried about that.”

22 But the danger is that this definition 
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1 of an instrument that carries a rate above a 

2 national cap will at some point be swept into this 

3 evolving definition of high volatility deposits.

4 There's already a lot of discussion --

5 not any kind of even official guidance on that --

6 but I think a lot of us when we've had recent 

7 examinations on the liquidity side have heard about 

8 this high volatility deposit definition.

9 Not to beat my business model drum 

10 again, but if you're a commercial bank and you've 

11 got a lot of commercial deposits, you have a lot of 

12 deposits that are over the FDIC insurance limit. 

13 They’re certainly what we would view as core 

14 deposits, but they count as high volatility 

15 deposits in these new definitions.

16 And so I think the overall concern is 

17 does this category that we've always thought of as 

18 only applying to troubled institutions now somehow 

19 get swept into another category that could affect 

20 all institutions.

21 And maybe the -- one's a suggestion, 

22 move away from the national caps, but the other is 
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1 more of a question to you in terms of does this then 

2 become quite naturally something that's 

3 extrapolated into oh, and this is also a high 

4 volatility deposit because it's carrying an 

5 interest rate that's significantly above a national 

6 cap.

7 MS. MILLER: Can I add that you're also 

8 in a metropolitan area that probably pays higher 

9 rates.

10 MEMBER SCULLY: Well, we have a lot of 

11 credit union competition. And I never know if IDIs 

12 count. People insured by NCUA or only FDIC. If it 

13 doesn't count NCUA, you're definitely not capturing 

14 the highest rates.

15 MEMBER DONNELLY: Question. You made 

16 a comment, Rae-Ann, and I appreciate it. I think 

17 it's helped me on this because this is a concern of 

18 mine. 

19 The concern to the loss to the fund 

20 because the brokered deposit has no value at the 

21 sale, that is higher weighted than the liquidity 

22 that they'll provide me before I close. Is that an 
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1 accurate statement? And I hope that makes sense.

2 MS. MILLER: No, it does not so can you 

3 repeat the question? 

4 MEMBER DONNELLY: Sure. I heard you 

5 say that the brokered deposits have no value at the 

6 sale. That's after the bank's been liquidated. 

7 So that seems to me to be a higher value 

8 to the FDIC versus the liquidity available to the 

9 institution before it fails.

10 MS. MILLER: I don't think that's quite 

11 fair to say that but I think that's what Mary Ann 

12 is saying by this term which is not an official 

13 definition of high volatility but I agree that as 

14 examiners we have probably relied on that too much. 

15 And we're working on that certainly with the 

16 instructions.

17 It's a balancing act because it does --

18 brokered deposit, high rate deposits are part of 

19 many institutions' business model and used 

20 appropriately and provide appropriate liquidity.

21 But the restrictions are there for a 

22 reason and the reason is our history of having 
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1 problems with them being used imprudently and not 

2 getting the appropriate value when it fails. It's 

3 not that one is more valuable than another.

4 MEMBER DONNELLY: And just from my 

5 perspective coming in and playing cleanup is a whole 

6 lot easier looking backwards and having 20/20 than 

7 it is while you're there in the heat of the battle.

8 Seeing a bank that's funded with local 

9 CDs at the highest part of the market, absolutely 

10 the highest funding in the market when brokered 

11 deposits are different than that. 

12 And as soon as that institution gets 

13 into trouble, those CDs run off just as fast as 

14 anything else from a liquidity standpoint only, not 

15 from a safety and soundness and can I sell it 

16 tomorrow perspective. 

17 That is so evident. As soon as you 

18 lower those rates those things are gone. And then 

19 the value has got to be lower when they're priced 

20 higher than market and you can come in after the 

21 sale, after the close and reduce that the one time 

22 whatever that is.
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1 MS. MILLER: You make a good point. We 

2 caught the tail end of Pat's presentation on the 

3 pricing model. So although it's unusual for a 

4 community bank apparently to be penalized for 

5 brokered deposits it could happen. 

6 But high rate deposits aren't 

7 necessarily factored into that calculation. 

8 That's something else for the rulemaking. Are we 

9 hitting the right note there?

10 Certainly when we look just at cost of 

11 funds and look at 90 percentile payers, 95 

12 percentile payers they are as likely to fail as 

13 institutions that are heavily reliant on brokered 

14 deposits.

15 MEMBER HARTINGS: Can you answer the 

16 question how do the credit unions pricing fit into 

17 the IDIs? Is that part of it?

18 MS. MILLER: I can answer. Oh, you 

19 want me to? 

20 We don't calculate credit unions in the 

21 national rate but community banks, or really any 

22 bank. We call it the community bank exception 
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1 because that's typically who uses it.

2 But if a bank is paying in its local rate 

3 area a bank that's less than well-capitalized and 

4 wants to show us evidence of where they are on the 

5 rate-paying scale they can use credit unions as an 

6 example. And often do.

7 MEMBER HARTINGS: And why don't you?

8 MS. MILLER: Well, you know, I think 

9 going back in 2009 we didn't give a real good reason 

10 as to why we didn't. I think perhaps at the time 

11 we did not have the same ability to gather that data 

12 with credit unions.

13 The service that we use is primarily a 

14 bank gathering service but certainly again it would 

15 be something that would be of interest. Certainly 

16 when you look at the services and you want to find 

17 the highest CD rate you will see credit unions 

18 appear along that list with banks.

19 MEMBER MENON: You also use the rates 

20 that are posted nationally by online banks like 

21 Synchrony and banks like that?

22 MS. MILLER: So, the national -- no. 
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1 The national rates are done through a service that 

2 actually, I don't know if they call around or they 

3 have a call-in sheet or whatever but they do all 

4 branches and all offices regardless of whether 

5 they're -- we don't just look at high rate payers.

6 And another thing that made me think 

7 when you asked that question is, and this is why I 

8 was asking Joe that question about specials is we 

9 don't include special features. And I think in 

10 this market something we were talking about before 

11 we came in is the rate that's posted or the rate that 

12 they might answer to you on for this company is the 

13 12-month jumbo CD at 25 basis points. That's what 

14 they advertise.

15 But they're running a special on a 

16 13-month jumbo at 3 percent and that doesn't get 

17 captured. And I think that's something that's 

18 changed and that's much more prevalent than what was 

19 envisioned in 2009.

20 MEMBER TURNER: And if somebody were to 

21 come in the branch and say they were getting ready 

22 to move, they were going to pay more than 25 basis 
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1 points. So it's not really reflective of what the 

2 market is.

3 I think you guys did a terrific job of 

4 explaining the regime. I feel like I understand it 

5 now. And I understand where the FDIC is coming 

6 from.

7 If I was in your shoes though the last 

8 thing I would ever want is a bank to fail as a result 

9 of lack of liquidity that was otherwise viable 

10 because the FDIC is going to lose money every time 

11 on that bank when it fails.

12 So I would be trying to -- now, you don't 

13 have the ability. The statute specifies that these 

14 things will be prohibited. It's your job I guess 

15 to define what substantially in excess of the market 

16 is. 

17 So you've got to identify what's the 

18 margin over the market and then what's the market. 

19 It seems to me the margin over the market should 

20 probably vary based on what the market is.

21 The higher the market rate, the higher 

22 the margin should be probably. And then the market 
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1 because of what we talked about you've got, 

2 whatever, 3,000 Citi Corp branches factoring into 

3 that number and they're three basis points or 

4 whatever they are on everything.

5 I don't know, that's a hard question.

6 MS. MILLER: Tell me about it. Mary Ann 

7 mentioned what do you use as an indices. We call 

8 it the peg. Where do you set the peg is an issue.

9 Interestingly if you just reduce --

10 currently anyway if you just reduce it to main 

11 office, so Citi or B of A doesn't get 10,000 votes 

12 or whatever you don't get that much of a lift just 

13 because just overall rates are super, super low.

14 There's the 75 basis points. Could it 

15 be something sliding?

16 There's two issues when you said as the 

17 FDIC we wouldn't be somebody where a viable 

18 institution failed because of this.

19 We were also in this period of time when 

20 interest rates were artificially low where banks 

21 were staying afloat and not having to make the hard 

22 choices. 
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1 There's a reason why there's rate 

2 restrictions is because you're in trouble, you've 

3 got to do something to fix this problem. So it also 

4 served when we had very low interest rates to sort 

5 of help those institutions stay afloat which 

6 probably should have made those hard choices and 

7 fired management and shrunk and done those things 

8 and they didn't have to do that. So it's a 

9 balancing act.

10 MEMBER DONNELLY: I think Jack talked 

11 about credit unions. I'd really -- I'm not here to 

12 bash credit unions today but it's -- you look at my 

13 QwickRate portfolio it's all credit unions, 100 

14 percent. So I'm basically funding them to outbid 

15 me on the CD and buy it back.

16 (Simultaneous speaking)

17 MEMBER DONNELLY: -- they've under bid 

18 me on. 

19 But if you discount that in the picture 

20 you're missing a huge piece of the big picture and 

21 it's evolving so rapidly as we speak in the 

22 Synchrony Bank and all those. Those things, the 
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1 evolution is so quick I don't think we have 10 or 

2 15 years to deal with it. I think it has to be dealt 

3 with in a much compressed period of time because 

4 that's getting worse instead of better.

5 I really think that needs to be somehow 

6 added.

7 MEMBER HARTINGS: Joe mentioned the 

8 differential as rates go up. But as rates are 

9 moving there's -- when rates seek that level there's 

10 not as many specials, not as much kind of cloak and 

11 dagger out there. 

12 And you've got to figure out somehow how 

13 to consider that in this formula because I would 

14 tell you right now your rate survey is not a very 

15 good survey because you're not capturing. Stuff's 

16 going like this and they're hiding it here, they're 

17 hiding it there. We're all trying to figure out how 

18 to do it.

19 Now, once we get up to that level we stay 

20 there for six months, eight months, a year, it all 

21 kind of levels out. But this is really, your rate 

22 survey is probably not capturing today what the 
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1 rate's really doing out there.

2 MEMBER HANRAHAN: Rae-Ann, I found the 

3 history very helpful. Shame on me. I did not know 

4 that the methodology changed in 2009 so that was 

5 good information to have.

6 I'm glad that FDIC saw fit to make a 

7 change in '09 when it stopped not working perfectly. 

8 And it seems like FDIC is open to consider other 

9 changes now as a result of the RFP that's going out.

10 This chart I think really tells the 

11 story. And one of the reasons I do conclude there's 

12 something wrong with it is if a bank that's paying 

13 a rate less than half the cost of the rate at which 

14 the U.S. Treasury borrows money how could that be 

15 regarded as a high rate? Does that mean the U.S. 

16 Treasury is overpaying by two times? 

17 It just seems to me on its face to be not 

18 working right.

19 MR. DAVIS: Any other questions? 

20 MEMBER DONNELLY: Nobody else wants to 

21 put their neck out there.

22 MS. MILLER: How do you follow that?
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1 MR. DAVIS: Thank you very much. That 

2 concludes the panel for today so I'll turn it back 

3 over to the chairman for closing remarks.

4 CHAIRMAN McWILLIAMS: Thank you, Chad. 

5 Thank you, Rae-Ann and Vivek. 

6 So you definitely listened to my 

7 suggestion not to fall asleep this afternoon. 

8 Thank you all. This was incredibly valuable and I 

9 just want to take a minute to say goodbye to the old 

10 friends and welcome the new ones to the committee. 

11 And I'll turn it over to Marty for the closing 

12 remarks.

13 BOARD DIRECTOR GRUENBERG: I don't have 

14 much to add. Let me take the opportunity to thank 

15 Mary Ann and John and Jack and Chris for their 

16 service as well as to welcome our new members.

17 I'm really struck again with the quality 

18 of the conversations we have and the value of the 

19 input that you provide to us. It's really 

20 thoughtful and nuanced and you don't always agree 

21 with one another which makes it even more valuable 

22 from my standpoint.
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1 I thought I'd like to commend the 

2 chairman for having the round table, adding the 

3 round table to the meeting this morning. I thought 

4 that was as fine a seminar on community banking that 

5 I've ever participated in. I learned a great deal. 

6 And it adds a lot of value to the agency. So thank 

7 you all.

8 CHAIRMAN McWILLIAMS: Thank you.

9 (Whereupon, the above-entitled matter 

10 went off the record at 3:16 p.m.)

11