1

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

FEDERAL DEPOSIT INSURANCE CORPORATION

+ + + + +

ADVISORY COMMITTEE ON COMMUNITY BANKING

+ + + + +

MEETING

+ + + + +

THURSDAY,

MARCH 28, 2019

+ + + + +

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

in the Federal Deposit Insurance Corporation Board 

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

D.C., Jelena McWilliams, Chairman, presiding.
2

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

PRESENT:

JELENA McWILLIAMS, Chairman

MARTIN GRUENBERG, FDIC Board of Directors

DICK BESHEAR, Chairman, President & CEO, First

Security Bank and Trust Company

ASIF DAKRI, Vice-Chairman & CEO, Wallis Bank

FRED DeBIASI, President & CEO, American Savings

Bank

CHRIS DONNELLY, President & CEO, Bank of the

Prairie 

JAMES J. EDWARDS, JR., CEO, United Bank

KEITH EPSTEIN, Executive Vice President & CEO,

Roxboro Savings Bank, SSB

DAVID J. HANRAHAN, SR.

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

Alabama

KENNETH KELLY, First Independence Bank

BRUCE KIMBELL, President & CEO, First Community

Bank of the Heartland

THOMAS LEAVITT, President & CEO, Northfield

Savings Bank

LORI MALEY, President & CEO, Bank of Bird-in-Hand

TIFFANY BAER PAINE, President & CEO, Security

Bank USA

ALAN SHETTLESWORTH, President & COO, Main Bank

LOUISE WALKER, President & CEO, First Northern

Bank of Dixon

LEN WILLIAMS, CEO, People's Intermountain Bank
3

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

ALSO PRESENT:

LISA ARQUETTE, Associate Director, Division of

Risk Management Supervision

RYAN BILLINGSLEY, Corporate Expert, Division of

Risk Management Supervision

LUKE BROWN, Associate Director, Division of

Depositor and Consumer Protection

CHAD DAVIS, Deputy to the Chairman for External

Affairs

DOREEN EBERLEY, Director, Division of Risk

Management Supervision

JAMAEL EL-HINDI, Deputy Director, FinCEN

KEITH ERNST, Associate Director, Division of

Depositor and Consumer Protection

MARTIN HENNING, Deputy Director, Division of Risk

Management Supervision

ERIK KIEFEL, Senior Advisor for Strategy, Policy

Division, FinCEN

ALICIA LLORO, Senior Financial Economist,

Division of Depositor and Consumer

Protection

M. ANTHONY LOWE, FDIC Ombudsman

BRANDON MILHORN, Chief of Staff

RAE-ANN MILLER, Associate Director, Division of

Risk Management Supervision

LAURA RICHARDSON, Chief of Trade, Investment, and

Fraud Section, Intelligence Division, FinCEN

LISA ROY, Associate Director, Division of Risk

Management Supervision

ROBERT STORCH, Chief Accountant, Division of Risk

Management Supervision

JAMES WATKINS, Senior Deputy Director, Division

of Risk Management Supervision

JEFFREY WEINSTEIN, Senior Financial Economist,

Division of Depositor and Consumer

Protection
4

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

C-O-N-T-E-N-T-S

Introductions and Opening Remarks,

Chairman Jelena McWilliams .................... 5

FDIC Efforts Regarding Do Novo Institutions....8

Community Bank Technical Assistance Efforts

and Related Request for Information...........28

Use of Bank Filings Required Under the

Bank Secrecy Act.............................. 44

Updates from Committee Members ............... 90

Update on Supervisory Issues ................161

Remarks by the FDIC Ombudsman ............... 240

Briefing on the Results of the 2017

National Survey of Unbanked and

Underbanked Households ...................... 249

Subcommittee on Supervision Modernization ... 280

Adjourn ..................................... 391
5

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

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

2 9:06 a.m.

3 CHAIRMAN McWILLIAMS: Good morning. 

4 I'd like to welcome members of the committee who 

5 are here for their first meeting; Bruce Kimbell, 

6 President and CEO First Community Bank of the 

7 Heartland, Clinton, Kentucky.

8 MEMBER KIMBELL: Good morning.

9 CHAIRMAN McWILLIAMS: Good morning.

10 Dick Beshear. Did I pronounce that 

11 right?

12 MEMBER BESHEAR: You did just fine. 

13 Thank you.

14 CHAIRMAN McWILLIAMS: Did I?

15 MEMBER BESHEAR: Yes.

16 CHAIRMAN McWILLIAMS: Can you 

17 pronounce my name?

18 (Laughter.)

19 Chairman, President, and CEO First 

20 Security Bank and Trust Company, Oklahoma City, 

21 Oklahoma.

22 Keith Epstein, EVP and CEO of Roxboro 
6

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Savings Bank, Roxboro, North Carolina.

2 MEMBER EPSTEIN: Thank you for having 

3 me.

4 CHAIRMAN McWILLIAMS: Thomas Leavitt, 

5 President and CEO of Northfield Savings Bank, 

6 Northfield, Vermont.

7 MEMBER LEAVITT: Good morning.

8 CHAIRMAN McWILLIAMS: Good morning.

9 Fred DeBiasi. Did I get it?

10 MEMBER DeBIASI: Perfect.

11 CHAIRMAN McWILLIAMS: All right. You 

12 should all be named Jelena.

13 (Laughter.)

14 CHAIRMAN McWILLIAMS: President and 

15 CEO of American Savings Bank in Middletown, Ohio.

16 Lori Maley, President and CEO of Bank 

17 of Bird-in-Hand, Bird-in-Hand, Pennsylvania.

18 MEMBER MALEY: Thank you.

19 CHAIRMAN McWILLIAMS: We have added 

20 these new members in an effort to ensure that we 

21 have representation from community bankers across 

22 the country from cities as well as rural areas.
7

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 On a personal note, having spent a 

2 little bit of time in Ohio and having driven to West 

3 Virginia and Pennsylvania and rural parts of 

4 Maryland quite often back and forth between Ohio 

5 and Washington as I was getting confirmed, I really 

6 realized we need more representation from the 

7 heartland. 

8 So, Bank of Heartland, welcome. We've 

9 added these new members in an effort to ensure that 

10 we have representation from that part of the 

11 country as well. 

12 As in our meeting last October, we want 

13 to allow more time for dialogue and input from 

14 committee members so my opening remarks are very 

15 short. 

16 We have some time on the agenda later 

17 this morning to hear from the committee members 

18 about your experience with your banks and your 

19 communities. 

20 I'll now turn the program over to Chad 

21 Davis who will start as the moderator for today's 

22 meeting.
8

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MR. DAVIS: Thank you, Chairman.

2 Our first panel, jumping right into it, 

3 we have Jim Watkins, the Senior Deputy Director 

4 from the Division of Risk Management Supervision. 

5 Jim is going to talk about FDIC efforts regarding 

6 de novo institutions.

7 MR. WATKINS: Thank you and good 

8 morning. I will provide an update on our de novo 

9 efforts and activity, our deposit insurance 

10 application-related initiatives, and the latest 

11 feedback we've received through two outreach 

12 efforts regarding the deposit insurance 

13 application process for forming new banks.

14 First, I would like to update you on de 

15 novo activity. While only two institutions opened 

16 between the end of 2010 and the end of 2016, 

17 activity has recently increased with the FDIC 

18 approving deposit insurance for 24 institutions 

19 since January 1, 2017. FDIC staff encourages the 

20 formation of new banks, and we are currently 

21 reviewing nine deposit insurance applications.

22 On December 6, the FDIC announced 
9

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 several actions to promote a more transparent, 

2 streamlined, and accountable deposit insurance 

3 application process. As reflected in your 

4 handout, we introduced on our public website 

5 applications and supervision performance metrics 

6 and other information. 

7 Specific to deposit insurance 

8 application, the website includes information 

9 regarding application disposition and pending 

10 applications. 

11 We also republished our processing 

12 timeframe guidelines for applications and 

13 announced a voluntary process to receive and review 

14 draft deposit insurance proposals. This process 

15 is intended to provide the FDIC and organizing 

16 groups the opportunity to better understand and 

17 work through possible challenges in a 

18 collaborative manner before a formal application 

19 is filed.

20 Although the process is open to any 

21 organizing group, we believe the process will be 

22 particularly helpful for proposals with unusual or 
10

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 complex aspects and for groups seeking technical 

2 assistance. We expect to provide organizers an 

3 update within 30 days of receiving a draft 

4 proposal, and for most proposals to complete our 

5 review within 60 days.

6 We have established an application 

7 mailbox as an additional means by which bankers and 

8 others may email questions regarding specific 

9 applications or other application processes. 

10 We've updated our handbook for 

11 organizers of de novo institutions and our deposit 

12 insurance procedures manual. The handbook 

13 addresses the information needs of organizers and 

14 the procedures manual provides a comprehensive 

15 list of instructions for FDIC staff regarding the 

16 deposit insurance application process.

17 Now, in terms of outreach, the FDIC has 

18 pursued two important initiatives designed to 

19 obtain feedback from industry participants and 

20 other interested parties. Beginning in December 

21 of 2018 and through the first quarter of this year, 

22 round table events have been held to discuss the 
11

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 deposit insurance application process.

2 We've held events in each of the FDIC's 

3 six regional offices and one event here in 

4 Washington, D.C. Participants have included 

5 bankers, potential organizers, industry 

6 associations, and other interested parties. 

7 These events are structured around three primary 

8 points of interest.

9 First, we ask participants to provide 

10 a report out of questions and concerns about the 

11 application process. Second, regarding specialty 

12 business models, we encourage discussion of the 

13 most significant concerns about the application 

14 process. And, third, we ask participants to 

15 discuss any other suggestions the FDIC should 

16 consider for improving the effectiveness, 

17 efficiency, and transparency of the application 

18 process, or for addressing any other questions or 

19 concerns. In addition, on December 6, the FDIC 

20 announced a request for information, or RFI, that 

21 posed 13 questions, some of which are particular 

22 to specific types of de novo applications and some 
12

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of which addressed the overall application 

2 process.

3 In addition to requesting information 

4 regarding steps the FDIC can take to improve the 

5 deposit insurance application process, the RFI 

6 also solicits information regarding any aspect of 

7 the application process that discourages potential 

8 applicants from initiating or completing the 

9 process.

10 We also solicited ways in which the FDIC 

11 could or should modify the application process for 

12 traditional community banks. The comment period 

13 remains open through the end of this month, March 

14 31st.

15 Our outreach efforts have resulted so 

16 far in 10 comment letters in response to the request 

17 for information. Participation in the round table 

18 events has been very fruitful. Over 100 

19 participants participated during these 

20 discussions. These efforts have generated a 

21 substantial number of specific comments and 

22 suggestions regarding the application process.
13

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Now let me share some of those comments. 

2 One of the first comments that groups have 

3 suggested is that the agencies consider modifying 

4 the requirement in which regulators require an 

5 applicant to identify a specific physical location 

6 at the time an application is filed. One of the 

7 underlying reasons is there's a cost. 

8 In other words, they may have to enter into 

9 a lease or acquire a building or something of that 

10 nature. There is an active cost to that. It may 

11 be difficult to enter into a lease arrangement. By 

12 requiring that, it impacts the cost of organizing 

13 an institution so there is a suggestion that we not 

14 have necessarily a specific location but a general 

15 description.

16 The other item that comes up in all of 

17 these discussions is something along the topics of 

18 a burn rate. In other words, the organizing cost 

19 can be rather substantial and significant. 

20 There's a desire to lower the organization cost, 

21 or the burn rate if you will. There are 

22 discussions about possible ways we could sequence 
14

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 the application process or modify things to lower 

2 or reduce the burden or the burn rate in filing an 

3 application.

4 The third topic that seems to come up 

5 is ways to better enhance communication or share 

6 information at earlier stages and be more 

7 responsive in a timely manner. Another topic that 

8 seems to come up is more clarification on capital 

9 requirements. It seems like the question always 

10 comes up, “Does it require 25 or 30 million to open 

11 a new bank?” 

12 We always say it's 8 percent capital at 

13 the end of the three years and it depends on the 

14 business plan, but there is still a desire to be 

15 more specific on capital requirements. This 

16 always seems to be a question that comes up with 

17 all of the items.

18 Another topic that comes up is a desire 

19 to have delegations for approval in handling --

20 full handling of deposit insurance applications at 

21 the local level or at the regional level. 

22 Commenters have stressed that they appreciate and 
15

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 value the local office. 

2 They feel strongly that the 

3 relationship with their case manager is strong. 

4 The relationship with the regional office is 

5 positive and professional, and they would like it 

6 to be handled at the local level as opposed to 

7 anything coming up to the Washington office.

8 There is also a desire to have better 

9 information on what is viewed as being 

10 substantially complete. Substantially complete 

11 is the time frame when the regulators start our 

12 clock to review and analyze an application, and 

13 they would like some clarity on what is viewed as 

14 substantially complete.

15 Then there's another topic of the 

16 change of business plan. What constitutes a 

17 change of business plan? We've seen a number of 

18 proposals where sometimes when they go out for a 

19 stock offering it comes up a little bit less than 

20 what the application had. Sometimes it is 

21 substantially more than what the application had,

22 and they want to have some flexibility and 
16

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 understanding of what constitutes a change of 

2 business plan.

3 Then there's this issue, and it's more 

4 pronounced in certain areas, for example San 

5 Francisco or New York, where the issue of stock 

6 options and stock compensation in general, or stock 

7 warrants is a driver of a lot of new ventures. 

8 There's a desire that the regulators 

9 take a fresh look at our requirements, which 

10 frankly is in our statement of policy, on stock 

11 options. That can be a source of considerable 

12 compensation and an attractive way of bringing in 

13 new talent for many new businesses, and they are 

14 suggesting that the FDIC take a fresh look at that.

15 Then there is a strong desire just in 

16 looking at our forms and our application forms, if 

17 you will, where they are frankly not user friendly 

18 and they are not easy to pull off the website 

19 necessarily so there is a desire to make them more 

20 user friendly and automated.

21 Then finally a number of individuals 

22 suggested that the FDIC should take a fresh look 
17

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 at its -- our risk tolerance with the suggestion 

2 that from time to time we are viewed as being too 

3 risk averse. Maybe there is some time for self 

4 reflection on that, I suppose. 

5 It hasn't always been my experience 

6 that we are too risk averse on opening new banks, 

7 but fair enough. We should take a fresh look at 

8 that and make sure that we are welcoming of all 

9 proposals.

10 Finally, each and every one of these 

11 comments is going to be reviewed here and then we'll 

12 develop some recommendations and specific action 

13 plans for consideration. We expect the action 

14 plans will include additional outreach efforts and 

15 communication changes, processes, requirements, 

16 and expectations.

17 In conclusion, we are actively pursuing 

18 multiple initiatives, if you will, aimed at 

19 improving the deposit insurance application 

20 process. Although work is not yet complete, we 

21 anticipate that our efforts will continue to make 

22 the application process more transparent, more 
18

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 streamlined, and more accountable.

2 Thank you for your time this morning.

3 MR. DAVIS: Any questions, comments?

4 MEMBER HANRAHAN: Yes, Jim. With 

5 regard to capital, could you provide a range of the 

6 amounts of approved capital amongst the, I think 

7 you said, 24 applications that have been approved 

8 since the beginning of 2017?

9 MR. WATKINS: I would have to go back 

10 and look at the record, but I think it's 14 and some 

11 have been 100 million. It's a wide range. I will 

12 say there's a number that have been around 25 

13 million, but that is not our standard. The 

14 difficulty with having -- so even though we've 

15 approved 24 or so applications, it's still a small 

16 number so don't read into it. 

17 Our expectation is 8 percent after 

18 three years, and it depends on the business plan. 

19 If a business plan comes in sufficient, maybe you 

20 can do it for 6 million. There is no particular 

21 capital number, dollar amount. Thank you.

22 MEMBER HANRAHAN: Thank you.
19

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER EDWARDS: Jim, I commend you and 

2 the FDIC for the work that you're doing here. With 

3 our industry continuing to consolidate at 

4 approximately 5 percent a year, I think it's really 

5 important for our industry to do what we can to try 

6 to encourage de novo formation.

7 My one comment, I'm from Georgia, would 

8 be just to echo what you're saying. I've heard 

9 some groups that are applying, or considering 

10 applying, and working with their attorneys. There 

11 is concern that what is substantially complete in 

12 their eyes, or maybe their attorney's eyes, is not 

13 the same as the FDIC is expecting. I think 

14 anything you can do to sort of clarify what is 

15 substantially complete, what a substantially 

16 complete application looks like, would be helpful. 

17 MR. WATKINS: Let me suggest also if 

18 you know anyone interested in organizing a bank, 

19 which is maybe a touchy topic for existing bankers, 

20 please encourage people to talk to the FDIC. We 

21 are very open to having like prefiling meetings,

22 and you can have as many prefiling meetings as you 
20

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 like. We can help walk through what our 

2 expectations are to help navigate that process so 

3 when an application is filed, it can be handled 

4 expeditiously.

5 MEMBER MALEY: So Bank of Bird-in-Hand 

6 was one of the two banks you mentioned. That's our 

7 bank. We opened in 2013. Our order said 16 to 20 

8 million and honestly we opened with 17 and three 

9 years later we raised another 12 so you do need a 

10 lot of capital, especially if your business plan 

11 is one that may exceed those expectations so, you 

12 know, you do need the capital buffer.

13 MR. WATKINS: Well, I happen to favor 

14 capital just so you know.

15 MEMBER K. KELLY: Good morning. This 

16 is Kenneth Kelly here from Detroit. I would like 

17 to commend you on getting around to the regional 

18 offices. Is there a plan to take that further? I 

19 heard the Chairwoman discuss the heartland and 

20 wanted to know if there's a plan to have meetings 

21 like this in the broader part of the country.

22 Another part of that question, if you 
21

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 don't mind, is give me a little bit of a sense of 

2 where you're seeing the de novos. Is it happening 

3 in one area of the country or is it pretty broad 

4 across the country?

5 MR. WATKINS: Two items. One, my 

6 sense is we probably need to digest the information 

7 that we received to date and then come up with some 

8 action plans and look at ways to either revise some 

9 of our application steps and processes, maybe 

10 forms, and then reach out to the industry as a whole 

11 and trade associations and coordinate future 

12 discussions. We haven't quite laid out exactly 

13 what our next steps will be, but my sense is that 

14 will probably be an appropriate course of action.

15 In regards to where are the de novos, 

16 almost every region -- we have six regions. Almost 

17 every region has had de novo activity. We are 

18 seeing more interest, I think it's fair to say, in 

19 our San Francisco region, our Atlanta region, and 

20 our New York region at the moment. But there's 

21 interest in other areas as well.

22 I will say in the Midwest -- so the 
22

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Midwest has a considerable number of banks. What 

2 we've heard at some of the outreach discussions is 

3 organizers and investors instead of maybe forming 

4 a new bank look at opportunities to acquire an 

5 existing bank and maybe reposition it, restructure 

6 it, reformat it in some way. They look at the 

7 premium and the investment level that can arise 

8 from that and see if it is such. 

9 There's a lot of institutions in the 

10 Midwest that perhaps may be family owned and at some 

11 point have had some interest in selling. That may 

12 explain some of the transactions where banks are 

13 acquired by other parties instead of forming a new 

14 institution. It's a picture of items that go on.

15 MEMBER K. KELLY: Thank you.

16 CHAIRMAN McWILLIAMS: Ken, if I can 

17 just add -- I'm sorry -- for a second. We are also 

18 considering the idea of perhaps having something 

19 similar to this on a smaller scale in our regional 

20 offices so having like the sub-councils or 

21 sub-committees that would be regional and advising 

22 regional directors as well. That's in the works. 
23

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 I mean, there are some federal law issues that we 

2 have to navigate to make sure we can get there.

3 MEMBER K. KELLY: I understand.

4 CHAIRMAN McWILLIAMS: It's an effort 

5 we are undertaking.

6 MEMBER K. KELLY: Great. Thank you.

7 MEMBER SHETTLESWORTH: Just one quick 

8 question, James, if I can. Alan Shettlesworth, 

9 Main Bank in Albuquerque, New Mexico. We actually 

10 had someone come to our bank and talk to us because 

11 our bank is about 13 years old so we are the newest,

12 youngest bank organization in New Mexico. 

13 Someone came and talked to us 

14 November/December time frame. First time this has 

15 ever happened about getting our advice on how to 

16 start a new bank, specifically on one of the many 

17 tribes we have there in partnership with a lot of 

18 the Indian reservations or tribes.

19 My question is would it be good to send 

20 them to you to kind of put you in contact with them 

21 or who?

22 MR. WATKINS: They are certainly 
24

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 welcome to come to us, but each regional office. 

2 You can go directly to the regional director at each 

3 regional office. Each regional office has an 

4 application specialist exclusively for de novo 

5 institutions. Some offices actually have a 

6 committee as well that looks at de novos. Each 

7 regional office has specialists that can help 

8 explain the application process.

9 CHAIRMAN McWILLIAMS: Did you have 

10 something?

11 MEMBER EPSTEIN: I was just going to 

12 add that we certainly appreciate these efforts. 

13 We, and I'm sure I speak for many of my colleagues, 

14 have benefitted short term from consolidation and 

15 that we have something sort of different to offer 

16 our market and some of our neighboring counties 

17 that no longer have a community bank have found 

18 their way to our bank and we are grateful for that. 

19 We also see that long term the lack of 

20 community banks is going to affect all of us in some 

21 negative ways. We've had training sessions 

22 cancelled due to lack of participation. Resources 
25

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 available at the state level for the bankers 

2 association are fewer when there are fewer member 

3 banks and so forth. 

4 With that said, I would encourage you, 

5 and I'm sure you have already to a certain extent, 

6 but to engage the state banking associations. 

7 They certainly have a vested interest in seeing de 

8 novo activity and may be able to help you sort of 

9 get the message out that the FDIC is open for 

10 business in terms of new applications. 

11 I think that there is a misperception 

12 in the marketplace. I have had others tell me that 

13 where are we going to get $25 million from investors 

14 in a small community. It seems that many of the 

15 de novos that are in the formation process are in 

16 more metropolitan areas. 

17 I think the Chairman had made some 

18 comments, and I can't remember the exact numbers, 

19 but there are a number of counties that don't have 

20 a bank at all. It's unlikely that one of the bigger 

21 regional or national banks is going to enter those 

22 markets. There's probably just not the critical 
26

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 mass there that they're looking for. But perhaps 

2 for their own self-interest there would be 

3 investors in those communities that would like to 

4 form a community bank. 

5 I know you're not in the business of 

6 soliciting investment and formation of banks, but 

7 whatever can be done in concert with the state 

8 banking associations to sort of get the word out 

9 that there's not this huge mountain of capital that 

10 needs to be amassed in order to launch a bank I think 

11 that would be helpful.

12 MR. WATKINS: Thank you for the 

13 suggestion.

14 MEMBER WILLIAMS: James, just a quick 

15 question. Len Williams from Utah where we've got 

16 a preponderance of ILCs and fintech-type bank 

17 charters. I know there are several applications 

18 in the works now. Are you seeing anything 

19 different than you have historically on the 

20 percentage of traditional community banks that are 

21 requesting charters versus more specialty ILC-type 

22 organizations?
27

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MR. WATKINS: So before us now we only 

2 have nine proposed de novo institutions that we're 

3 looking at. While we can't speak to specific 

4 pending applications, we are open to all 

5 applications. To the extent that they may have 

6 business activity that is not traditional, we'll

7 still consider that and review it in relation to 

8 the statutory factors. 

9 They would be expected to satisfy the 

10 statutory factors. That's really our basis for 

11 analysis. We're open to all forms and all 

12 charters. We encourage discussions on that. I 

13 think the draft application process can be useful 

14 for those groups as well.

15 MEMBER WILLIAMS: I appreciate that 

16 you're open to all kinds. Of the nine that have 

17 started, have they been predominately traditional 

18 or specialty?

19 CHAIRMAN McWILLIAMS: This is where I 

20 crumple the paper, you know.

21 (Laughter.)

22 MR. WATKINS: Frankly, each business 
28

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 plan can be different. The banks that have already 

2 been opened some of them are kind of business 

3 focuses and some of them are traditional focus. 

4 Some may have avenues where they are looking at 

5 funding not only from traditional deposit sources, 

6 but also internet sources so it's a variety and so 

7 we're open to all.

8 MEMBER WILLIAMS: Thank you.

9 MR. DAVIS: Okay. All right. Moving 

10 to the next topic. Thank you, Jim.

11 Next up we have Lisa Roy, Associate 

12 Director from the Division of Risk Management

13 Supervision. Lisa is going to address the FDIC's 

14 community bank technical assistance efforts. 

15 She's also going to talk about a related request 

16 for information that we are going to -- or we hope 

17 to issue next month.

18 MS. ROY: Thanks, Chad.

19 Good morning, everyone. As Chad 

20 indicated, we hope to issue a request for 

21 information next month relating to our technical 

22 assistance efforts for banks. The purpose of the 
29

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 RFI is really to seek public input on how to ensure 

2 our technical assistance offerings are effective 

3 and valuable.

4 We wanted to talk with you this morning 

5 to seek your feedback and suggestions on the draft 

6 request for information. We are going to walk 

7 through the areas in which we provide technical 

8 assistance, how we provide technical assistance, 

9 and some of the draft questions in the request for 

10 information.

11 If you look on slide 3, it highlights 

12 seven areas in which we provide technical 

13 assistance. I'm going to start with the first area 

14 of technical assistance videos. We started 

15 issuing technical assistance videos in 2013, and 

16 we have videos that are targeted specifically for 

17 bank directors and we have other videos that are 

18 targeted for bank officers and staff.

19 One of the questions in the RFI that we 

20 want to seek feedback on is how institutions have 

21 used the videos and if institutions can identify 

22 for us which videos are most helpful for directors 
30

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 and which are most helpful for officers and staff.

2 In December of last year, we issued an 

3 updated video on the Bank Secrecy Act and we issued 

4 that video using a new format. The new format is 

5 a voice-over format, and we moved to this format 

6 in an effort to reduce cost of producing the videos, 

7 but also to amend the videos more quickly. 

8 So we also want to seek feedback on the 

9 new video format -- do people like it or do they 

10 not like it? The prior format had people on screen 

11 as well as words on a slide in essence. We want 

12 to seek feedback on whether people think the 

13 voice-over format is effective. Then the last 

14 question we want to seek feedback on is, “Are there 

15 additional videos that we should consider issuing, 

16 are there videos that we should consider pulling 

17 down?

18 I want to move from there to our 

19 Directors’ Resource Center. Currently our 

20 Directors’ Resource Center on the FDIC.gov website 

21 is organized by product type. We have videos in 

22 one location and we have guidance in another 
31

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 location. We have rules and regs in a different 

2 location.

3 So one of the initiatives -- slides 5 

4 and 6 highlight for you where we want to head in 

5 this area. We think it would be more helpful for 

6 the industry to head to a topic-based resource 

7 center. The pages you see in front of you are pages 

8 that are not in production yet so you can't find 

9 them on the .gov website yet. We hope to issue them 

10 in the next two to three weeks.

11 This is a page in development. We 

12 started with the Bank Secrecy Act. This is 

13 essentially the format we want to move to. The 

14 left side of the screen would essentially highlight 

15 what the law is, what our regulations are, what the 

16 guidance is relating to this particular topic.

17 On the right side would be other 

18 information. In this case, it's the FFIEC 

19 examination manual. It's the video that we have 

20 outstanding. Then it's other information -- links 

21 to FinCEN, OFAC. So we want to seek feedback. We 

22 hope to issue this topic-based resource page on the 
32

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Bank Secrecy Act prior to or around the same time 

2 that we issue the request for information.

3 Using that resource page as an example, 

4 we would like to seek feedback from the industry 

5 on the format of this topic-based resource center

6 -- What suggestions do people have to improve it? 

7 Are there additional things that we should consider 

8 adding to these particular pages? And what 

9 additional topics should we consider developing 

10 resource pages for?

11 I'll move ahead to our director or 

12 banker colleges. I'm sure many of you have 

13 attended banker or director colleges. These are 

14 offered in each of our regions. They are offered 

15 on a varying schedule. Each regional office 

16 determines the subject matter for that particular 

17 one-day event based on questions that they've 

18 received and what they think the bankers want to 

19 hear about.

20 One of the questions we are asking is

21 -- Have you attended one of these events in the last 

22 two years? Are these one-day seminars helpful? 
33

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Is the length sufficient to meet your needs? And 

2 are there topics you would like to see addressed 

3 in banker or director colleges?

4 We also want to ask about our webinars 

5 and teleconferences. So we often host differing 

6 webinars or teleconferences on different topics. 

7 We want to ask -- are they useful and how could 

8 we make them more useful and are there particular 

9 topics you would like to see webinars or 

10 teleconferences on? 

11 We want to seek feedback also on how we 

12 announce the webinars and teleconferences. So do 

13 you feel you have sufficient time -- notice about 

14 these to adequately plan to participate? 

15 We also want to ask about the materials 

16 that we provide for teleconferences or webinars and 

17 how we can increase the effectiveness of those 

18 materials. Can you find them after the fact on our 

19 website? Typically it's slides that are 

20 available. Is there other information you would 

21 like to see related to those teleconferences or 

22 webinars?
34

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 The next area we have is our Community 

2 Bank Resource Kit. This Kit was originally 

3 created in April 2016 at the time we had the 

4 community banking conference. It was a nice 

5 take-away for the conference. We also sent one to 

6 each state non-member bank, and we had a supply of 

7 them available for the banker or director colleges. 

8 So people could attend the one-day events and have 

9 a take-away.

10 We want to seek some feedback. The 

11 product is about three years old so we want some 

12 feedback on the kits. How have they been useful? 

13 How could we make them more useful to board members 

14 and staff? What materials or information would 

15 you like to see in the resource kit? And how would 

16 you prefer the kit to be delivered -- electronic, 

17 hardcopy, or both? The April 2016 version was 

18 available only in hardcopy so that's why we want 

19 to ask if people would like to see it also available 

20 electronically.

21 The next two slides essentially 

22 highlight regional compliance newsletters. We 
35

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 give a picture of what one would look like. Each 

2 of the FDIC's six regions produces a quarterly 

3 compliance newsletter, and they are sent by email 

4 to all state non-member banks in the region. It 

5 provides information on FDIC initiatives, updates 

6 to guidance, common exam findings, and other 

7 topics.

8 In the draft RFI, we want to get some 

9 feedback on the compliance newsletters. Are they 

10 helpful for institutions? Is the delivery 

11 mechanism by email effective -- why or why not? Is 

12 there additional information you would like to see 

13 included in these regional newsletters, and what 

14 is your preference -- longer, more in-depth 

15 articles, or shorter articles that provide quick 

16 updates?

17 The next two slides highlight our 

18 Supervisory Insights Journal. That is issued 

19 semi-annually. We just want some feedback on the 

20 Insights publications. We publish articles of 

21 interest to bankers and examiners in the industry,

22 and we're asking whether people find the 
36

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 information in the Insights articles helpful and 

2 why or why not, and are there any topics that you 

3 would like to see covered in upcoming Insights 

4 publications?

5 Then, finally, we kind of wrap up the 

6 draft RFI by asking some general questions. We 

7 find it would be helpful if people could rank our 

8 technical assistance offerings in terms of 

9 utilities. So what do bankers find more useful;

10 is it videos, is it webinars, or teleconferences? 

11 Is that ranking different for board members versus 

12 officers and staff?

13 Finally, one of our other questions is 

14 what other methods should we consider to provide 

15 technical assistance.

16 Before I open it up to questions, I just 

17 want to touch on the timeline for the RFI. We hope 

18 to issue the RFI next month. It would be issued 

19 for a 60-day comment period so that roughly takes 

20 us through the early summer. Then we do the 

21 analysis in the summer and come up with next steps 

22 in early fall.
37

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 With that, I would be happy to take any 

2 questions or suggestions for the request for 

3 information.

4 MEMBER SHETTLESWORTH: Lisa, in our 

5 bank, we use the videos for our directors’ training 

6 and it's working out really well for us. Most of 

7 the videos are exactly where they need to be. Some 

8 are a little bit lengthy, which is understandable 

9 given the regulations. 

10 Just understand if we're using it for 

11 directors’ training in there, the attention spans 

12 aren't necessarily the longest for this stuff so 

13 I think it addresses the issues. My request would 

14 be just to focus on keeping it as short and concise 

15 as is practical.

16 Then when it comes to the notifications 

17 and the supervisory insights, one of the number one 

18 things I'm looking for in these publications is 

19 trying to identify regulatory hot buttons; what's 

20 trending in our region or in the area. That's a 

21 big thing for us every time those things come out.

22 MS. ROY: Great. Thank you.
38

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Hi, Tom.

2 MEMBER LEAVITT: Tom Leavitt, 

3 Northfield Savings Bank in Central Vermont. I 

4 just want to compliment the regional team, the 

5 northeast region, Assistant Director Marianne 

6 Hatheway; Bill Hardy, supervisory examiner out of 

7 the Springfield office in Massachusetts. They 

8 personally come to our directors’ colleges each 

9 year in Montpelier, our state capital. 

10 They put on a robust program bringing in other 

11 members of the regional team. Our directors 

12 attend. They take it seriously. There's a lot of 

13 feedback in the boardroom, particularly the first 

14 two board meetings after that directors’ college 

15 about areas of risk and supervision that you're 

16 highlighting in the directors’ colleges. 

17 I would say, at least in our case, more 

18 of the same to bring that level of resource to a 

19 small state suggests that the door is open and our 

20 folks willingly take on that opportunity.

21 MS. ROY: Thank you.

22 MEMBER PAINE: Tiffany Paine, Security 
39

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Bank, Bemidji, Minnesota. A couple of things. We 

2 also utilize the directors’ resources and they are 

3 great. I think they would shorten a little maybe 

4 if it wasn't the actors and the slides, although 

5 the actors were fabulous. 

6 (Laughter.)

7 MEMBER PAINE: Let's not discount 

8 their skills. But I do -- I looked at the new 

9 format for the BSA, and I thought that was 

10 effective. A lot of times people have different 

11 things going on so they will play it a few times 

12 and multi-task. Not that I'm suggesting that's 

13 the way we ask them to do it, but it's the way 

14 reality comes out.

15 The one thing I would say is if you go 

16 in the search area on the FDIC website, just a 

17 suggestion the way I found it was I searched for 

18 video, not training, not education. Make sure 

19 that your search aligns with what people are going 

20 to be looking for. If they are looking for 

21 education, it's a FIL that comes up on something 

22 else. I would suggest that.
40

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 As far as the articles, you're looking 

2 for longer, shorter. Personally, if they are 

3 coming to me, I want shorter so I can identify the 

4 appropriate individual that needs to look at them, 

5 source it to them, and then they would do the 

6 additional research. I want to make sure that they 

7 are getting to the right people. 

8 If it's too long, what I'm afraid if 

9 it's coming to me, I'm going to look at that first 

10 paragraph or that first sentence or whatever is 

11 going to grab me and I'm going to push it along 

12 anyway. It's a lot of time that you're spending 

13 on some detail that maybe wouldn't be as useful to 

14 me.

15 Hot topics for future, what we're 

16 seeing out there is Reg. O, a new conversation 

17 that's coming back. I mean, it's always there but 

18 it's hot right now, or whatever is going on. Then 

19 additional regulation videos if we are going to 

20 utilize them more as a resource for our compliance 

21 officers and our auditors and the staff in those 

22 areas that it applies to. Maybe just a little more 
41

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 regulatory detailed videos.

2 MS. ROY: Thank you.

3 MEMBER EDWARDS: Lisa, Jim Edwards, 

4 United Bank in Central Georgia. So overall I think 

5 there is -- when I received this I went out and 

6 worked with my compliance office to kind of 

7 refamilarize myself with everything that is on the 

8 website. There's a tremendous amount of resources 

9 out there so I think that's great.

10 You could probably make the same 

11 comment about when you look at our website, our bank 

12 website, but it can be hard to navigate to what you 

13 want. So, as much as possible, I think if you can 

14 clarify how to get to various items and try to keep 

15 them two or three clicks away without having to go 

16 really deep down to find something, that's helpful. 

17 It sounds like you're already doing that.

18 MS. ROY: I think that was really the 

19 rationale behind getting to the topic-based

20 resource page. It's one-stop-shopping so you can 

21 get there quickly, and you can find what you want 

22 related to that topic.
42

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER EDWARDS: Hot topics. My head 

2 compliance officer reiterated that anything you 

3 can do, that examiners can do, that will elevate 

4 items that are being found that are giving the FDIC 

5 concern is very helpful to him because he can then 

6 go back and get that elevated with our board and 

7 with our employees and make sure that we're working 

8 on that before our next exam.

9 The regional compliance newsletters 

10 are very helpful. That is used throughout our 

11 organization. When I asked why do we feel that 

12 way, the response I got was they are using 

13 real-world examples. That is so helpful. 

14 We're not just talking about a reg, but 

15 we're talking about here is what we are seeing 

16 happening, without naming names, of a local bank 

17 and here is what should be done to correct that 

18 issue so that's some comments.

19 MS. ROY: Thank you.

20 MEMBER EDWARDS: I've got more 

21 comments and I'll give those to you later.

22 MS. ROY: Great. Thank you.
43

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 CHAIRMAN McWILLIAMS: Thank you for 

2 being so kind about our website, it's not nearly 

3 as good as you all claim it to be, so we are actually 

4 working on revamping the website and making it more 

5 user friendly and making it easier to find things 

6 in general. Not just for the outside, but for our 

7 examiners since they are learning and on the 

8 internal side in terms of their access to documents 

9 and resources. We have some work to do, and that 

10 work is being done.

11 MEMBER EDWARDS: Thank you.

12 CHAIRMAN McWILLIAMS: Thank you.

13 MEMBER DONNELLY: Lisa, I have just one 

14 comment. Chris Donnelly, Bank of the Prairie, 

15 Olathe, Kansas. I reiterate what everybody else 

16 said but you've got a ranking question in here. I 

17 don't know that I would say rank them. As Tiffany 

18 does, I source these out to different individuals 

19 and the more details or specific information as 

20 quick as you can get it so they can take and utilize 

21 within that, or go search farther into the website 

22 and find things. I think if you start trying to 
44

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 put weight into it, maybe directors get more value 

2 than staff, individual staff who may miss some 

3 points. I think they are all equally important, 

4 just to who the receiver is.

5 MS. ROY: Thank you.

6 MR. DAVIS: All right. I have to move 

7 us along. Thank you Lisa, thank you Jim.

8 Our next topic is one of the more 

9 frequent topics that we hear discussion on, not 

10 only at these meetings, but when the Chairman and 

11 I do state visits it's one that comes up the most. 

12 That is the Bank Secrecy Act and required bank 

13 filings such as currency transaction reports and 

14 suspicious activity reports.

15 We thought it might be helpful to hear 

16 from FinCEN this morning about how these filings 

17 are used. We are pleased to have a panel from 

18 FinCEN -- Deputy Director Jamal El-Hindi, Senior 

19 Adviser for Strategy Erik Kiefel, and Chief of 

20 Trade, Investment, and Fraud Section Laura 

21 Richardson.

22 MR. EL-HINDI: Thank you, Chairman, 
45

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 and Committee for inviting us to be part of your 

2 discussions again today. I was last here in 2015 

3 and we very much appreciate the opportunity to 

4 speak with you directly.

5 Community banks for us are very 

6 important in terms of what they do, but they are 

7 also some of the more difficult institutions for 

8 us to connect with directly. This is an excellent 

9 opportunity for us.

10 I know that we're tight on time so I'm 

11 going to keep my remarks brief. I'm going to talk 

12 a little bit about the overall value of BSA 

13 information before I turn it over to my colleagues 

14 who will give you some specific presentations.

15 Please know that FinCEN and our law 

16 enforcement partners are able to do very important 

17 things with the BSA information provided by 

18 financial institutions like yours. The data plays 

19 a critical role in keeping our country strong, our 

20 financial system secure, and our families safe from 

21 harm.

22 We know your institutions put a lot of 
46

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 resources into complying with the BSA requirements 

2 and, understandably, you want to know what happens 

3 with the information you are sending and how it is 

4 being used.

5 When financial institutions like yours 

6 report suspicions about elder fraud, human 

7 trafficking, cyber crime, narcotics trafficking, 

8 terrorism, and other illicit activity, they 

9 provide incredibly valuable leads and ongoing

10 support for law enforcement investigations. 

11 Importantly, they make it harder for criminals to 

12 move and hide illicit proceeds in the financial 

13 system.

14 BSA data also aids ongoing 

15 investigations tied to bulk cash smuggling, gang 

16 activity, significant fraud, transnational 

17 organized crime, bribery, healthcare fraud, 

18 corruption, embezzlement, kleptocracy, and 

19 third-party money laundering among other crimes.

20 It doesn't go into a black hole. 

21 FinCEN has nearly 500 federal, state, and local law 

22 enforcement and regulatory agencies with direct 
47

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 access to the FinCEN database of BSA records. 

2 Within these agencies, there are an estimated 

3 11,000 active users of BSA data. 

4 These users include 149 SAR review 

5 teams and financial crimes task forces located all 

6 around the country covering all 94 federal judicial 

7 districts, including one in each state, and the 

8 District of Columbia, and Puerto Rico. 

9 The direct access comes through a system that 

10 we call FinCEN Query. In the last five years,

11 FinCEN Query users have made more than 10 million 

12 queries of the FinCEN database. 

13 BSA data is also vital for unmasking and 

14 investigating criminal tax evasion and other 

15 crimes. The Internal Revenue Service Criminal 

16 Investigation Section alone conducts more than 

17 126,000 BSA data queries each year and 24 percent 

18 of its investigations begin with a BSA source.

19 Financial intelligence is a key tool 

20 for FBI criminal investigations. All FBI subject 

21 names are run against the BSA database. More than 

22 21 percent of FBI investigations use BSA data and 
48

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 for some types of crime, like organized crime, 

2 nearly 60 percent of the investigations use BSA 

3 data. Roughly 20 percent of FBI international 

4 terrorism cases utilize BSA data.

5 On a daily basis, FinCEN takes the SARs 

6 that you file, and we run them through more than 

7 100 automated business rules to identify reports 

8 that merit further review by our analysts. Our 

9 terrorist financing-related business rules alone 

10 generate over 1,000 matches each month for review 

11 and further dissemination to our law enforcement 

12 and regulatory partners in what we call a flash 

13 report.

14 These flash reports enable the FBI, for 

15 example, to identify, track, and disrupt the 

16 activities of potential terrorist actors. It is 

17 incredibly valuable information. We push them out 

18 as flash reports because they have direct access 

19 to the data, but this is one way in which we can 

20 highlight certain parts of the data and bring it 

21 straight to their attention.

22 Over the past few years, two of the 
49

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 financial institutions in this room today have 

2 directly contributed to the development and 

3 dissemination of flash reports related to ISIS and 

4 other terrorist groups.

5 I'm not at liberty to provide more 

6 specific information due to the nature of the 

7 investigations, but this underscores the fact that 

8 the reporting of banks in this room and banks all 

9 over the country, large and small, that reporting 

10 is critical. I would like to quickly touch upon 

11 two important information-sharing programs that we 

12 have at FinCEN -- our 314(a) and 314(b) programs. 

13 With 314(a), which is about sharing 

14 information between industry and government, 

15 government and industry, on a roughly 

16 every-two-week basis, FinCEN reaches out to 

17 approximately 40,000 points of contact within the 

18 financial community to see if they have financial 

19 data that could be used to support a significant 

20 and specific money laundering or terrorist 

21 financing investigation.

22 In order for us to make these requests 
50

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 on behalf of law enforcement, they have to certify 

2 that the matter is of a high-level of significance 

3 and that they have exhausted all other means of 

4 investigation. In other words, when we send these 

5 requests out to support specific investigations, 

6 we do not send them out lightly.

7 When financial institutions receive 

8 requests, they check to let us know if they have 

9 any positive connection to an account or 

10 transaction matches. We then let law enforcement 

11 know so that they can follow up through appropriate 

12 legal channels with the financial institution.

13 Of the 17 financial institutions here 

14 today, seven of you have had at least one positive 

15 response to a FinCEN 314(a) request. That's 

16 nearly half of you. Again, these are significant 

17 money laundering and terrorism financing cases.

18 The feedback we receive from law 

19 enforcement speaks for itself. On average, law 

20 enforcement tells us that they identified 10 new 

21 accounts and 47 new transactions per 314(a) 

22 request. Based on the total feedback, 95 percent 
51

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of our 314(a) requests have contributed to arrests 

2 and indictments. I just want to thank you for the 

3 role that you're playing in that effort.

4 314(a), again, is about information 

5 sharing between government and industry. 314(b) 

6 is about information sharing between and among 

7 financial institutions themselves. After 

8 registering with FinCEN, this program provides 

9 safe harbor for institutions to exchange 

10 information concerning individuals, entities, 

11 organizations, or countries with respect to 

12 possible terrorism or money laundering activities.

13 FinCEN has approximately 6,000 

14 financial institutions currently participating in 

15 the program, five of which are in this room today 

16 so thank you for being part of this program. For 

17 those of you who are not yet participants, I 

18 encourage you to consider registering to 

19 participate in the program. If there are reasons 

20 why you're hesitant to register, I hope you feel 

21 comfortable raising that with me here or 

22 separately.
52

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 More and more we are recognizing how 

2 appropriate information sharing between and among 

3 financial institutions helps strengthen our 

4 collective ability to identify illicit actors, 

5 while at the same time recognizing the need to 

6 balance financial privacy rights.

7 314(b) can be particularly useful in 

8 helping financial institutions obtain a better 

9 understanding of their customers' sources of 

10 funds. And a focus on sources of funds is critical 

11 to your SAR filing obligations. 

12 Our review of SAR reporting indicates 

13 that more and more financial institutions are 

14 taking advantage of 314(b) for this purpose which 

15 is encouraging. We have a fact sheet on our 

16 website that talks about all of the advantages that 

17 314(b) provides and also talks about some of the 

18 mechanics of it as well.

19 If you have questions about the 314(b) 

20 program or anything else, our regulatory help line 

21 is just a call away. In total, banks in this room 

22 have made more than 64 inquiries into our 
53

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 regulatory help line since May 26 so we appreciate 

2 your engaging with us. 

3 On a yearly basis, that call center 

4 receives thousands of calls. I think it's close 

5 to tens of thousands at this point.

6 Overall, we get good feedback on our 

7 responsiveness, but use this as an opportunity to 

8 let us know of ways in which we can improve. 

9 On that note, I would just like to 

10 conclude by saying we feel that we have built a 

11 pretty strong system with our financial 

12 institutions, but that doesn't mean that we can't 

13 make it better. FinCEN is always reviewing our 

14 rules, our engagements with you to figure out if 

15 there are better and more efficient ways to do that. 

16 We are currently in the process of working with our 

17 federal counterparts right now to undertake 

18 another review of that.

19 I'm now going to turn it over to Erik 

20 Kiefel and Laura Richardson to talk in greater 

21 particulars. Erik is going to talk about a 

22 particular project that we have going on right now 
54

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 to make sure that we better assess the actual value 

2 of BSA data, and we are doing that because sometimes 

3 you have to make difficult choices in terms of 

4 everything is valuable, but sometimes some 

5 information is more valuable than others.

6 Part of what we're trying to do right 

7 now is to help financial institutions focus on the 

8 most valuable ways in which they can contribute to 

9 our efforts. Laura Richardson from our 

10 Intelligence Division is going to talk about 

11 specific reporting in the case of elder care fraud 

12 as an example.

13 Before I turn it over to them, I also 

14 want to take the opportunity to introduce Daniel 

15 Campos from our Intelligence Division. He's 

16 shadowing us today as part of a leadership 

17 development program. We're proud of the way that 

18 we try to work to develop and keep the talented 

19 staff that we have. Laura was part of that 

20 leadership potential program in the past. Both 

21 Dan and Erik were presidential management fellows 

22 at different points. At some point, Dan, you might 
55

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 be up here.

2 CHAIRMAN McWILLIAMS: I think that was 

3 a threat, so good luck.

4 (Laughter.)

5 MR. EL-HINDI: I'll turn it over to 

6 Erik.

7 MR. KIEFEL: Thank you very much. 

8 What I wanted to talk to you all about a little bit 

9 is the project that Jamal mentioned where we're 

10 looking at in really a thorough way trying to map 

11 out and catalogue as best we possibly can the full 

12 value of BSA reporting.

13 This is a rather unique project, and one 

14 that involves interacting with all the 

15 stakeholders from the community banks to the 

16 largest financial institutions, to the money 

17 services businesses, to our stakeholders like the 

18 FDIC that we partner with on a daily basis at the 

19 federal level, as well as with law enforcement and 

20 others at the federal, state, and local level.

21 The purpose of this project, which we 

22 just began at the beginning of this year, at the 
56

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 end of January, is to understand how extensive and 

2 how crucial that BSA value from your reporting is. 

3 Jamal already highlighted a number of aspects of 

4 it. 

5 What we hope to get out of this approach 

6 and this project is to be able to map out and 

7 catalogue across that array of stakeholders, 

8 across that array of activities, be they related 

9 to national security such as the ones Jamal 

10 mentioned, or ones that have very personal 

11 financial criminal impact on individuals that are 

12 your customers, which Laura will be talking to.

13 And understanding exactly where in that 

14 value chain, and that's how we're sort of thinking 

15 about it, is this value chain that comes from the 

16 institutions through FinCEN, through law 

17 enforcement, with the regulators, where that value 

18 is, how it can be -- how it is being maximized now, 

19 how it can be more effectively used going forward.

20 One of the things that we found out, and 

21 it's early, through this process is that the value 

22 is much more than does a single SAR, does a single 
57

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 CTR, lead to or facilitate a particular 

2 investigation. The BSA reporting value is much 

3 greater than that. Laura's examples will 

4 highlight that aggregation, that capability of 

5 bringing everything together that we at FinCEN are 

6 able to do along with our other stakeholders.

7 As part of this effort, we are trying 

8 to develop a clear understanding of that value 

9 chain, all the different elements of it, all the 

10 different participants of it, and how they 

11 contribute to it.

12 And, just as importantly, to Jamal's 

13 point on the regulatory review efforts, if you 

14 will, what happens when any part of that chain is 

15 interrupted, or diminished in some way, so that we 

16 can understand if we pull this string, what will 

17 happen, how will that value overall be changed, and 

18 is that going to be a positive thing or a negative 

19 thing for its overall use.

20 Also, we are beginning to understand in 

21 that more detailed way what the characteristics of 

22 that value are, trying to define those for the 
58

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 different purposes and stakeholders and users 

2 throughout. Not only at the end, but throughout 

3 that value chain itself.

4 What I can say right now is it's very 

5 clear that all stakeholders benefit from and create 

6 that additional value along that chain in some 

7 fashion. We just want to be able to actually show 

8 it to you and clearly identify it for you.

9 This value also isn't just a 

10 pass-through. It isn't just your reporting going 

11 through down to law enforcement and its use there. 

12 All along the line, there are different force 

13 multipliers. They are adding value and not just 

14 in a linear fashion, but in an exponential fashion,

15 to the underlying reporting that your institutions 

16 and other institutions are putting together.

17 The sort of final thing I would like to 

18 highlight on this is that as we're going through 

19 this project, we will be reaching out and 

20 interacting with all those stakeholders in some 

21 fashion. 

22 We want to understand everyone's 
59

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 perspectives on the value of that reporting that 

2 either is being developed within the institution 

3 or used by someone else along the chain, so we'll 

4 be going through this process over the next year 

5 to come with those key findings and ways of thinking 

6 about and viewing BSA value as we get closer to the 

7 end of the year. That is something to look forward 

8 to as we go through the year.

9 My colleague --

10 MR. EL-HINDI: Before you introduce --

11 I'm just going to provide one anecdote with respect 

12 to this study and the scoping of it and some of the 

13 difficulties that we have.

14 When we talk about the value of the 

15 information that we have, there are so many ways 

16 in which you can assess it, and one conundrum that 

17 we had, and we actually talked to the people who 

18 are trying to -- as part of government contracting 

19 you have to have certain sessions where you talk 

20 about your needs. 

21 We're trying to say how do we assess the 

22 value of something that may be reported now and we 
60

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 don't see any value in it right now, but 10 years 

2 from now it could be a crucial piece of an 

3 investigation. As Erik said, it's not just about 

4 things leading to a particular investigation or 

5 particular tip. 

6 We are finding all the complexities 

7 that are associated with how you value this vast 

8 array of information coming from a vast array of 

9 filers being used from a municipal law enforcement 

10 agency all the way up to the FBI. It's actually 

11 -- I'm very excited about the project and looking 

12 forward to the results we get.

13 MR. KIEFEL: So Laura is going to walk 

14 you through one of those examples that we've been 

15 talking about. This is an example that highlights 

16 that totality of the aggregation of the reporting 

17 being used in a value-added way. Quite frankly, 

18 in helping protect some of the most vulnerable of 

19 your customers.

20 Laura.

21 MS. RICHARDSON: Thank you, Erik, and 

22 thank you everybody for listening to me today.
61

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 So, as Erik pointed out I am going to

2 be talking about how SARs are used in aggregate on 

3 elder financial exploitation and in aggregate 

4 means every SAR that any of you has ever filed on 

5 elder financial exploitation has been or will be 

6 looked at in this way.

7 We've shared some of this information 

8 already with your compliance people in a webinar 

9 that we did last year.

10 We've shared some of this information 

11 in reports that the FinCEN Intel Division has done 

12 for the law enforcement and regulatory customers 

13 in the last year.

14 I'm going to be referring to slides that 

15 are in your packet if you want to look at those. 

16 And it's really talking about how government as a 

17 whole has been using the SARs in aggregate but also 

18 specifically to protect elders and catch 

19 criminals.

20 And my main collaborators in this area 

21 have been the Department of Justice and the 

22 Consumer Financial Protection Bureau. And really 
62

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 speaking for them, I can't tell you how useful they 

2 tell me the SARs are to their investigations and 

3 their protection of elders.

4 But as Jamal pointed out, this is just 

5 one use case for SARs. We're talking about elder 

6 financial exploitation because it's a large topic 

7 and it's an important topic that touches all of us.

8 But this governmental usage applies to 

9 any topic in the BSA that Jamal mentioned. So back 

10 to my slides.

11 So we have a checkbox on the SAR for 

12 elder financial exploitation. We've done a couple 

13 of advisories advising the financial community to 

14 use that checkbox when they file a SAR on elder 

15 financial exploitation and thank you very much. 

16 It looks like that has been working because we are 

17 getting large numbers of those SARs. 

18 So I'm flipping to my next slide which 

19 is the statistical portion of the presentation. 

20 And the headline, so the headline is there's been 

21 a big increase in reporting of elder financial 

22 exploitation in the SARs.
63

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 So this chart is basically counting up 

2 every SAR that was filed between 2012 and 2017. 

3 And you'll see the number of filings overall 

4 increased dramatically. Now we're getting about 

5 6,000 SARs a month on elder financial exploitation 

6 alone.

7 And then there's some color coding on 

8 that chart. It's breaking it down by industry. 

9 So the lower bars on the chart, those are the orange 

10 color, that's your industry. That's depository 

11 institutions as a whole.

12 And historically you guys have 

13 accounted for the majority of the elder financial 

14 exploitation SAR reporting, and your numbers are 

15 growing and that gray component of the bar is money 

16 services businesses which used to not file but now 

17 they file significant numbers of SARs as well.

18 So then we get the question well, why 

19 is that number growing? Is it because more elders 

20 are being exploited, or is it an awareness thing 

21 because there's been state regulations and 

22 advisories and other publicity around elder 
64

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 financial exploitation?

2 And we can't really answer. It's a 

3 chicken/egg question. It's probably some of both.

4 But the point, since the numbers are 

5 growing, it's good that we're doing something with 

6 those as a government. 

7 So flipping to my next slide, it's like 

8 well, what are the SARs are saying, exactly? And 

9 the bottom line in this chart is that the SARs are 

10 talking when you read the narratives and ask what's 

11 really going on about a mix of activity, primarily 

12 theft and scams.

13 And how FinCEN analysts reach this 

14 conclusion is a little behind the scenes look at 

15 our methodology. So we will read a statistically 

16 representative sample of the hundreds of thousands 

17 of SARs, and we start seeing themes in the 

18 narratives. Then we start tallying up how often, 

19 how many SARs fit this theme versus that theme.

20 So, in this case, we saw theft from 

21 elders was really the biggest theme in 38 percent 

22 of the SAR narratives, but it was followed closely 
65

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 by scams against elders. That was 36 percent of 

2 the narratives.

3 And then, another important point is,

4 in 17 percent of those SARs that the analysts 

5 reviewed, they actually couldn't understand the 

6 storyline well enough to assign it to any of those 

7 categories. So perhaps the SAR narrative wasn't 

8 very detailed, or it was vague.

9 And in those cases, of course, we 

10 appreciate more specificity and more detail in 

11 terms of understanding the story behind the SAR.

12 And in the interest of time you can read 

13 the other numbers. I'm going to flip to the next 

14 chart which to me is the most heartbreaking point 

15 in this presentation.

16 It's focusing on the SARs reporting 

17 theft from elders. And it's looking at the 

18 relationship between the elder victim and the 

19 perpetrator of the theft.

20 And the numbers tell us that in almost 

21 half of the SARs the perpetrator of the theft 

22 against the elder was a family member of the elder.
66

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And then, in another almost 20 percent,

2 it was a non-family caregiver. So, you put that 

3 together and it's like wow, two-thirds of the theft 

4 against elders is by someone who knows the elder 

5 and the elder probably trusts. So, sad point 

6 again.

7 Next slide is looking at the 

8 scam-related SARs. And the statistics here are 

9 using tens of thousands of SARs reporting scams and 

10 looking at the subject address information that you 

11 provide us in the SARs.

12 Because we know that many elder scams 

13 originate outside the U.S., we were really 

14 interested in this particular analysis because it 

15 helped give us an idea of where the money is going.

16 Usually the money is going back to the 

17 country where the scam originated. Nigeria is at 

18 the top of the list here. You could call Nigeria 

19 actually the birthplace of email scams. We think 

20 that that is why we get so many elder SARs flagging 

21 Nigeria.

22 Jamaica is also high on the list which 
67

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 we know from working with law enforcement is the 

2 birthplace of many of those lottery-type scams.

3 And then, India is high on the list 

4 which we know from Department of Justice is because 

5 so many of those technology-driven scams originate 

6 in India.

7 So next slide. So now we're moving on 

8 to --

9 MEMBER K. KELLY: Question, Laura.

10 MS. RICHARDSON: Oh, sure.

11 MEMBER K. KELLY: Just to be clear, is 

12 there not any of the scamming taking place in the 

13 U.S. or it's just not on the chart?

14 MS. RICHARDSON: It's just not on the 

15 chart. Really the bulk, the Bank Secrecy Act data 

16 as a whole is USA-centric. So typically for any 

17 given data set like 90 some percent of subjects will 

18 be U.S.

19 But we were looking at the foreign here 

20 leaving out U.S. more because -- the scams tend to 

21 be more foreign originated, but not exclusively.

22 MR. EL-HINDI: And I think that that 
68

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 slide was about how international scams break down 

2 in terms of the comparison of the different 

3 countries.

4 MS. RICHARDSON: Right.

5 MEMBER K. KELLY: Thank you.

6 MS. RICHARDSON: Sure. So, we're done 

7 with the analysis of the elder SARs, and now we're 

8 more on to stacks in terms of the FinCEN data 

9 system, the filers and the users of the data.

10 And I like this chart. It touches on 

11 a couple of points that Jamal already stated, but 

12 here you have numbers and you have a visual.

13 And the numbers are we have actually 

14 154,000 financial institutions, including all of 

15 you, reporting data e-filed into the BSA system.

16 And then a number on here Jamal already 

17 gave you. We have 11,000 federal, state and local 

18 law enforcement users that are authorized to pull 

19 out of our FinCEN query system. And they're doing 

20 27,000 queries a day in that system.

21 And they do include examiners, 

22 regulators, SAR review teams, national security 
69

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 customers. They also include the FinCEN 

2 Intelligence Division. And we alone are producing 

3 hundreds of intel reports a year that go out to the 

4 law enforcement and the regulatory and the national 

5 security customers.

6 So the data that you contribute goes 

7 into a system that is extremely valuable for a large 

8 audience of government users. And I'm not 

9 exaggerating when I say that I hear all the time 

10 that the law enforcement users get information out 

11 of the BSA system that is unique in their 

12 investigations or it's information that they would 

13 not have been able to obtain otherwise were it not 

14 for the BSA system. So really thank you for 

15 everything that you contribute into the system.

16 So, my last slide is describing very 

17 recent actions of two of the biggest federal 

18 government users of the elder financial 

19 exploitation SARs in particular.

20 And those are the Department of 

21 Justice's Consumer Protection Branch and the 

22 Consumer Financial Protection Bureau.
70

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 If you Google this, by the way, you 

2 would find tons of media reporting on the things 

3 that they've done recently.

4 The CFPB released a public report on 

5 February 27 on their website where they analyzed 

6 over five years' worth of the elder financial SARs. 

7 It's been a subject of a number of national news 

8 stories and we actually have one of the CFPB authors 

9 here in the room, Hector Ortiz. Hector has copies 

10 of the report that he will be happy to share with 

11 you or you can go to cfpb.gov.

12 Then on March 7 the Department of 

13 Justice announced what they call a sweep where they 

14 roll up -- this was over 200 cases and several 

15 billion dollars' worth of attempted crime against 

16 elders.

17 The focus there was on tech support 

18 scams originating in India, but they also 

19 publicized a story that you might have seen in the 

20 national news. It was actually the former CIA and 

21 FBI Director William Webster was an attempted 

22 victim of one of these Jamaican lottery scams, he 
71

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 and his wife. So they have been in the press.

2 They actually cooperated with the FBI 

3 on the investigations, wore a wire, and they're 

4 helpful in sort of personalizing the story of 

5 anybody can be a victim of the elder scammers. 

6 It's obviously useful when it's someone who can 

7 work with law enforcement and wear a wire. Good 

8 publicity.

9 And then, at this event, the attorney 

10 general stated that elder protection continues to 

11 be a top priority of DOJ. I know DOJ uses SARs as 

12 one of basically their top two sources of leads on 

13 all of these consumer protection investigations,

14 and they are literally looking at every SAR filed 

15 every month and triaging it to send leads out to 

16 the different U.S. attorney's offices for elder 

17 justice cases.

18 So, I hope that this has given you some 

19 insight into how FinCEN and its government partners 

20 are using your SARs on elders. 

21 But I again emphasize this is not just 

22 exclusive to elders. We do this with all the types 
72

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of SARs.

2 And my last point is speaking for the 

3 governmental users of the SARs again. They are all 

4 extremely grateful for the efforts that all of your 

5 compliance departments put into giving us SARs so 

6 we thank you very much. 

7 MR. EL-HINDI: And I'm just going to 

8 add one thing. And what I love about the CFPB 

9 report is that it shows how agencies other than 

10 FinCEN are developing the capability to analyze 

11 this data in aggregate.

12 And some of that comes from the fact 

13 that not represented here is our liaison division 

14 which plays a big role in training our stakeholders 

15 in terms of the value of financial intelligence 

16 generally and how to use the BSA data specifically.

17 So we run a series of courses throughout 

18 the year that are always over-subscribed by our law 

19 enforcement colleagues. And we're getting more 

20 and more of them to understand not just the value 

21 of the information generally, but how to use it 

22 specifically.
73

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And when we see efforts like those of 

2 our interagency partners that's the type of thing 

3 where we talk about value added or the exponential 

4 value added of the BSA that I think that we're going 

5 to learn more about through this study.

6 So with that I hope that there are some 

7 time for some questions.

8 MEMBER HANRAHAN: A couple of 

9 questions. Laura, your stats were great. Thank 

10 you. Very interesting, very informative.

11 Your slide 6 shows the very sad stats 

12 about family relationships to victims. Am I 

13 correct in assuming that where it's a 

14 family-related theft that that would fall to local 

15 law enforcement for further investigation and 

16 prosecution?

17 And if so, how receptive do you find 

18 local law enforcement to be to take that case on?

19 MS. RICHARDSON: Okay. I love that 

20 question. On a couple of our webinars we talked 

21 about how this applies to the financial personnel 

22 too at a local level.
74

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 The financial personnel at a local 

2 level are the ones that are best positioned to 

3 contact local law enforcement, also to contact the 

4 local adult protective services. Obviously 

5 without saying we're filing a SAR on this. Just 

6 heads up, look at this elder because the CFPB is 

7 out promoting this concept too as is DOJ.

8 You could prevent a lot of the theft if 

9 you can stop it at the local level. And adult 

10 protective services and local law enforcement are 

11 usually best positioned to try to stop it. Is that 

12 answering your question?

13 MEMBER HANRAHAN: It's helpful, yes. 

14 In general how receptive do you find local law 

15 enforcement to be to take interest in those cases?

16 MS. RICHARDSON: I can talk generally 

17 and not specifically. But generally this ties 

18 into what Jamal said too about the training. 

19 So when we do training for law 

20 enforcement on how to use this FinCEN query system 

21 we have been providing specific training, a lot of 

22 it for the local law enforcement customers on how 
75

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 you find the elder SARs in your jurisdiction in this 

2 query system because those are the ones you're 

3 responsible for.

4 And my sense, but this is kind of third 

5 hand is they're pretty receptive to finding that. 

6 They're pretty receptive to finding it.

7 MR. EL-HINDI: And I think with law 

8 enforcement just across the country different 

9 groups are going to be positioned in different ways 

10 with respect to their resources and their focus.

11 And so as Laura said training and making 

12 them aware of how this information can be used, how 

13 it can be used to make a case go more easily is 

14 something that we need to work on.

15 I think she's right, there is 

16 definitely an appetite out there for the use of this 

17 information for local issues.

18 Just the way that it works, some of our 

19 larger municipalities have direct access to the 

20 data through relationships with us. But many of 

21 the smaller ones will work through a state 

22 coordinator.
76

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 I think that that's something that 

2 we're probably going to be focused on as we look 

3 at BSA value and trying to make sure that in those 

4 local situations we're able to have the information 

5 used as effectively as possible.

6 MS. RICHARDSON: There is the 

7 federalized local too which is the U.S. attorney's 

8 offices, 96 of them I believe. So those people, 

9 main DOJ is acting as a coordinator and farming out 

10 the appropriate leads to every U.S. attorney's 

11 office. So they're getting that kind of local 

12 action too.

13 And then there may be local task forces 

14 involved in elder justice too. Because it is a DOJ 

15 priority as well as something of interest to the 

16 local and state law enforcement and adult 

17 protective services personnel.

18 MEMBER WALKER: Thank you for being 

19 here and learning about the project for looking at 

20 the value in the filings is really important. And 

21 again very welcome.

22 I don't know, you've talked about how 
77

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 you're going to go about it, but I think maybe 

2 soliciting feedback through the state banking 

3 associations would be extremely helpful versus 

4 picking out different banks so that everybody has 

5 an opportunity because I bet we all have examples 

6 that we could bring up like continuing to file the 

7 same CTRs for the same customer for the past 10 

8 years, those kinds of things would be good to be 

9 talking about. So thank you again for being here.

10 MR. EL-HINDI: And I'll just say that 

11 we do have state banking associations reach out to 

12 us and engage. And every time they have engaged 

13 with us we have talked about this project and said 

14 would you be amenable to having the consultants who 

15 are working on this project reach out to you. And 

16 the response is always yes.

17 MEMBER WALKER: Yes. Western bankers 

18 would be very much -- we would welcome.

19 MEMBER DAKRI: I think all bankers 

20 would welcome that actually.

21 MEMBER WALKER: It's like line up.

22 MEMBER DAKRI: That was one of my 
78

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 questions or my comments also would be well, we all 

2 understand as bankers this is a common goal for 

3 everybody in this room to make sure that we have 

4 the correct information that's out there.

5 But we also want to make sure that we 

6 balance a little bit of what we're reporting. SARs 

7 definitely are extremely important, but I have the 

8 same thing with CTRs where you're going on and on 

9 and on. And I don't know if there's a better way 

10 to do it instead of a daily or you know, is there 

11 a better way to aggregate, or some other method 

12 that's more modern than what we've been doing for 

13 the last 30-40 years that would be more useful.

14 MR. EL-HINDI: I'll just share with you 

15 that we have been focused -- first of all, CTR 

16 information is also incredibly valuable. One 

17 thing to keep in mind is that SARs are subjective 

18 reporting. CTRs are objective.

19 And so, when you combine those two,

20 there are force multipliers there. So, CTRs are 

21 very valuable.

22 We know that the aggregation issue is 
79

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 costly, and we know that a lot of money goes into 

2 CTR reporting and that not all banks are situated 

3 the same way.

4 So there have been some ideas that we've 

5 been discussing and the potential to experiment 

6 with different types of reporting that could come 

7 in that could give us the same value information, 

8 but try to reduce the cost as you know.

9 We have our -- you are able, for certain 

10 categories of cash intensive businesses to exempt 

11 those customers from CTR filing requirements. And 

12 we tried to improve that process several years ago 

13 to make it easier to take the exemption or to be 

14 examined for it with mixed success.

15 Even though we've tried to improve 

16 that, some financial institutions will say it's 

17 harder to monitor the exemption than it is to just 

18 provide the information. That's still a nut that 

19 we have to crack.

20 MS. RICHARDSON: Can I add a plug for 

21 the utility of the CTRs though in analysis is always 

22 very interesting to our analysts. When they see 
80

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 let's say CTRs on a subject who you don't think is 

2 in a cash business and there isn't a SAR as one 

3 example. Why is that professional walking to the 

4 bank twice a day and depositing cash? Does not 

5 make sense to me.

6 Or when we compare it to some of the 

7 other types of reporting that is supposed to be 

8 cash-related. Like there's the currency and 

9 monetary instrument report of the cash going in and 

10 out of the country across the borders. 

11 It's really funny sometimes to see, the 

12 bank says you deposited this much cash, but you 

13 didn't file that importation form. Where did it 

14 come from?

15 Or there's this form 8300 that trade 

16 businesses need to report for cash receipts. We 

17 often see either there's an 8300 filed, some 

18 business got X millions in cash and there isn't a 

19 CTR so where did it go, the mattress?

20 Or the vice versa, like the business 

21 deposits all the cash and you all file the CTRs and 

22 there was no 8300. We're like again where did you 
81

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 get the money if you didn't file this one. So CTRs 

2 are really useful in case work and especially --

3 basically for money laundering purpose. And 

4 fraud. So don't stop filing them.

5 MEMBER DEBIASI: Quick question. 

6 Fred DeBiasi, American Savings Bank in Middletown, 

7 Ohio.

8 Just curious with the CTR threshold. 

9 That's been in place I think since the late 

10 seventies, early eighties. Any thoughts on 

11 inflation adjusting that at some point? To make 

12 it easier for banks.

13 MR. EL-HINDI: The issue of thresholds 

14 always comes up. The last time that it came up in 

15 a concerted effort was around the time that I 

16 started at FinCEN.

17 And there was a lot of talk about 

18 increasing the threshold I think at that time from 

19 10,000 to 30,000 to take into account inflation.

20 The FBI at that point came in with some 

21 statistics in terms of just how much information 

22 would be lost, particularly in the terrorism 
82

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 context. And that issue began to die away.

2 I would just say that, and this is as 

3 we think about value and as we think about 

4 thresholds, our goal is not to respond to just 

5 anecdotes or ideas, but to actually have metrics 

6 that we can look at to see how those thresholds are 

7 set and figure out whether or not they need to be 

8 adjusted.

9 On the one hand, $10,000 doesn't pay for 

10 as much as it used to. On the other hand, $10,000 

11 in cash given the variety of ways that you can move 

12 money and use electronic debit cards, et cetera, 

13 et cetera, could be seen as more unusual now than 

14 it was in the past.

15 This is where we get to some of these 

16 tricky questions in terms of value. And as our 

17 director has said and the under secretary has said 

18 when it comes to thresholds we're going to study 

19 it so that we do it right and not -- yes, $10,000 

20 doesn't buy as much as it used to, but that's not 

21 the only part of the story.

22 MEMBER DEBIASI: That's a good point. 
83

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Is there other metrics that would be maybe more 

2 valuable than just the dollar figure, even if it 

3 was lower, higher, et cetera, that would be more 

4 helpful as opposed to just an arbitrary number that 

5 law enforcement --

6 MR. EL-HINDI: It's a good point and I 

7 think it's some of the stuff that Erik and the team 

8 that are focusing on value will actually be diving 

9 into.

10 MR. KIEFEL: To that point that exactly 

11 is the types of questions we're trying to answer 

12 through this project.

13 One of the ways we've initially begun 

14 to look at it is we publish every year and we give 

15 out awards to law enforcement agencies that put 

16 together and nominate cases that have used BSA in 

17 many cases very extensively.

18 And as part of that we recognize the 

19 institutions whose reporting was crucial and 

20 involved in those cases.

21 And one of the things that we've begun 

22 to look at is for those cases that won the awards,
84

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 as well as the nominated ones, how much would their 

2 case have been affected if the threshold had been 

3 higher.

4 And in some cases as much as two-thirds 

5 of the CTRs would have been gone. And those CTRs,

6 as Laura mentioned, connect through the 

7 transactional information different individuals, 

8 different entities. And those connections might 

9 be lost.

10 So that's the sort of thing that we're 

11 trying to understand better quantify and be really 

12 able to say with some assurety, this is what happens 

13 when you pull the string on that value chain in a 

14 way that's detrimental to it.

15 MEMBER DEBIASI: To your point about 

16 lower -- or the debit card transactions. You could 

17 probably make a counter argument that you could 

18 even make a case to lower the threshold which I'm 

19 not advocating by the way.

20 (Laughter) 

21 MR. EL-HINDI: You said it. Strike 

22 that from the record.
85

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 That's exactly the point. And then you 

2 think about the variety of different illicit 

3 activities out there where the threshold for 

4 third-party money laundering. 

5 You're talking about people who are 

6 professionals who are laundering millions of 

7 dollars. And then you compare that with the 

8 support for a terrorist act where the cash is going 

9 to be certainly much smaller.

10 These are some of the tough issues that 

11 we have to deal with when we come up with a system 

12 where we're trying to collect as much valuable 

13 information from all of you while at the same time 

14 being mindful of the resources that go into it.

15 MEMBER DONNELLY: A comment if I may. 

16 First of all, thank you for the information. I 

17 think the data that -- what it really is used for 

18 is very helpful and to take back and share it with 

19 the people who actually do it on the ground.

20 A comment on the 314(b). We use that 

21 and it is -- if you haven't used it, I would really 

22 encourage it. It does help us make a better 
86

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 decision and we appreciate that rule. When it came 

2 into effect, we decided to use it, and it has been 

3 -- we don't use it a lot, but it's extremely 

4 helpful.

5 The final piece on the exemption on the 

6 CTR, is there a process or a way that we can think 

7 through that we can request exemption back through 

8 the law enforcement agencies and put the onus back 

9 on them to tell us no.

10 Because I have the same as somebody has 

11 said, the same person been filing for the last 15 

12 years. If we can send in a request saying is this 

13 guy a bad guy, come get him, or if he's not a bad 

14 guy can we exempt him to where the responsibility 

15 is back to the law enforcement agent or whomever, 

16 whoever gets it to either bless it or to tell us 

17 no.

18 MR. EL-HINDI: It's an interesting 

19 point. Right now, the exemption process works by 

20 regulation. If the customer meets certain 

21 requirements, you get to exempt them.

22 But we have not incorporated into that 
87

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 anything specific that you might be able to obtain 

2 from law enforcement. It's an interesting idea.

3 MEMBER DONNELLY: Put the onus back to 

4 them. And they may not want that work, but it's 

5 the same work we're doing so it's a suggestion or 

6 something to think about.

7 MR. EL-HINDI: Thank you.

8 MEMBER SHETTLESWORTH: If I could just 

9 bring it into perspective a little bit. With Main 

10 Bank in Albuquerque, New Mexico, we're $142 million 

11 in assets, one location.

12 We have a whopping 14 employees. Five 

13 of those employees participate in filing of the 

14 SARs and CTRs. 

15 We have at least three of our 

16 individuals review every single CTR and SAR. We 

17 hire a third-party company to come in once a quarter 

18 and review 100 percent of our CTRs and SARs.

19 We feel that's our -- no one put that 

20 requirement on us. The FDIC certainly has, but in 

21 order to comply with our low volume we feel that's 

22 the only way to do it.
88

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And so my comment is that's excessively 

2 costly for small banks like us. And so anything 

3 we can do to make it a little bit easier.

4 I mean, I would love to raise the 

5 threshold. I understand it's not there, but if 

6 there's anything we can do on the smaller, low 

7 volume scale that would be hugely appreciated 

8 because this is just excessively costly in my view.

9 MR. EL-HINDI: And this is why we like 

10 this forum, and we like opportunities to engage 

11 with community banks because we know that the costs 

12 are high and we want to make sure that you 

13 understand just how valuable the information is.

14 And we do look for ways to try to provide 

15 -- to make it easier. 

16 I think you all would probably have seen 

17 the recent statement that FinCEN and the federal 

18 agencies put out with respect to resource sharing 

19 in this context.

20 We hope something like that for certain 

21 institutions can be at least one way to address some 

22 of the costs where there are certain things that 
89

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 you can do as a smaller financial institution in 

2 terms of engaging with others, with other 

3 institutions, potentially sharing certain costs or 

4 certain information that could be helpful.

5 That's just part of it, but we are very 

6 much aware of the concern that you have.

7 MR. DAVIS: Thank you very much. This 

8 is a great discussion. I apologize for having to 

9 cut it off, but we've gotten significantly behind 

10 here.

11 Thank you again to everyone for coming. 

12 I might suggest since we only have one break that 

13 we keep it, but if we could cut it to 10 minutes 

14 that would get us back here at 10:45.

15 And I will work with the schedule to try 

16 and get everybody a break for lunch right at noon 

17 again. Thank you.

18 (Applause)

19 (Whereupon, the above-entitled matter 

20 went off the record at 10:36 a.m. and resumed at 

21 10:51 a.m.)

22 MR. DAVIS: Just to kind of give 
90

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 everybody a preview, I thought -- I talked to 

2 Anthony and I think we're going to move the 

3 ombudsman update to the afternoon. And we'll keep 

4 the member discussion next as scheduled.

5 And then I talked to Keith and he 

6 thought he could get us up to our -- or get us out 

7 for lunch on time. So, we'll do -- in the afternoon 

8 we'll do the supervision update right after lunch 

9 and then we'll have the Ombudsman's Office update 

10 right before or right after the break, and then the 

11 Supervision Modernization Subcommittee update 

12 after that.

13 All right. So this is the second time 

14 that we are doing the updates from the committee 

15 members. I think for the new members I believe I 

16 talked to each of you on the phone to kind of give 

17 you a preview of what this was.

18 But we won't start with you so you can 

19 kind of see how this works. The basic idea is that 

20 each person gets a few minutes to talk about what 

21 they're seeing in their markets. It's really kind 

22 of free time to update us on whatever you think is 
91

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 most relevant. It could be your markets, it could 

2 be what you're seeing with your customers, it could 

3 be something unique to the bank.

4 I believe we started on this end last 

5 time so I asked Danny if he would go first this time. 

6 And I know Dave had complained --

7 (Simultaneous speaking)

8 MR. DAVIS: I do remember David 

9 complained he didn't have anything to say.

10 (Laughter)

11 MR. DAVIS: So with that, please.

12 CHAIRMAN MCWILLIAMS: Good luck Chris.

13 MEMBER D. KELLY: Well, thank you. 

14 Hometown Bank, Oneonta, Alabama, we're about a $360 

15 million bank.

16 Our primary customer base is wage 

17 earners and small business. Very diversified as 

18 far as employment, Birmingham and several areas is 

19 where most of our folks work and so it's -- we've 

20 got healthcare, automotive, you name it. It's 

21 pretty diversified.

22 In regards to the bank the biggest thing 
92

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 I think we all kind of felt this was the increase 

2 in deposit rates. It finally tipped the -- I know 

3 we had a member and I can't recall her name now, 

4 but she said they had done a study I think you guys 

5 may remember that at 2 percent that was the tipping 

6 point that if we ever got to 2 percent with deposit 

7 rates then we'd have people moving, that the betas 

8 would be an increase.

9 And I think that was true. And we had 

10 to play some catch-up to get there. 

11 I don't want to steal what David was 

12 going to say about that too, but I don't anticipate 

13 even though the Fed's on hold I don't anticipate 

14 that coming back. I don't anticipate -- I think 

15 the competition for funding is such that we're 

16 going to see that hold. I think the pricing is 

17 going to hold for funding.

18 From an economic perspective, and I'll 

19 tell you, we pay a lot of attention to our 

20 customers' activities. We count every swipe, we 

21 count every engagement. That's what we call it.

22 But any kind of activity that they're 
93

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 doing, loans, new accounts, down to items cleared, 

2 you name it.

3 And the reason we do that is because we 

4 have the information, and it kind of gives us a feel 

5 for the economy in general. Because when people 

6 are active they're doing something, they're buying 

7 -- commerce is taking place and that's what we like 

8 to do.

9 I will mention that we do quite a bit 

10 of one to four family on the books, in the 

11 portfolio. And, in December, we had a record month 

12 for those type of loans, but it was all front-loaded

13 demand because we saw a marked decrease in January, 

14 February and March.

15 And when we look at these metrics we use 

16 to gauge customer activity and gauge customer 

17 economic activity, I would say we're down somewhere 

18 between 17 and 20 percent.

19 So, I'm not too concerned that we're 

20 going to see a replay of the great recession, but 

21 this is really where the rubber meets the road.

22 We have about 20,000 customers so it's 
94

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 a pretty big sample. And I'm a little concerned 

2 that they're not as active as they were.

3 Small business, they got the big pump 

4 of the tax bill, but they're out of money now. I 

5 mean they ran through that. They found a place to 

6 spend it. It's not necessarily transferring over 

7 to the wage earner. So that's just again my 

8 perception from where I am.

9 MEMBER HANRAHAN: So I've been a banker 

10 in south Jersey for 30 years, and the economy in 

11 south Jersey is pretty darn good.

12 Business owner confidence is strong. 

13 Probably the biggest complaint is their inability 

14 to attract all the employees they want, but if 

15 you've got to have a problem that's not the worst 

16 problem in the world.

17 And costs are under control, and 

18 business owner profit margins seem to be good.

19 As Danny just commented, my biggest 

20 concern about banking conditions is the low, flat 

21 yield curve. 

22 And I thought about this as Jim Watkins 
95

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 was making his de novo presentation. I applaud and 

2 love all the work that FDIC has done to communicate 

3 that it's got an open door about de novos and 

4 sincerely wants them to be formed.

5 As I toy with the idea of -- if I were 

6 in that position today of starting a new bank, I 

7 don't think the biggest challenge would be raising 

8 the right amount of capital. I don't think the 

9 biggest challenge would be obtaining regulatory 

10 approval.

11 I do think the biggest challenge would 

12 be convincing myself that in today's yield 

13 environment I'm going to be able to generate an ROE 

14 that is the right ROE for my capital and for my 

15 friends and family who I ask to invest in a bank 

16 with the really challenging yield curve that we 

17 have today.

18 And as FDIC seeks ways to encourage more 

19 banks to form I think you've done a lot of good work 

20 to make sure that prospective bankers know what is 

21 required and to let them know that you're eager to 

22 see it happen.
96

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 I suspect that part of the reason, 

2 perhaps a big part of the reason there aren't more 

3 banks forming is it's just, it's a challenging 

4 capital thesis and investment thesis to make to be 

5 able to generate -- I think it needs to be a double 

6 digit ROE that you get to in a short period of time.

7 It seems to me that with today's yield 

8 curve and what it looks like it's going to be for 

9 a while that's a challenging condition for an 

10 existing bank and it's an especially challenging 

11 condition for a new one. That's all I've got.

12 MEMBER K. KELLY: So, I'll try to 

13 piggyback off of David and say that as you think 

14 about capital it is a challenge for in particular 

15 minority banks.

16 But the thesis I think David is 

17 proposing is that in the banking industry it is very 

18 hard if you're an interest income only institution 

19 to make the required returns for investment. I 

20 think that's what you're saying.

21 And so we're having to think through how 

22 do you look at supplementing through non-interest 
97

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 income and other fee structures that allow for us 

2 to kind of compensate that to generate a return on 

3 equity that will be suitable for investors.

4 But the bottom line structurally if you 

5 read the Fed Chicago's report, it just demonstrates 

6 for minority banks and the space that they play in,

7 it is a strategic and demographically challenging 

8 structure. And that's something that we have to 

9 address on a daily basis.

10 And so in my role as chair of the 

11 National Bankers Association which is about 92 

12 years old serving the minority community, that's 

13 an effort we're going to be focused on in looking 

14 at trying to find partners through the regulatory 

15 agencies, through business, industry, and 

16 legislatively to help us compensate and make some 

17 good decisions to be sure that we can tap into that 

18 market.

19 Now, why is that important? The FDIC 

20 has done a study on the underbanked and unbanked 

21 and as all of us know that is capital or cash that 

22 is outside of the banking system.
98

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 We also know that it disproportionately 

2 affects ethnic areas. And so we have a strong 

3 effort to look at how do we help shape and change 

4 those numbers and demographically make a 

5 difference in those communities.

6 So I'll say back to Detroit and our 

7 banking environment has been very positive. Many 

8 of you probably have heard all of the positive 

9 things that are going on in Detroit.

10 We have been fortunate to partake in 

11 some of that. Some of this is going to take a very 

12 long time to get to where we want to go, but the 

13 reality is we are in a very positive business market 

14 there.

15 There's one of the largest 

16 announcements of investment, Chrysler and Fiat, 

17 that just happened recently and so we're very 

18 pleased with what's going on in Detroit, and I would 

19 invite all of you to come and visit at some point 

20 in time and most importantly spend some money. 

21 Thank you.

22 MR. DAVIS: Thank you. Louise.
99

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER WALKER: Okay. Louise Walker, 

2 First Northern Bank, Dixon, California. 

3 Our markets continue to be healthy and 

4 locally we're focused on job growth, improved 

5 healthcare and infrastructure, education and 

6 regionally building an inclusive economy.

7 There is a movement out of the Bay Area 

8 because of the cost to live there to move to more 

9 rural and affordable markets. And so we're 

10 experiencing growth from that.

11 We're also experiencing intense 

12 competition for loans and deposits with continued 

13 underwriting requirements being somewhat lax.

14 Water has improved in California, but 

15 because our climate is so unpredictable we are 

16 looking at right now having impacts for pollination 

17 on trees for the upcoming season.

18 I do want to acknowledge chairwoman for 

19 coming out to California to the Western Bankers CEO 

20 Conference and visiting with us.

21 She asked for some feedback and so I'm 

22 just going to quickly go through some of the items 
100

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that bankers have asked me to talk about.

2 The first thing is the regional office 

3 in San Francisco and then of course the field 

4 offices that support that.

5 The safety and soundness examinations 

6 have been very refreshing. They have been focused 

7 on the big picture, and it's been conducted in a 

8 collaborative and fair and transparent manner, and 

9 it felt like a true partnership and so we want to 

10 thank them for that.

11 And also we appreciate the focus on the 

12 elimination of the outdated FILs and the 

13 supervisory advisory memos.

14 We would also like if FDIC would 

15 consider looking at CRA. I think that was probably 

16 the biggest item that came from the membership is 

17 CRA, focusing on consistency, what counts and what 

18 doesn't count, and that changes from one exam to 

19 another, that we need to look at how to define our 

20 assessment areas, raising the large bank asset 

21 threshold, and just the definition of small 

22 business doesn't work in California.
101

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And so CRA is very impactful to the 

2 rural banks in California and so looking for 

3 whatever help FDIC can do in that area.

4 Of course, the most costly and 

5 burdensome area is BSA. And so continuing to find 

6 a solution to reduce the number of CTRs and maybe 

7 looking at a seasoned customer exemption as we just 

8 talked about.

9 And of course cannabis, just what we can 

10 do, any help there to have a safe and better 

11 regulated system and safe communities.

12 One of the items is public bank. 

13 There's currently an effort to form a public bank 

14 in California. And right now there's three 

15 separate bills that are being proposed.

16 And so we would welcome the opportunity 

17 to sit down with FDIC and gain a perspective on the 

18 manner in which these entities would be insured. 

19 So that's an item that we're facing in our area.

20 Also, capital ratios. There's some 

21 concern about the 9 percent, that they would 

22 welcome more an 8 percent, keep it simple and 
102

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 optional. 

2 And I'm not sure about this, but it 

3 appears that if you drop under 9 percent that you 

4 could be subject to prompt corrective action 

5 because right now it's at 5 percent. You can opt 

6 in and opt out for a valid reason. And so the 

7 question is what would be involved with that.

8 And it may restrict some banks from 

9 opting in at all.

10 TRID. I know this is an item for CFPB,

11 but it's something we've been working on for a year. 

12 And so any help that we could get from FDIC would 

13 be very welcome.

14 And it has to do with TRID on 

15 construction loans that many rural banks got out 

16 of construction lending. And with the various 

17 disasters that have been happening in California 

18 and elsewhere we are looking for an exemption so 

19 that TRID would not apply to construction loans 

20 because -- well first of all, the disclosures can 

21 be confusing for customers and this would allow 

22 more banks locally to participate in construction 
103

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 lending like it was before TRID was implemented.

2 Just in general, there were comments on 

3 compliance and the level of detail required and 

4 reviews. So maybe focusing in on the compliance 

5 area.

6 And then some rural banks commented 

7 that they had received criticism on out-of–

8 the-area lending which they believe is necessary 

9 because there aren't a lot of opportunities in 

10 their market area.

11 And then I know we're going to be 

12 talking about it later, but the brokered deposit 

13 national rate cap, the scrutiny on liquidity and 

14 what is considered stable funding. Some banks 

15 have been surprised in the exam process that their 

16 level of deposits, or their deposits in certain 

17 areas have been questioned which they thought ended 

18 up being stable funding.

19 So that's just a rundown on some of the 

20 items. And again, thank you for coming to 

21 California. It was wonderful to have you.

22 CHAIRMAN MCWILLIAMS: It was a 
104

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 homecoming. Thank you.

2 MEMBER EDWARDS: I'm Jim Edwards, CEO 

3 of United Bank in Zebulon, Georgia, about an hour 

4 south of Atlanta.

5 I've known Louise for a while here. 

6 Great summary. I just want to say ditto, ditto, 

7 echo, echo.

8 Two comments just quickly there. Out 

9 of the number that she talked about there.

10 I do hope that the FDIC will continue 

11 to engage on CRA modernization. I know some of the 

12 other agencies appear to be moving on this, and I 

13 think FDIC has begun to do that as well so thank 

14 you. 

15 I think it's time to do that and I think 

16 it's time to look at how to continue to make that 

17 relevant in today's environment. So thank you for 

18 your efforts on that.

19 The capital rules, maybe we can have 

20 more time this afternoon to talk a little bit about 

21 that. I share your concerns about that. I'm 

22 hearing a lot of banks that are just saying I 
105

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 thought this was supposed to be regulatory reform, 

2 but it feels like if we fall below this new level 

3 that, is that really reform? A lot of concern 

4 about that.

5 And so obviously I think an 8 percent 

6 threshold would make a lot of sense because I don't 

7 think any banks are going to run at that threshold.

8 I mean I know we would not. Whatever 

9 the threshold ends up being, we're not going to be 

10 comfortable, our board won't be comfortable 

11 running right at that line. So again, quick 

12 thoughts on that. Maybe there's more time this 

13 afternoon to talk about that.

14 I am a relatively new member on the 

15 committee here so just as a quick reminder United 

16 Bank is a 110-year-old bank. We're located in 10 

17 contiguous counties south and east of Atlanta in

18 suburban and rural markets primarily.

19 Historically very much of a 

20 consumer-oriented traditional bank. Over the 

21 years have grown to also include a lot of commercial 

22 lending, trust and mortgage operations as well.
106

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 The Georgia economy though remains 

2 really strong overall, and we're excited to 

3 continue to be a part of that.

4 Georgia is fortunate that especially in 

5 the more metropolitan areas we continue to see 

6 solid population inmigration which is certainly 

7 helpful. And that's led to continued strong -- a 

8 strong number of housing starts which has helped 

9 fuel the economy and has obviously been helpful for 

10 our industry.

11 From a banking standpoint, statewide 

12 you'll find, in the more urban areas, you will find 

13 banks that our loan/deposit ratios have risen 

14 dramatically over a couple of years ago. 

15 Liquidity is becoming an issue. Deposit pressure 

16 is certainly there.

17 As you move into the more rural areas,

18 you will find that that's not the case as much. We 

19 are still running at a lower deposit ratio than we 

20 wish we were, frankly. And we are looking more for 

21 loans, although we have begun to see or continue 

22 to see I would say moderate loan growth this year 
107

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 as we've moved into this year.

2 Speaking to our bank specifically 

3 continue to see loan portfolio metrics that are 

4 probably the best I've ever seen in my career in 

5 terms of charge-offs and past dues and obviously 

6 I think any good banker, when things have been this 

7 good for this long we're all trying to look around 

8 the corner and see what may be coming next.

9 But so far at least in our institution 

10 we have not seen any deterioration in those 

11 metrics.

12 I will say that with this solid economy 

13 that continue being able to hire -- recruit and hire 

14 people has become more of a challenge for us than 

15 it was certainly a couple of years ago and that's 

16 something we've spent a lot of time working on here 

17 recently.

18 Making sure we're maintaining our 

19 staff. We run a call center that's open from 7 in 

20 the morning till 11 o'clock at night, seven days 

21 a week, and so staffing that today is more of a 

22 problem than it was historically. But that's 
108

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 something we've been able to work around and 

2 continue to do well.

3 In closing, I would just say we did 

4 recently just finish up a FDIC Safety and Soundness 

5 Exam. It was probably one of the most efficient 

6 exams that we've ever had.

7 I felt like there was much more work 

8 done offsite. We sent more information to our 

9 regional office or to our field office.

10 When the examiners showed up they had 

11 done a lot of work. And so that was appreciated. 

12 The safety and soundness portion was probably only 

13 active for a little over two weeks which was one 

14 of the quicker exams. So I did want to commend the 

15 FDIC for the efforts that have been made along those 

16 avenues to really make the exam productive and yet 

17 efficient as well. I think that's it for me. 

18 Thank you.

19 MEMBER DAKRI: Asif Dakri, CEO of 

20 Wallis Bank out of Houston.

21 We are probably a little bit more unique 

22 than some other banks here in terms of we're in 
109

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Texas, California and now Georgia.

2 From a macro level, I guess if I look 

3 at the cities we're in, in the Texas market, Dallas, 

4 Houston, San Antonio, still remain very strong. 

5 Economies are good. No real signs of significant 

6 slowdown at all in any of those markets.

7 Texas has seen an influx of people over 

8 the years coming from California and other markets,

9 and I think that will continue now with the new tax 

10 laws. A lot of the higher-income people are trying 

11 to get out of places like California because no 

12 longer a deductible on their SALT taxes.

13 We also see in Texas a lot of 

14 consolidation going on. The community banks are 

15 disappearing one by one. While they're still 

16 called community banks and now they're the $10 and 

17 $12 billion community banks as opposed to the $1 

18 and $2 billion community banks.

19 And I don't see that stopping anytime 

20 soon. As we see more and more players come from 

21 out of state into the Texas market, we see them 

22 picking up whoever they can to try and get that 
110

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 critical mass as quickly as possible.

2 That being said, competition is still 

3 strong. Everyone is looking for the same dollar 

4 in terms of deposits and the same loans so that 

5 remains very competitive.

6 If I look at our Los Angeles market, it 

7 is still doing well for us. We see that market to 

8 continue to be fairly strong. Unemployment has 

9 dropped down there. We have good numbers 

10 regarding our loans and our demand for loans. We 

11 don't see that slowing down anytime soon.

12 Atlanta, similar as what Jim just said 

13 there. Another strong market for us that's doing 

14 well.

15 If I drop down into kind of industries,

16 we see housing is still fairly strong, multifamily 

17 is still going and there's still construction 

18 moving there.

19 Retail growth in some of the cities such 

20 as Houston and Dallas, and San Antonio continues 

21 to be strong. I think that's just a function of 

22 migration of people coming into the market.
111

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 L.A. retail is still going, but we see 

2 a little bit of signs of slowdown there. 

3 Industrial growth has been strong across the board,

4 including L.A., which I think they have a shortage 

5 of industrial space so we see a lot of growth there. 

6 Ditto for Houston, San Antonio and Dallas in that 

7 respect.

8 Overall we don't see much of a slowdown 

9 happening. The bank has had great years. We've 

10 been fortunate to be in Texas over the last 10 years 

11 so we didn't have a lot of the issues that the rest 

12 of the country did have. So we've been just 

13 steadily growing as the days have gone on, and we 

14 believe that will continue for the next 12 months 

15 or so at least.

16 Rates are a concern with the yield curve 

17 and what will happen to our cost of funds and 

18 whatnot. We've seen obviously the deposit betas 

19 increase over the last 6 to 12 months.

20 We probably are in more 

21 hypercompetitive markets than some other people. 

22 In L.A., their CDs are reaching close to 3 percent 
112

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 at this time for 12-month CDs. Texas market, we're 

2 in the 2.65, 2.75, 2.85 for 12-month CDs.

3 We have seen recently people start 

4 dropping the longer end. So as we go 18 months, 

5 24 months out, we're seeing the pricing on the CDs 

6 start to come down. But short-term pricing is 

7 higher than I think all of us anticipated.

8 But overall the markets are strong.

9 MEMBER MALEY: Lori Maley, Bank of 

10 Bird-in-Hand. Bird-in-Hand Bank is located in 

11 Lancaster, Pennsylvania.

12 We actually -- I consider it an honor 

13 being the first bank granted a charter in the United 

14 States after the financial crisis.

15 We were the first bank in Pennsylvania 

16 in five years that was issued a charter at the time. 

17 We're actually the only bank that has been 

18 chartered as far as new startup banks in 

19 Pennsylvania.

20 We serve a unique community. We 

21 started with $17 million in capital and about 10 

22 employees when we opened the bank and now we just 
113

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 crossed our five-year anniversary mark in 

2 December, this past December, and we are up to $370 

3 million and have over 50 employees.

4 So hopefully that gives you some 

5 confidence that there are markets that really do 

6 want community banks.

7 We have two branches. We're actually 

8 looking to -- we have approval for a third branch. 

9 That should open in June.

10 What we found in the community is that 

11 there was so much demand. We deal with the Amish 

12 and Mennonite populations called the Plain 

13 Community.

14 So they drive horse and buggies. So 

15 their limit of travel circumference is very small, 

16 so 5 to 10 miles is basically their travel allowance 

17 in a horse and buggy.

18 So we had a lot of people asking us well, 

19 can't you come to our area. There's a lot of 

20 underbanked people in the southern parts of 

21 Lancaster County.

22 So what we did is we came up with what 
114

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 we think was an innovative idea. We built a mobile 

2 bank unit which is actually a 29-foot RV, has an 

3 ATM, has a walk-up window and actually has a 

4 facility where you go inside and open accounts.

5 And that mobile bank serves nine 

6 separate locations every week. So people know. 

7 And we try to strategically put it in locations that 

8 we know the Amish would frequent like the hay sale 

9 so they'll know that the mobile bank would be there.

10 What we've seen is what we expected that 

11 that will probably actually determine where we put 

12 our next brick and mortar branches because the 

13 locations we thought would be very successful have 

14 been incredibly successful.

15 DIRECTOR GRUENBERG: Lori, you want to 

16 tell everybody what you call your mobile bank?

17 MEMBER MALEY: We call it the gelt bus. 

18 And if you know anything about Pennsylvania Dutch,

19 gelt means money. 

20 They actually call our chief lender 

21 Bill O'Brien the gelt chappie which means money 

22 man. So we just extrapolated that.
115

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Even though the bank's only open five 

2 years, Bill has been a staple in that community. 

3 He's lent to the Amish grandparents, the parents, 

4 the children and now he's into the generation of 

5 the grandchildren. So it is a very 

6 family-oriented area.

7 Agriculture is very big in Lancaster 

8 County. Unemployment, Lancaster County is in the 

9 top 5 counties out of 67 for the lowest 

10 unemployment. So a lot of times our customers 

11 actually have trouble finding people to hire as 

12 well as us.

13 So I think the things that we're seeing 

14 in that market is some high loan and deposit 

15 competition. We're seeing competition with 

16 pricing.

17 Our bank has always had incredible loan 

18 demand. From the time we opened the doors, it has 

19 been just nonstop as far as loan demand. It's 

20 highly unusual.

21 We've had just several -- a couple of 

22 small delinquencies. No loans past due. No loans 
116

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 charged off. No loans over 90 days. So the 

2 community really reflects that mentality of paying 

3 back money. That's what they believe.

4 Deposit competition is incredibly --

5 we're noticing it a lot in the economy there. 

6 That's really our problem, trying to get deposits 

7 at a reasonable price to fund the loan growth.

8 I think what we also see in our area, 

9 not necessarily with us, but there's higher 

10 reliance on non-core funding. We really have 

11 taken deposits out of the community.

12 And we're willing at times to pay a 

13 little bit more to take that money and fund it for 

14 loan growth. I think we're seeing lower asset 

15 yields due to some higher concentrations in retail 

16 and commercial real estate lending.

17 And there are still some challenges 

18 relative to appraisals in some areas. So it's hard 

19 to find appraisers, it's hard to find appraisers 

20 for certain properties.

21 But just one comment, I wanted to thank 

22 the FDIC. I think you've done a great job bringing 
117

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 the de novo thought to the forefront. And I think 

2 it will be benefitting many communities.

3 I think with all of the growth we've 

4 seen in our market. You know, sometimes it's hard 

5 to manage as a startup bank. It's a very difficult 

6 thing to manage. But we do appreciate, and I think 

7 our community appreciates, having the chance to 

8 have that charter. So thank you.

9 MEMBER DEBIASI: Good morning. Fred 

10 DeBiasi, American Savings Bank, Middletown, Ohio.

11 I would like to start out by expressing 

12 my gratitude to the Chairman McWilliams and the 

13 FDIC staff for this opportunity to sit on this 

14 committee and to be here today.

15 I know we're certainly no question my 

16 bank has to be the smallest bank represented here 

17 maybe ever since the committee was founded at $43 

18 million in assets. So to have a voice here is truly 

19 an honor.

20 I will say I didn't realize being my 

21 first meeting that I would be given a microphone 

22 and a captive audience.
118

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 That being said, I promise I'll have my 

2 comments concluded by 6 p.m. tonight.

3 (Laughter)

4 MEMBER DEBIASI: In all seriousness, 

5 just to give a quick synopsis of our community in 

6 southwest Ohio.

7 Middletown, Ohio at one time not in the 

8 too distant past, the early sixties, we had the 

9 highest, third highest per capita income in the 

10 country. And really we're a microcosm I think you 

11 could say of what's happened throughout the rust 

12 belt and into Appalachia.

13 Today our income per capita in 

14 Middletown is less than $21,000. Our median 

15 household income is approximately $37,000 which is 

16 well below the state and national average. 

17 So you can kind of see what's happened 

18 in the last 50 plus years in our community.

19 And really to me it underscores the 

20 value of a community bank in a town like Middletown 

21 because truly we are a main source of capital for 

22 those in our community that may not otherwise be 
119

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 able to find capital.

2 And also we're an agent of change in 

3 solving problems where I think a more nebulous 

4 out-of-town bank just simply isn't going to get 

5 engaged in a community and help problem solve.

6 I can go into a lot of issues that we're 

7 facing. Certainly I'd be remiss if I didn't 

8 mention the impact that the opiate problem has had 

9 in our community in Middletown and the devastating 

10 effect it's had. And working through those 

11 challenges in our community has made everything 

12 more difficult from banking, quality of life.

13 The good news is in 2006 before the 

14 great recession we had our largest employer. 

15 We're a steel town. Our largest employer AK Steel 

16 had a lockout which was pretty devastating. We 

17 were just rebounding from that and then the great 

18 recession hit so we had a double whammy.

19 The good news is 10 years later we're 

20 resilient. We're on the I-75 corridor between 

21 Cincinnati and Dayton. Vacant buildings are down 

22 in our community. They're being absorbed.
120

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Housing is being absorbed in our 

2 community. So things are moving in the right 

3 direction. We're in the process of a downtown 

4 revitalization.

5 So with that being said I'm still 

6 bullish on our community. I feel like what the 

7 challenges are is again banking in today's day and 

8 age, and I can go on a lot of things.

9 I do want to echo what Jim said though 

10 as far as the FDIC. Our recent, most recent 

11 compliance exams really were a game-changer for us.

12 A lot of the heavy lifting was done up 

13 front. They were very streamlined. And 

14 literally our compliance -- our field group onsite 

15 was in and out in less than three days.

16 For a bank that has 11 employees, I 

17 can't tell you how much we appreciate that and the 

18 effectiveness of that exam. It means a lot.

19 Because even a very smooth exam for a 

20 bank of 11 employees, it's all hands on deck and 

21 it's lost productivity no matter how well it goes. 

22 And most times it goes well, but it's still lost 
121

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 productivity, and we certainly appreciate any time 

2 our regulators can help relieve some of that just 

3 burden of time more than anything.

4 I know we'll probably touch on some 

5 things later. I do want to mention just a couple 

6 of things really quickly in terms of on a higher 

7 level.

8 Again, as far as regulatory, being a 

9 state-chartered bank we feel the strength of the 

10 state regulator and FDIC partnership is vital.

11 We believe for the sustainability of 

12 our state charter and state charters in general it 

13 truly needs to be a partnership of equals. And 

14 we're hopeful that the FDIC will if they aren't 

15 already pursuing new opportunities to help educate 

16 our state examiners. We feel that's important.

17 One last comment I'd like to make is 

18 again on a larger scale. To some degree, we're 

19 envious really of what a champion the NCUA is for 

20 the credit unions.

21 And I know that there's a clear and 

22 critical role for the FDIC, but we believe the FDIC 
122

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 along with the OCC and the Fed could maybe speak 

2 to the strength of our country's banks as well as 

3 be more proactive in ensuring sustainability of 

4 traditional community banks in the face of credit 

5 unions abusing their intended mission and 

6 non-banks continually encroaching on our industry.

7 I believe the regulators could be a huge 

8 asset for our industry in pursuing laws in Congress 

9 regarding data security. If they did weigh in in 

10 our defense. And they would be a credible voice 

11 to help drown out irresponsibility on the part of 

12 retailers and other gatherers of data.

13 So again, a little bit of a macro level 

14 there but we would certainly appreciate again, I 

15 know the NCUA is certainly a cheerleader for their 

16 industry, and we're hoping maybe for more of the 

17 same from our federal regulators. Thank you.

18 CHAIRMAN MCWILLIAMS: So I've spent 

19 plenty of time driving up and down I-71 corridor,

20 and it's an honor and a privilege to have you here. 

21 I know how much those communities are struggling,

22 and it was important to us that you have that 
123

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 representation here as well. So thank you.

2 MEMBER LEAVITT: This is my first time 

3 at the table so just a brief introduction to 

4 Northfield Savings Bank.

5 We're a 152-year-old mutual 

6 headquartered in Northfield, Vermont, which is 

7 also home to Norwich University, celebrating its 

8 200th anniversary this year as the nation's first 

9 private military college. My dear friend 

10 President Rich Schneider has been at the helm since 

11 1993. So quite a remarkable story.

12 And one of his predecessors back in 1867 

13 founded our institution. We've been independent 

14 ever since. No acquisitions and never having been 

15 acquired.

16 We're just over $1 billion, and we have 

17 approaching $120 million in capital. We operate 

18 13 offices in central Vermont and the Champlain 

19 Valley and county, the Burlington area.

20 We have a roughly even mix of 

21 residential and commercial loans on our books. 

22 That's been heading in the commercial direction 
124

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 much more assertively in the last few years.

2 We've been growing at a high single 

3 digit rate overall.

4 We compete in a market for a small state 

5 that is very active with what I call legacy banks. 

6 These are institutions that were once founded and 

7 headquartered in my hometown of Burlington that are 

8 now carrying the flags of People's United Bank, TD 

9 Bank, Community Bank NA, Citizens Bank, and Key 

10 Bank.

11 And they control 90 percent of the 

12 deposits in the MSA. The MSA itself is just the 

13 three counties along Lake Champlain and 

14 northwestern Vermont that make up about one-third 

15 of our state population, state population being 

16 about 640,000 all in.

17 So that is our one metropolitan area 

18 that is relatively healthy and robust with 

19 educational institutions, high technology, legal, 

20 food services, and products. A good mix of 

21 entrepreneurialism and public service type 

22 positions make up our communities up that way.
125

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 We are now the largest bank 

2 headquartered in the state of Vermont by way of 

3 attrition. We don't have the largest market 

4 share, but now hold that distinction, that 

5 visibility and responsibility that goes with it.

6 As far as Vermont's economy, it's 

7 chugging along moderate to slow growth. It 

8 depends on the area of the state. It's very much 

9 a tale of rural versus the more vibrant 

10 metropolitan corridor.

11 We have low unemployment, sub 3 

12 percent, but we also have low job creation and labor 

13 force growth. So that's the dichotomy and the 

14 challenge there in a state that is aging.

15 Trying to get more diverse. In the 

16 urban area, we're about 4 and a half to 5 percent 

17 minority, but that's well shy of where we would 

18 certainly like to be. But it's growing.

19 Challenges. Our strategic 

20 imperatives right now are to grow our core deposit 

21 base. The generation of those core deposits are 

22 earned day in and day out in the trenches without 
126

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 doubt.

2 Our commercial growth has been 

3 impressive, and we continue to layer resources in 

4 there. But we have to keep it going to fill the 

5 vacuum that the legacy banks have created by 

6 pulling the decision-making out of Vermont to their 

7 decision centers in other states.

8 We are looking to appeal to the next 

9 generation of customers, not necessarily 

10 Millennials only. We define it as people that are 

11 coming into a first-time event anywhere in their 

12 life cycle and trying to say, “Okay, you're going 

13 through something. We have the solutions. We've 

14 designed these just for you. We want to talk to 

15 you.”

16 But that means we've got to really 

17 compete with the larger institutions for that.

18 And then IT and cybersecurity. We took 

19 up John Vogel on his invitation in 2015 to come to 

20 the Cybersecurity Assessment Tool briefing in New 

21 York. We came back and formed an Information 

22 Security Council that I lead and have our VP of IT, 
127

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 our CFO, our VP of Risk Management, our network 

2 administrator join me on every month.

3 We built a new operations center in 

4 Berlin, Vermont, near the state capital of 

5 Montpelier in 2015 and then we co-located a data 

6 center with a third party in another state to make 

7 sure we were running in realtime potential DR 

8 crossover. 

9 So we're trying to build our scale in 

10 terms of systems to -- I keep telling our folks it 

11 took us a century and a half to get to $1 billion. 

12 And doing the math if we continue on the track that 

13 we're on we'll be at $2 billion inside of 10 years. 

14 So we have to have the scale to go with that if we're 

15 going to capitalize.

16 From a regulatory standpoint, I just 

17 want to echo what I've heard around the table so 

18 far.

19 We had a recent safety and soundness. 

20 We too were impressed with the work that was done 

21 up front offsite. A new examiner in charge really 

22 came through in that regard, tackled the assignment 
128

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 well, brought in some senior people on support.

2 Where we got hung up wasn't in all the 

3 coordination between the FDIC and Northfield 

4 Savings Bank, it was -- my surprise like I've heard 

5 elsewhere this morning around the national rate cap 

6 and getting very intimate with that national rate 

7 cap and how it's impacting on the definition of our 

8 funding concentrations under the liquidity segment 

9 of the safety and soundness.

10 So, I believe there are flaws in that 

11 calculation. And I would certainly like to 

12 explore it to understand it better.

13 But we are careful about understanding 

14 our competitive conditions. We look at the same 

15 rate watch information that the FDIC does. 

16 We do a scatter plot on all our 

17 maturities including non-time transaction 

18 accounts to see where we're at on both our standard 

19 rates and our CD specials and we're clearly right 

20 in the market, not excessively above.

21 And to have that hanging over our head 

22 to the extent that with a nearly 12 percent tier 
129

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 1 capital ratio we would ever be considered less 

2 than well capitalized it could really impact on our 

3 growth plan.

4 So, if I don't get another opportunity 

5 to speak on that I'm just putting that out there 

6 now. So in that liquidity section of the exam we 

7 were kind of thrown off a little bit.

8 We also volunteered to be a test case 

9 for one of your regional offices on the Project Five 

10 standardized exporting of loan data which created 

11 a spooling effect in terms of getting connected 

12 with our core vendor, with the FDIC, with our IT 

13 shop.

14 There was really terrific support all 

15 around from all three parties. So there was never 

16 any contention. But we did volunteer to do that.

17 But I think net result is it probably 

18 cost us a good couple of weeks on loan review, 

19 getting the FDIC loan reviewers fully oriented to 

20 our data offsite and onsite.

21 And that led to a couple of issues 

22 relative to what we thought were impacting on the 
130

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 scope of the exam. 

2 So we're happy to have done it, we're 

3 glad we learned the lessons. We want to move 

4 forward. We agree with the intentions.

5 But I did hear from one loan reviewer 

6 that that individual's preference is still to be 

7 onsite because of the nuance and the qualitative 

8 factors relative to examining a loan book. It's 

9 really hard to do with data alone. 

10 I'm not going to say it's a purely 

11 subjective line of work, but there is subjectivity 

12 involved and there are other sources of data 

13 besides what you put through that pipe that help 

14 you understand where that loan is at.

15 So I'm sorry if I've overspent my time, 

16 Chad, in my first time in the box and I hope you 

17 invite me back.

18 I would say if there are any risks right 

19 now that we're all facing in Vermont it's the 

20 potential and the downturn for CRE concentration 

21 risk. 

22 You've got commercial and industrial 
131

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that are generally healthy. Anything that is real 

2 estate that is occupied based on the overall solid 

3 economic conditions.

4 But then it kind of gets a little bit 

5 sideways when you go into some of the more 

6 speculative pro forma projects, whether it be in 

7 hospitality or in general office.

8 Retail seems to be all right. 

9 One-to-four family or investment property real 

10 estate seems to be all right. 

11 But I would say everybody is waiting to 

12 see if we're going to have one of those anvil 

13 falling from the sky moments where all of a sudden 

14 the dynamics shift overnight as they did in 2008. 

15 I don't want that, but that -- I rest my case.

16 MEMBER EPSTEIN: Keith Epstein, 

17 Roxboro Savings Bank, Roxboro, North Carolina. 

18 We're located just north of Durham County and just 

19 to the east of Orange County. Makes up two points 

20 of the Triangle – Raleigh, Durham and Chapel Hill.

21 Person County has a population of 

22 approximately 40,000 people. We are a $225 
132

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 million asset institution in our 96th year of 

2 existence. We have $169 million in deposits and 

3 approximately $115 million in loans.

4 Our mantra is that we honor our past and 

5 build our future by giving every customer a banking 

6 experience to remember. And we like to think that 

7 that mantra expresses to our customers and 

8 prospective customers the passion that we have for 

9 serving the people in our communities.

10 And I must say it's inspiring to be part 

11 of this group and be with so many people from all 

12 corners of the country and regulators, examiners 

13 that share our passion for community banking.

14 The industry is alive and well. Not 

15 everybody knows that. We've gone into a mode of 

16 self-promotion if you will. 

17 Historically, we've been a bit humble 

18 and not pursued the spotlight, but we are now 

19 actively telling our story. We think we have a 

20 story to tell and a means of differentiating 

21 ourselves from some of the other institutions that 

22 serve our markets, the regional banks and the 
133

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 institutions that would suggest that they're 

2 community banks, but they're really much different 

3 in orientation and business model to Roxboro 

4 Savings Bank.

5 And we've been pleased. We've had a 

6 very positive reception the last few years. We 

7 have enjoyed profits that exceed budget, and the 

8 business model works. It is not a means for 

9 exponential growth, but that is not our objective. 

10 We're looking for sustainable growth and thus far 

11 we've been able to achieve it here recently.

12 Our directors have supported 

13 management's strategic initiatives and authorized 

14 investment in a new digital banking platform, 

15 online mortgage and consumer applications, an 

16 overhaul of our core system and our hardware, 

17 software, a complete infrastructure improvement 

18 initiative. 

19 And we think that that is going to be 

20 the foundation for our success in banking the next 

21 generation of customers in our market, but we are 

22 very intent upon not changing the mode in which we 
134

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 do business. We have no intent to discourage the 

2 one-on-one customer interaction relationship 

3 building experience that we think is really the 

4 root of our success.

5 We are fortunate to be in a healthy 

6 market. We are certainly benefitting from the 

7 growth in the Triangle. There's a lot of migration 

8 to our part of the country from some other states.

9 And as housing prices are increasing 

10 and the cost of living is increasing in the more 

11 metropolitan areas, the rural areas by extension 

12 are starting to see development and starting to 

13 benefit. And we are enjoying that experience.

14 Through the first quarter, or nearly 

15 through the first quarter, our loan production has 

16 reached almost 40 percent of our annual goal. So 

17 we are really not seeing a slowdown.

18 Housing prices year-over-year are up 3 

19 and a half percent. And just to give you some 

20 context there, the last few years housing prices 

21 have been up 5, 6, 7 percent. So that's 3 and a 

22 half percent on the heels of a few years of really 
135

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 solid growth.

2 Unemployment in Person County is at 3.9 

3 percent, and we are part of the Durham MSA and 

4 unemployment for the MSA is at 3.3 percent. Near 

5 record lows. So we're pleased.

6 We are primarily a housing lender. 

7 Most of our portfolio is comprised of mortgage 

8 loans. We originate and sell to Fannie Mae. We 

9 have a portfolio of about $48 million that we 

10 service.

11 That servicing income is certainly a 

12 valuable source of non-interest income. But more 

13 importantly perhaps is the retention of that 

14 relationship so that we can continue to serve that 

15 customer. That base is valuable in terms of 

16 cultivating new deposit relationships, 

17 originating home equity lines of credit, and then 

18 when and as rates fall, people move into new homes 

19 and so forth it's sort of a customer base that we 

20 can count on for recurring business.

21 So we are anxious about any reform of 

22 the GSEs. I know that's a topic of conversation 
136

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 on Capitol Hill and with the change in leadership 

2 at the Federal Housing Finance Agency.

3 We are certainly hoping that small 

4 institutions such as ours will continue to have 

5 equal access to fair pricing and that their 

6 mandates won't change even if their private-public 

7 ownership structure changes.

8 A couple of other challenges that we see 

9 as we look forward. Congressman Ted Budd in North 

10 Carolina has been gathering feedback, and he's 

11 expressed some concerns about CECL.

12 And in trying to provide him some 

13 meaningful feedback, we did a little bit of 

14 research, and granted this is over the course of 

15 probably 18 months, but we have participated in two 

16 full-day workshops, four webinars, two meetings 

17 with our ALLL software vendor, three internal 

18 committee meetings and countless hours spent in 

19 side conversation reading articles and white 

20 papers and so forth all in an effort to try to ready 

21 ourselves.

22 And based on our participation, the 
137

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 chief credit officer attended a workshop just last 

2 month and found that we were a little further along 

3 than some of our peers.

4 And we're fortunate that we don't have 

5 to adopt the standard until the second round 

6 because we're not publicly traded as a mutual.

7 But nevertheless we are concerned with 

8 the cost and time that we have had to invest and 

9 anticipate investing going forward.

10 We're a small bank. We have 30 

11 employees. And any time that our chief lending 

12 officer, myself, any of the other lenders have to 

13 spend on this project if you will, that is time that 

14 we are not able to devote to the customers that we 

15 want to be serving. So that's a concern.

16 And the seven different types of 

17 methodology that are there for the choosing. It 

18 is nice to have options and I know that the creators 

19 did not want to prescribe a particular methodology 

20 for calculating your reserve, but with so many 

21 choices we can't help but wonder if each time we 

22 have a new examiner or auditor come through they're 
138

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 going to question our choice. And it will just 

2 take some time to help them understand.

3 And then with the future forecasting, 

4 you know, the Federal Reserve is struggling to 

5 determine where the economy is going, what the 

6 appropriate course of action is going to be, and 

7 needless to say their resources far exceed ours.

8 So we're not eager to begin playing 

9 economist and a little concerned with how that may 

10 play out.

11 We think that we can provide some 

12 meaningful feedback if given the opportunity. And 

13 this is a great forum for that in that we have an 

14 abundance of capital really that's been 

15 accumulated over the 96 years of our existence.

16 So we're not concerned with a one-time 

17 capital event to bolster our provision, although 

18 there's certainly other things we'd rather deploy 

19 that capital for. But we're just concerned with 

20 the time it's going to take to run those 

21 calculations and then our ability to justify our 

22 approach and how we've gone about that. So, 
139

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 something else we are concerned with.

2 We are seeing in our market a bit of a 

3 relaxing of credit standards and what I would 

4 consider a lack of discipline.

5 In particular, there's a credit union 

6 with some significant market share offering 100 

7 percent financing for homebuyers. They do not 

8 have to be first-time homebuyers. They do not have 

9 to be low-to-moderate income buyers.

10 They will finance 100 percent of cost 

11 and closing costs I might add and are also beginning 

12 to originate equity lines at 100 percent loan to 

13 value. And as you can imagine, it's a challenge 

14 to compete with that.

15 We're not going to compete for that high 

16 loan-to-value business, but we are no doubt going 

17 to lose and continue to lose some market share to 

18 that particular credit union.

19 And then we have a couple of other 

20 credit unions who are fancying themselves as 

21 commercial banks if you will and are doing some –

22 what we would consider – commercial lending. So 
140

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that's a challenge.

2 But with that said, we have just in the 

3 last 60 days had three -- a warehouse and two 

4 industrial buildings that have sold and two of the 

5 buyers we had an opportunity to finance and they're 

6 making significant investments in the improvements 

7 to these facilities. And that is really a good 

8 sign.

9 We have not thus far seen any slowdown 

10 in our local economy, and we feel fortunate as a 

11 result. Thank you for the opportunity to be here.

12 MEMBER BESHEAR: My name is Dick 

13 Beshear. I'm president and CEO of First Security 

14 Bank in Oklahoma City.

15 I want to thank the chairman and Chad 

16 Davis for inviting me here today. I can't tell you 

17 how honored I am to be here. I am new on the 

18 committee and when I first got the phone call I 

19 thought back to my old boss and mentor Morrison 

20 Tucker who was one of the first employees of the 

21 FDIC in the early thirties.

22 And he would always tell me stories 
141

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 about the FDIC, how it got started and the things 

2 that he did. One of his accomplishments was 

3 writing the first examination manual, or 

4 developing the first examination manual.

5 CHAIRMAN MCWILLIAMS: Now I know who to 

6 blame.

7 (Laughter)

8 MEMBER BESHEAR: That's exactly right. 

9 But I've listened to everybody here. One of the 

10 things I have struggled with is comments on what 

11 would be meaningful to the group.

12 And much as Mr. Tucker passed the bank 

13 on to me I'm kind of at the end of my career and 

14 I can just probably sum up -- any banking is hard, 

15 but it's the most rewarding career I think I ever 

16 could have had.

17 We are a $50 million bank in Oklahoma 

18 City. Oklahoma City's economy is doing rather 

19 well.

20 We serve an underserved community, a 

21 low-income community. And that community has --

22 its fortunes have not risen the same level that 
142

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 everybody else's has.

2 We are in the process of transitioning 

3 from a day-to-day management and ownership to where 

4 we became certified as a minority depository 

5 institution last year.

6 We're very excited about the 

7 opportunities that would potentially provide for 

8 us.

9 We are also or I am also very excited 

10 about the new group of bankers that we're bringing 

11 on and the new ideas, the new viewpoints that they 

12 have.

13 Instead of waiting for outside 

14 developers to come in and redevelop northeast 

15 Oklahoma City a block at a time they have engaged 

16 with the community and are looking at incremental 

17 development finance and trying to maybe redevelop 

18 a storefront at a time.

19 And so I think at least in our case 

20 community banking northeast is in good hands in the 

21 future.

22 Again I agree with everything my 
143

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 brother and sister community bankers have said. 

2 There's lots of challenges out there, but I am 

3 honored to be amongst you all. And I'll wrap up 

4 my comments.

5 CHAIRMAN MCWILLIAMS: It's an honor to 

6 have you truly. Thank you.

7 MEMBER BESHEAR: Thank you.

8 MEMBER KIMBELL: Good morning. My 

9 name is Bruce Kimbell, First Community Bank of the 

10 Heartland in Clinton, Kentucky.

11 I'm also new on the committee and 

12 looking forward to serving and have really enjoyed 

13 listening to everyone as we worked our way around 

14 the table and around the country. 

15 So last night at the reception,

16 Chairman McWilliams said something about she 

17 wanted people from the middle and so that's where 

18 we are.

19 I just found out a while ago my friend 

20 here from Minnesota is at the headwaters of the 

21 Mississippi River and we're about halfway to New 

22 Orleans. So we have the confluence of the Ohio and 
144

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 the Mississippi as they come together.

2 So we're an ag bank. We have seven 

3 locations. We're about $225 million. Extreme 

4 western Kentucky and northwest Tennessee.

5 We found I guess our uniqueness in 

6 trying to fill that community bank niche as we've 

7 looked for communities and for areas to serve that 

8 maybe have a regional bank presence or have a little 

9 bit larger bank presence and we try to come back 

10 into that area and to bring more of a community bank 

11 perspective into that working with our customers 

12 and working with our borrowers.

13 Probably one of, if not the only, ag 

14 bank in the group. We're about 65 percent of our 

15 business is ag based, conventional cropping - corn, 

16 wheat, soybeans, poultry, swine, you name it, we 

17 do it. 

18 We're big users of the USDA guarantee 

19 programs to help us.

20 Our farmers are going through a little 

21 bit of a struggle right now. The last two years 

22 have not been the friendliest. Prices are down, 
145

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 commodity prices are down and crops necessarily the 

2 last year weren't the best because of some weather 

3 conditions.

4 But beginning to see some struggles 

5 there. But I've been blessed. This will be my 

6 30th year at the bank and I've seen the good times 

7 and I've seen the bad times. And so we'll continue 

8 to go through those and we'll continue to serve 

9 through those.

10 My board always looks at me and wants 

11 me to -- they want us to remain relevant to the 

12 marketplace and that's what we try to do. We try 

13 our best to bring everything that all of you from 

14 the big city, we try to bring it to the country. 

15 And that's always been our goal is to try that, to 

16 know our markets.

17 We live there. We've really tried to 

18 focus on having good local bankers serve the 

19 communities. And we know how important that is for 

20 people to live and to, in turn, work there. And 

21 so we find that just imperative for our success.

22 We've been blessed over the last five 
146

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 years to have a couple of acquisitions and to grow 

2 the bank to the present level that we're at right 

3 now.

4 But we too know that we have to continue 

5 to do that. That's just a must these days.

6 So we look forward, I look forward to 

7 hearing the conversations from around the table. 

8 But it's -- the great thing about rural America is 

9 it doesn't change that much. But that's also 

10 sometimes that's its worst too, it doesn't change 

11 that much. There's not a lot of growth there.

12 And so we always have to try to find 

13 those opportunities to expedite that and to help 

14 that as much as we can. 

15 Where we're located is a town of 1,000 

16 people. We have 25 jobs. We provide 25 jobs in 

17 that town. And that's an important factor that I 

18 think sometimes gets forgotten in our 

19 consolidation world and in our merger world is 

20 those jobs disappear.

21 If we were to sell tomorrow, there's no 

22 doubt in my mind that that 25 would probably become 
147

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 6 or 7. And our little town can't afford to lose 

2 those jobs.

3 And so our plan is to stay local and to 

4 stay there and to keep pushing the community bank 

5 piece.

6 Thank you for putting us on the 

7 committee. Lots of good small banks in the room 

8 today. And I enjoy seeing that. Thank you very 

9 much.

10 CHAIRMAN MCWILLIAMS: Thank you.

11 MEMBER SHETTLESWORTH: Alan 

12 Shettlesworth, Main Bank, Albuquerque, New Mexico, 

13 $142 million in assets.

14 We mostly serve the small, medium-sized 

15 commercial businesses and commercial real 

16 estate-related entities. Our average loan size is 

17 less than half a million dollars so we don't really 

18 play in the very big space.

19 Economically speaking, the state is 

20 doing great. This is the first time since I can 

21 remember the state actually has a surplus because 

22 of the oil-and-gas holdings at the state level.
148

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Keep in mind, that's a projected 

2 surplus and so if oil and gas stay fine, we're good. 

3 If they go down, then God help us.

4 And our legislature just finished a 

5 60-day session, and they passed a lot of laws and 

6 one of those was an increase in our state income 

7 tax for this year, and so I fail to see how that's 

8 going to help promote business relocating to New 

9 Mexico but those are the challenges we have.

10 There's a lot of opportunity, a lot of 

11 potential in New Mexico and the economy is doing 

12 fine. We're jealous of our neighbors though from 

13 Arizona, Colorado, and Texas. They all seem to be 

14 doing a whole lot better but you know, everything 

15 is basically green lights for us.

16 I'm starting this meeting a whole lot 

17 more ticked off than I had been in a while. We just 

18 had another institution this month sell that was 

19 based in New Mexico and so that will make four 

20 institutions that we have lost in the last 15 

21 months.

22 That's incredibly frustrating because 
149

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 when institutions come and acquire -- or when 

2 outside institutions come and acquire New Mexico 

3 banks they're not doing it for the lending, they're 

4 doing it for the deposits to loan elsewhere and that 

5 really ticks me off.

6 As a competitor, that's a fantastic 

7 story so I appreciate it. We don't even have to 

8 be that good, and they will just send business to 

9 us because of their out-of-state decisions. 

10 So that is very frustrating though 

11 because I think by March now we'll be down to 35 

12 banks and that number is continuing to decrease and 

13 so that's really frustrating.

14 A lot of the same comments here in the 

15 room, but I will say in the last two months some 

16 fascinating things have occurred in the rate side.

17 The first fascinating thing is 

18 literally two months ago for the first time in our 

19 13-year history I have seen Wells Fargo as one of 

20 the high rate payers in some CDs. That's never 

21 happened before.

22 And so in the interest of talking about 
150

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 FDIC cap on interest rates that banks can pay that's 

2 the first time I've seen it. It's usually credit 

3 unions that are on the top there and so now Wells 

4 Fargo is there which is just fascinating because 

5 you can obviously see now finally they may be 

6 getting some negative impact or be having some 

7 challenges with their public nightmare they're 

8 dealing with.

9 The other thing is loan rates. The 

10 bottom fell out for loan rates. And so we're 

11 having this pressure on cost of funds going up. 

12 And in the last I'll say six to eight 

13 weeks we have seen loan rates drop to rates that 

14 I didn't think we were going to see before.

15 I am either glad or sad, I'll tell you 

16 in two years, to report that we competed in a deal 

17 and won it. Our rate is pretty dang near 4 percent 

18 which I never thought we'd see that again. That's 

19 a one-off kind of anomaly.

20 I lost a deal this week which is another 

21 complete anomaly, let's say six or seven hundred 

22 thousand dollar loan. Nice credit. I thought the 
151

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 pricing would be in the fives, and we lost it to 

2 a big bank, one of Brand X banks, and their rate's 

3 like 4.7 or something like that, fixed for 10 years, 

4 20 amortization. So it's pricing is really 

5 aggressive all of a sudden. So that just tells me 

6 there's a lot of banks out there, a lot of 

7 institutions looking for money and looking for some 

8 type of yield and loans are where they're going to 

9 get it because you can't really get it anywhere 

10 else.

11 And so it's scary but also exciting 

12 because the community bank model is a very 

13 successful model. But that's real-time stuff that 

14 we're dealing with right now. So we are seeing 

15 both cost of funds go up and loan and earning asset 

16 yields go down. So it will be an exciting year. 

17 So thank you.

18 MEMBER WILLIAMS: I'm Len Williams 

19 from Utah. We're a little bank that's 

20 headquartered about 30 minutes south of Salt Lake,

21 but we do have operations in a larger market as 

22 well.
152

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 We've actually got branches throughout 

2 the state. We're about $2.2 billion in total 

3 assets with 25 branches.

4 It's been a good run. Utah is today the 

5 fourth fastest growing economy in the nation. 

6 Continues to grow. Technology is the fastest 

7 growing sector right now. A lot of that has to do 

8 with the California costs. So we've had a lot of 

9 major players move into the market that's really 

10 lifted the economy for us, the higher paying jobs 

11 back into the market. It's been a good run.

12 There's also a lot of infrastructure 

13 being built. If anyone's been through the Salt 

14 Lake airport lately, they're doubling their size, 

15 relocating just about everything. 

16 They've also created a new -- what they 

17 call the creation of an inland port which is kind 

18 of an intermodal transportation hub. A lot of 

19 warehouses. Another major Amazon warehouse there 

20 as well as others.

21 As far as us, I mentioned it's been a 

22 good economy for a long period of time. This 
153

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 organization has been around 105 years and focused 

2 predominantly in the past on real estate.

3 Over the last year, we've actually 

4 diversified quite a bit and brought some of those 

5 concentrations down. So we had a good year from 

6 an earnings perspective. It's a healthy market.

7 I've worked in a lot of different 

8 markets, and Utah is probably one of the markets 

9 that I would say is not overbanked which is a little 

10 bit unusual. So margins continue to hold up pretty 

11 well for us.

12 Our net interest margin is around 530,

13 so it's a big number for a community bank. And we 

14 were again a good year so we've been fortifying the 

15 balance sheet to be ready when things turn. But 

16 we're sitting on about 12.2 percent capital and 

17 getting a 14 percent return on that.

18 As managing a loan book is kind of like 

19 going to the airport, right? It's better to be two 

20 hours early than five minutes late. 

21 So as we continue to be cautious as we 

22 go and try to conserve and preserve some capital 
154

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 for acquisitions and such. 

2 It's been good but there's still a 

3 little nervousness having been in the business for 

4 42 years.

5 The reason I asked the question earlier 

6 on what type of de novos are you getting was -- it 

7 wasn't a trick question. I just, that's a tough 

8 business case, it really is. Low margins starting 

9 up in some of the markets.

10 And we're seeing a lot of the cost to 

11 develop products and services. For example, I did 

12 some research recently and Chase in 2016, their 

13 technology budget was $9.5 billion. How do you 

14 compete with that, right?

15 So the only way we can see is finding 

16 really good partnerships, the right fin tech 

17 partnerships, the right technology partnerships. 

18 And I think that's probably even an area for the 

19 FDIC.

20 As you're moving ahead historically 

21 losses in credit costs, bank problems have been 

22 driven by credit costs and a little bit of fraud.
155

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 I think the technology partnerships are 

2 going to be something that -- to pay attention. 

3 And even some guidance would be helpful for people 

4 like us in this business.

5 I think there's -- the CECL impact may 

6 be a little bit more than some think. Our average 

7 loan tenure is only 1.2 years, and our reserve's 

8 still going to go up a little bit as we move forward. 

9 So times are good. Still proceeding 

10 cautiously. And to get to lunch on time that's all 

11 I've got.

12 MEMBER PAINE: I'm Tiffany Paine from 

13 Security Bank in Bemidji, Minnesota. That's 

14 Bemidji. If you read it, you might come up with 

15 a different pronunciation.

16 We come from a small town, 14,000. 

17 About 20 miles out it's about 50,000. Ten 

18 financial institutions. We just had our CRA exam. 

19 Actually they said there's 10 or 12 in our service 

20 area. I don't know where the other two are hiding. 

21 I'm not exactly sure.

22 Very interesting. We actually happen 
156

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 to be a hub for the northwest region of Minnesota. 

2 So we're doing well. 

3 We have 750 jobs, mid- to high-level 

4 jobs coming in in the next four years. Whether 

5 it's the hospital, Delta Dental Insurance has moved 

6 a center to us, and then the university is expanding 

7 as well. The university, a technical college, 

8 arts community, great, thriving business 

9 community, wonderful.

10 A lot of the communities around us are 

11 having challenges. Their banks are selling. I 

12 can tell you of four banks if you look at the numbers 

13 in Minnesota the banks, community banks are going 

14 down and we have a lot of community banks in our 

15 state. 

16 It's where Independent Community 

17 Banking of America started in Minnesota. So it's 

18 sad. It's sad that we're losing a lot of the $50 

19 million banks because they can't cost justify 

20 running a business with 10 employees and being the 

21 compliance experts and the audit experts and all 

22 of these different things.
157

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 So we have, and I know there was notice 

2 that went out talking about sharing of services. 

3 And we do share services. We have for the last 

4 seven or eight years with other banks that are in 

5 towns of 500 people or 700 people where they're $25 

6 million banks or $50 million banks.

7 We've co-oped some of our audit and 

8 compliance services. So that works out well for 

9 them.

10 And then we also lead participations 

11 for those areas because they don't have the loan 

12 demand. How many loans can 500 people have?

13 So we're seeing some struggle in those 

14 areas and banks pulling out of those communities. 

15 If US Bank throws in an ATM that takes deposits,

16 it's not really a bank.

17 So it is a challenge in those 

18 communities for us to try to help them out and 

19 figure out their needs.

20 Locally what we're seeing is we have 

21 about -- a range of $12 to $15 million between four 

22 or five customers that we had to create repurchase 
158

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 accounts for, right.

2 And I know I brought this up before, but 

3 they have their auditors telling them that they 

4 have to move money out of our bank because it's only 

5 $250,000 insurance. 

6 So we are 100 percent loans to deposit, 

7 95 to 100 percent. So we don't have a huge 

8 investment portfolio to offset these repurchase 

9 accounts. So the reciprocal deposit movement has 

10 been very beneficial to us.

11 But I do think that it is something that 

12 maybe we can revisit on the FDIC level about the 

13 dollar amount of the insurance for those border 

14 customers and doing an analysis on that.

15 We unfortunately -- well, we had a lot 

16 of snow this winter. We had a lot of cold this 

17 winter. So we have fellow and neighboring 

18 communities, we're actually on sand base so we're 

19 not really -- no flood zones in our area.

20 But you get about 45 minutes west of us 

21 and they're going to see problems. So we are 

22 already seeing people moving towards sandbagging 
159

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 and getting emergency preparations ready for them. 

2 So we know that the Grand Forks and Fargo area, that 

3 Red River Valley area is probably going to see some 

4 issues. Obviously we know Nebraska is having some 

5 challenges now. So we need to make sure that we're 

6 working with our neighboring businesses.

7 I will not take up any more time. Thank 

8 you very much. You all did a great job.

9 CHAIRMAN MCWILLIAMS: Thank you, 

10 Tiffany.

11 MEMBER DONNELLY: Being last and 

12 hopefully not least, I'll be very brief so we can 

13 get to lunch. And I don't want to be holding up 

14 anybody from lunch. The only thing that would be 

15 worse is holding you up from a bar.

16 I'm Chris Donnelly, I'm president and 

17 CEO of Bank of the Prairie in Olathe, Kansas. 

18 Olathe is a southwest suburb of Kansas City, 

19 Missouri MSA.

20 In general, the economy is good. 

21 Unemployment has been below 3 percent for some time 

22 now. We actually touched 2.5 percent. 
160

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 We do have the same issues everybody 

2 else has. Deposits are difficult to come by. We 

3 are losing loans because of rates. If you pushed 

4 close to 6 percent, the customer is not going to 

5 be around. So those are difficult items.

6 We don't have much ag in the suburbs, 

7 but the ag economy is still struggling in Kansas. 

8 Our one farmer that we do have is quite large. 

9 Fortunately he has real estate that's in the metro 

10 so it helps a lot.

11 And just closing to get to lunch --

12 Louise, if you do have people that want to move out 

13 of the Bay Area, we have all the rural, over 70,000 

14 square miles of rural in Kansas.

15 And Bruce, I'm 252 miles away from the 

16 geographic center of the United States in Lebanon, 

17 Kansas, and that's 252 miles from Kansas City and 

18 that's only halfway across Kansas.

19 You’re welcome to come out. Louise, 

20 we’ll take all you can send. I will wait until this 

21 afternoon for more comments.

22 CHAIRMAN MCWILLIAMS: Thank you, 
161

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Chris. 

2 MR. DAVIS: Well, it is 10 after 12 so 

3 I'm going to suggest we go ahead and break for 

4 lunch. If we can start right at 1, there's a couple 

5 of segments I'm going to try and work into the 

6 afternoon without delaying anybody too much.

7 But great discussion and see everybody 

8 at 1 o'clock. 

9 (Whereupon, the above-entitled matter 

10 went off the record at 12:10 p.m. and resumed at 

11 1:07 p.m.)

12 MR. DAVIS: So welcome back. We're 

13 now going to provide the committee with an update 

14 on several supervisory issues. Since we have a 

15 number of presenters for the session I guess we --

16 we have everybody here. 

17 We'll break it up into two groups, first 

18 from Division of Risk Management. We have Doreen 

19 Eberley, the director; Rae-Ann Miller, an 

20 associate director who oversees the risk 

21 management policy area; Robert Storch, the FDIC's 

22 chief accountant; and Ryan Billingsley, a 
162

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 corporate expert on capital markets.

2 I'll now turn the program over to 

3 Doreen.

4 MS. EBERLEY: Okay.

5 CHAIRMAN MCWILLIAMS: Doreen, can I 

6 say something?

7 MS. EBERLEY: Certainly.

8 CHAIRMAN MCWILLIAMS: So I just want 

9 you to know, everybody here, that this is our 

10 supervisory -- this is our risk management division 

11 and our supervisory staff.

12 I think -- and I have to apologize to 

13 the staff. I have asked them to work so hard since 

14 I came here. I don't know if they've gotten any 

15 sleep. But I've always said open up any guidance, 

16 open up any rulemaking, tell me why we're doing it 

17 the way we're doing it. If we haven't touched this 

18 for 20 years, absolutely open it up. If we haven't 

19 touched it in two or three years, open it up.

20 And I just -- kudos to you. You have 

21 gone above and beyond the task in opening up 

22 everything and taking a look. And I seriously 
163

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 don't know when you slept for the last 10 months,

2 but I appreciate it.

3 So this is a team that's done a lot of 

4 that work. Thank you.

5 MS. EBERLEY: Thank you. All right, 

6 so for our first panel on supervision this 

7 afternoon, Rae-Ann's going to talk about the 

8 reciprocal deposit rulemaking which was issued 

9 last December. 

10 She's also going to cover the advanced 

11 notice of proposed rulemaking that we issued at the 

12 same time which sought comments on all aspects of 

13 the brokered deposit and interest rate restriction 

14 regulations.

15 Bob's going to cover some recent call 

16 report revisions and proposed call report changes. 

17 He's going to talk a little bit about some of the 

18 things that we're working on related to CECL 

19 implementation.

20 And then Ryan's going to address the 

21 community bank leverage ratio.

22 So I think all of these things were 
164

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 brought up this morning, and so this is your 

2 opportunity to engage with the folks that are 

3 writing the rulemakings and working on these issues 

4 and can answer any questions for you. So, Rae-Ann.

5 MS. MILLER: Thanks very much. I'm 

6 just going to talk a little bit about the deposit 

7 areas that Doreen mentioned.

8 So we finalized our regulation to 

9 conform with changes in we call it S-2155. I can 

10 never remember the full name of the law. It's 

11 long.

12 But basically to conform our 

13 regulations to the law. 

14 And basically the upshot of it is that 

15 most reciprocal deposits will no longer have to be 

16 reported as brokered deposits on the call reports.

17 So there are two limitations to that 

18 reporting. First of all, there's a general cap. 

19 So institutions that are well capitalized and have 

20 a composite condition of outstanding or good which 

21 corresponds to CAMELS ratings of 1 or 2 generally 

22 as of their last exam, or that have not obtained 
165

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 a waiver from the FDIC may except from being 

2 reported as brokered deposits qualifying 

3 reciprocals up to this general cap of 20 percent 

4 of the institution's liabilities or $5 billion, 

5 whichever is less of those two.

6 And then the law and the regulation 

7 provide for a special cap for institutions that are 

8 not well capitalized and not in outstanding or good 

9 condition.

10 They may except qualifying reciprocal 

11 deposits up to a special cap which is the lesser 

12 of either the general cap or the average of 

13 reciprocal deposits held during the last four 

14 quarters since the institution was well 

15 capitalized and in outstanding or good condition.

16 So there's a little bit of calculations 

17 involved if the institution falls below.

18 So there are some other limitations to 

19 be cognizant of in the law and the regulation and 

20 that is less than well capitalized institutions 

21 that do have the exception are still subject to 

22 statutory interest rate restrictions on all 
166

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 deposits, including reciprocal deposits not 

2 reported as brokered. That's a continuation of 

3 section 29 of the law.

4 The exempted deposit can't consist of 

5 funds obtained for the institution directly or 

6 indirectly by or through a deposit broker before 

7 submission of placement into the deposit placement 

8 network. So that's the change there.

9 We also talked about in December we 

10 issued an advanced notice of proposed rulemaking 

11 with our final regulation on reciprocals. And the 

12 ANPR is much broader.

13 And in that ANPR we have a lot of data 

14 and information and we asked for comments on all 

15 aspects of our brokered deposit regulation. The 

16 comment period is open through May 7, 2019.

17 While we asked for comments on 

18 everything, we are particularly interested in 

19 issues related to sweep deposits, deposit listing 

20 services, the statutory exceptions that are set 

21 forth and how we have interpreted those statutory 

22 exceptions, particularly the primary purpose 
167

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 exception.

2 We talk a little bit about software 

3 products, prepaid cards, some things that weren't 

4 necessarily around when section 29 was first put 

5 on the books.

6 And we also talk about the definition 

7 of the national rate. I know we have some new 

8 members here, but we did have a presentation on that 

9 I think at the last meeting.

10 And specific questions in the ANPR talk 

11 about classification of deposit brokers and 

12 brokered deposits and our interpretation of the 

13 law, how we've applied it as well as the calculation 

14 on the rate restrictions.

15 So again we encourage -- we've received 

16 about a dozen comments so far, but as you know with 

17 these things they usually come in on the last day. 

18 So we are encouraging everybody to comment, and 

19 we'll take it from there and see what further 

20 changes we might want to make to our regulations. 

21 So with that, that's all I had, Doreen.

22 MS. EBERLEY: Okay. Any questions for 
168

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Rae-Ann?

2 MEMBER EPSTEIN: May I ask a question, 

3 please? Keith Epstein, Roxboro Savings Bank, 

4 Roxboro, North Carolina.

5 The rate cap, that's a national rate 

6 cap. Has there been consideration to a regional 

7 rate cap? 

8 Earlier my colleagues all made 

9 comments, and we heard in varying markets the 

10 deposit rates are at varying levels. Of course we 

11 heard the same thing on the loan side. There's 

12 obviously correlation.

13 So that's maybe something worth 

14 considering.

15 MS. MILLER: Yes, I think that's 

16 certainly worth putting in a comment on.

17 We've considered a number of different 

18 aspects. The national rate is I believe set forth 

19 -- and I don't have my lawyer with me -- set forth 

20 in the law or prevailing market.

21 And the way we've interpreted 

22 prevailing market is a local market rate 
169

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 determination. So in those instances where --

2 sometimes we call it the community bank exception.

3 In those instances where a bank falls 

4 below well capitalized, they can come to us for a 

5 local rate determination rather than having the 

6 national rate apply. So there is a provision for 

7 that.

8 The difficulties with -- although I'd 

9 be interested in hearing your views and reviewing 

10 and thinking them through.

11 But the difficulties of having multiple 

12 caps is there's a balance between simplicity and 

13 bright lines and fair treatment. So trying to 

14 strike that balance.

15 MEMBER HANRAHAN: Rae-Ann, I want to 

16 say thank you for listening to the comment that I 

17 and a few others made about the issue of de novos' 

18 ability to enter into reciprocal deposits, and they 

19 have to be deemed brokered for a while until they 

20 have the first exam and they're well rated and all 

21 that.

22 And while I could tell you we're 
170

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 constrained by the law from what we can do, I felt 

2 like you created at least a pathway for a de novo 

3 to deal with that.

4 So, a corollary question I have for that 

5 is -- and I'm going to half look at you and half 

6 at Jim Watkins in the back row who made the de novo 

7 presentation this morning.

8 Given that if a de novo wants to enter 

9 into reciprocal deposits which for the reasons I 

10 set forth in my comment letter I think are -- they 

11 tend to be really good, local sticky deposits.

12 Is it plausible that a de novo could put 

13 in its business plan that it's going to do so,

14 acknowledging that they're going to be deemed to 

15 be brokered deposits for the first year, year and 

16 a half, whatever of their existence?

17 MS. EBERLEY: Yes.

18 MEMBER HANRAHAN: Thank you.

19 MEMBER DONNELLY: If I may, Rae-Ann, 

20 thank you. And I'm just looking over my comments. 

21 I see a typo in the comments.

22 MS. MILLER: I noticed that, Chris.
171

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 (Laughter)

2 CHAIRMAN MCWILLIAMS: Chris, how do 

3 you think you ended up at the very end?

4 (Laughter)

5 MEMBER DONNELLY: The technical piece 

6 of being regional, I'm a bank with two locations 

7 in the same city. That's it.

8 And I sent in with my comments a local 

9 rate. You can clearly see the differential, what 

10 I'm competing against. And I don't know what the 

11 technical or the mechanical piece of trying to 

12 separate our markets and rates.

13 I know that's probably impactive to the 

14 FDIC, but it's pretty impactive to a local bank who 

15 when you're using a completely different rate that 

16 may not even be close.

17 So I guess, I think that's a really 

18 important thing to consider. And I don't know what 

19 the math needs to be for regional people, gather 

20 your data for you, or how you gather that data.

21 But I did the research, and it's really 

22 clear that the numbers and who makes up the pool 
172

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of people that make up the average.

2 I kind of want to hear on what do you 

3 see in the market because now not only am I 

4 competing against every credit union in Kansas 

5 City, I'm also competing against hundreds of online 

6 people that are bombarding me with advertising for 

7 deposit rates that are way beyond what the market 

8 and what the rate cap is.

9 So have you looked at what the change 

10 in the environment has done for that? I hope that 

11 makes sense.

12 MS. MILLER: So yes. We changed the 

13 peg the last time in 2009 because of those changes 

14 in the market. We actually had a way of gathering 

15 data that wasn't envisioned in 1989and 1991 when 

16 the law first came on the books and was revised.

17 So we get the data actually from a 

18 third-party source and crunch it that way. That's 

19 not the only way to get the data, but that's what 

20 we do.

21 I was sort of referring to the 

22 difficulties of maintaining multiple -- well first 
173

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of all, like I said, I have to go back and look, 

2 but I'm almost positive the law requires us -- it 

3 does require us to set a national rate.

4 But to have and keep up with multiple 

5 rates and know which one would be applicable to you 

6 is very difficult. So the law provided a pretty 

7 flexible avenue for us that's worked pretty well 

8 for when a bank gets in trouble is to apply for this 

9 local rate determination.

10 For you, you might have two distinct 

11 markets, and we would react to those two distinct 

12 markets. I'm not sure if that's how it works in 

13 your area.

14 But again, we've got this ANPR. It's 

15 wide open. We're taking on all ideas, all comers. 

16 No matter where you set the peg is never perfect, 

17 or a peg, or multiple pegs is never going to be 

18 perfect.

19 The fact of the matter is rate 

20 restrictions are restrictions for a reason and they 

21 kick in when institutions become troubled. And so 

22 they're not meant to be a big benefit, but we want 
174

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 a balance between being punitive and being 

2 reasonable in those instances.

3 Working on all different aspects and 

4 looking forward to your comments. And without 

5 typos.

6 (Laughter)

7 MR. STORCH: Thank you. Good 

8 afternoon. As Doreen mentioned I'd like to touch 

9 on a few recent developments related to accounting 

10 and regulatory reporting for you this afternoon.

11 As you're aware, the banking industry 

12 and the banking agencies get closer every month to 

13 the effective date of the FASB's accounting 

14 standard on credit losses which introduces the 

15 current expected credit losses or CECL 

16 methodology.

17 The earliest mandatory effective date 

18 is nine months away on January 1, 2020 for so-called 

19 SEC filers, but early adoption of the standard is 

20 permitted in the first quarter of this year.

21 In response to the accounting change,

22 the agencies under the auspices of the FFIEC have 
175

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 finalized a number of revisions to the call report 

2 to accommodate the CECL methodology and a separate 

3 change in credit loss accounting for 

4 available-for-sale debt securities.

5 These revisions were announced in a 

6 financial institution letter from the FFIEC in 

7 early March which is included in your materials for 

8 this meeting.

9 Because the FASB's credit losses 

10 accounting standard includes different effective 

11 dates for three categories of institutions 

12 depending on their characteristics and includes 

13 this year's early adoption option, the changes to 

14 the call report begin to take effect as of March 

15 31, 2019, but will not be fully phased in until 

16 year-end 2022.

17 For example, you'll begin to notice 

18 gradual changes in terminology in the call report 

19 as the allowance for loan and lease losses becomes 

20 the allowance for credit losses on loans and 

21 leases, and after an institution adopts the new 

22 accounting, there also will be allowances for 
176

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 credit losses on held-to-maturity debt securities 

2 and on available-for-sale debt securities.

3 Because of the different effective 

4 dates for different institutions, the call report 

5 forms through the use of footnotes in the call 

6 report instructions will address which accounting 

7 terms and which call report data items are 

8 applicable to which institutions during the period 

9 the industry transitions to the new accounting 

10 standard.

11 Although these call report revisions 

12 will start to appear in the first quarter 2019 call 

13 report, we're not suggesting that an institution 

14 is required to adopt the CECL methodology any 

15 sooner than the effective date that applies to the 

16 institution under the accounting standard.

17 The call report changes taking effect 

18 this quarter also relate to the agency's recent 

19 final rule that provides for an optional three-year 

20 phase-in of the initial or day-one impact on 

21 regulatory capital of adopting the CECL 

22 methodology.
177

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 The call report regulatory capital 

2 schedule will include a new yes/no item for which 

3 an institution that has adopted CECL will indicate 

4 whether it has a CECL transition election in effect 

5 as of the quarter-end report date.

6 If so, the form and instructions will 

7 explain where the various transitional amounts 

8 should be included in the regulatory capital 

9 schedule during the three-year phase-in period.

10 These transitional amounts only affect 

11 regulatory capital and not the amounts the 

12 institution that has adopted the new credit losses 

13 accounting standard reports on the call report 

14 balance sheet and income statement.

15 As Ryan Billingsley will be discussing,

16 the agencies have issued a proposal for an optional 

17 community bank leverage ratio or CBLR for 

18 qualifying institutions.

19 The agency's notice of proposed 

20 rulemaking included for illustrative purposes a 

21 potential reporting format for a CBLR reporting 

22 schedule that could be included in the call report.
178

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 The banking agencies’ capital policy 

2 staffs working with the FFIEC's task force on 

3 reports have been developing a proposed one-page 

4 CBLR reporting schedule that we expect to issue for 

5 comment within a few weeks.

6 The comment period for this call report 

7 CBLR proposal will be separate from the comment 

8 period for the proposed CBLR rule itself so I was 

9 asked to briefly explain the process the banking 

10 agencies go through under the Paperwork Reduction 

11 Act or PRA to implement the CBLR reporting schedule 

12 as part of the call report.

13 As the first step in the process, once 

14 all necessary senior management approvals have 

15 been obtained, the agencies will publish a Federal 

16 Register notice for the proposed CBLR reporting 

17 schedule and related deposit insurance assessment 

18 revisions to the call report for a 60-day public 

19 comment period.

20 The FFIEC will notify all reporting 

21 institutions about this proposal and encourage 

22 institutions to comment on it in a financial 
179

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 institution letter that the FDIC will distribute.

2 A sample of the proposed CBLR reporting 

3 schedule and draft instructions will be available 

4 on the FFIEC's website during the comment period 

5 to assist you in understanding the proposal and 

6 preparing your comments.

7 At the end of the comment period, the 

8 FFIEC and the agencies will review the comments to 

9 determine whether the proposed CBLR revisions to 

10 the call report should be modified in response to 

11 comments, but also to align the CBLR revisions with 

12 the final rule on the community bank leverage ratio 

13 and the related assessment revisions.

14 As required by the PRA, the agencies 

15 will then publish a second Federal Register notice 

16 on the reporting revisions for a 30-day comment 

17 period and submit the final revisions to the call 

18 report to the U.S. Office of Management and Budget 

19 or OMB for review and approval.

20 The second Federal Register notice 

21 describing the CBLR reporting requirements cannot 

22 be published until the final rule for the CBLR 
180

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 itself is published.

2 The final CBLR reporting requirements 

3 would take effect the same quarter as the effective 

4 date of the final rule on the community bank 

5 leverage ratio, and institutions would be notified 

6 about the final reporting changes to implement the 

7 CBLR and the call report in a financial institution 

8 letter from the FFIEC.

9 Let me turn back now to the FASB's 

10 credit losses accounting standard. Since the 

11 standard was issued in June 2016, the agencies 

12 first issued a joint statement on the standard that 

13 same month and then in December of 2016 and 

14 September of 2017 we issued frequently asked 

15 questions or FAQs on the standard with a 2017 

16 document incorporating the FAQs originally issued 

17 in 2016.

18 The focus of these FAQs is on the 

19 application of CECL and other aspects of the new 

20 accounting standard as well as related supervisory 

21 expectations.

22 The agencies have developed some 
181

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 additional FAQs which we have combined into a 

2 single document with the existing FAQs, and we 

3 expect to issue this expanded set of FAQs very soon.

4 In the latest FAQs document, the 

5 agencies have updated the responses to three 

6 previously issued questions that are affected by 

7 the FASB's November 2018 amendment to the effective 

8 date of the standard for those institutions that 

9 are not public business entities to reflect this 

10 new effective date of the standard for these 

11 non-PBEs in the responses to those three questions. 

12 This effective date amendment means 

13 that non-PBEs as they're called that have a 

14 calendar year fiscal year would begin reporting 

15 credit losses under CECL in the first quarter of 

16 2022, rather than in the fourth quarter of 2021.

17 The new FAQs document also includes 

18 minor technical and editorial changes to certain 

19 previously issued FAQs. 

20 It will also signal that the agencies 

21 plan to issue proposed supervisory guidance on the 

22 allowance for credit losses under CECL before year 
182

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 end.

2 This supervisory guidance when 

3 finalized would replace the agencies’ 2001 and 2006 

4 allowance policy statements for institutions as 

5 they adopt the new accounting standard over time.

6 Until then, each institution should 

7 continue to follow current U.S. GAAP on impairment 

8 and the allowance for loan and lease losses, and 

9 to refer to those two existing allowance policy 

10 statements.

11 Finally, the banking agencies will be 

12 hosting an interagency webinar for bankers on the 

13 weighted average remaining maturity or WARM method 

14 for estimating allowances for credit losses on 

15 Thursday, April 11 from 2 to 3:30 p.m. Eastern time.

16 As with the two interagency banker 

17 webinars on CECL that the agencies conducted in 

18 2018, representatives from the FASB, the U.S. 

19 Securities and Exchange Commission, and the 

20 Conference of State Bank Supervisors will also be 

21 participating in this webinar.

22 Because of questions that have been 
183

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 posed to the FASB, the FASB issued a staff 

2 question-and-answer document in January 2019 

3 confirming that the WARM method is one of many 

4 acceptable methods that can be used to estimate 

5 allowances for credit losses for less-complex 

6 financial asset pools under CECL.

7 That FASB staff Q&A document is 

8 available on the FASB's website and its text is 

9 consistent with information the agencies 

10 communicated in their February 2018 banker webinar 

11 that discussed practical examples of how smaller, 

12 less-complex community banks can implement CECL.

13 Institutions that participated in a 

14 previous CECL webinar may already have received 

15 registration information about this upcoming April 

16 11 webinar from the Federal Reserve whose 

17 facilities are used for these events.

18 The FDIC will be sending a financial 

19 institution letter to all of our supervised 

20 institutions about the webinar in a few days.

21 Thank you and I look forward to your 

22 comments and questions. 
184

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER EPSTEIN: May I make a comment 

2 please? The first comment is back in 2017 I 

3 believe, and there have been subsequent webinars, 

4 but I think that was the first that we had an 

5 opportunity to participate in and perhaps the first 

6 that you offered.

7 It was very informative, and we have 

8 sent emails since to the designated site for 

9 questions and the responses have come promptly and 

10 have been very concise and easy to interpret. So 

11 I appreciate that. There may be more questions 

12 forthcoming.

13 The other question I have is has the 

14 FDIC made any attempt to estimate how the average,

15 I guess, provision will be affected across the 

16 industry. How many millions or billions or tens 

17 of billions of dollars do you all anticipate will 

18 have to be added to the reserve?

19 It sounds like there's pretty much 

20 consensus agreement that most banks if not all will 

21 need to increase their allowance. Is that your 

22 finding?
185

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MR. STORCH: You're correct that the 

2 expectation is that most banks would have to 

3 increase their allowances because the new model is 

4 forward looking and it looks at losses over the 

5 expected -- the lifetime of contractual term of 

6 loans and maturity debt securities and then the 

7 modification to available for sale.

8 So the expectation is except perhaps 

9 for the very shortest term loans there would need 

10 to be an increase.

11 There's no real good way of forecasting 

12 that I know what the overall effect would be because 

13 it's going to depend on the composition of each 

14 bank's portfolio and the underwriting practices 

15 they use, what their allowance levels are going 

16 into the effective date and also what the forecasts 

17 are for the credit risk drivers that are key factors 

18 in estimating collectability.

19 So what the agencies have done since we 

20 can't really come up with an overall estimate is 

21 do some what I would call sensitivity analysis 

22 where we look at, okay, if institutions had to 
186

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 increase their allowances by 10 percent, by 25 

2 percent, by 50 percent even going up to 100 percent,

3 which we don't think is likely, early numbers we're 

4 hearing because of state of the economy right now 

5 is not a very huge increase, a smaller increase than 

6 may have originally been anticipated.

7 Looking at those numbers the effect on 

8 capital ratios, of course not knowing what's 

9 actually going to happen between now and the 

10 effective date, only a small number of institutions 

11 really have any material problem, particularly in 

12 PCA categories. 

13 So that at least gives some comfort that 

14 it shouldn't have an adverse effect on the industry 

15 as a whole. That's the type of analysis we've been 

16 performing periodically as we get a new quarter's 

17 worth of call report data.

18 MEMBER EPSTEIN: One other question if 

19 I may. We use the FDIC state profile information 

20 on a quarterly basis as we work on our 

21 qualifications, the qualified adjustments rather.

22 But of course that's looking at prior 
187

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 quarter trends in terms of asset quality and 

2 unemployment and bankruptcy filings and so forth.

3 Will there be any data forthcoming from 

4 the FDIC that we may be able to use as a resource 

5 as we do our forecasting?

6 MR. STORCH: We have been looking at 

7 that and I think some of the information at least 

8 we have been considering is several different 

9 Federal Reserve banks and so forth do some 

10 forecasting.

11 They may not be at the state level per 

12 se, it would be more for the Federal Reserve 

13 district and that may be a source to supplement the 

14 current condition type data that's maybe more 

15 readily available.

16 But sources like that that have a degree 

17 of credibility and are relevant to your particular 

18 portfolio, whatever key drivers you're looking at 

19 now, are likely to be the same drivers on a 

20 forward-looking basis. There may be some newer 

21 ones that come into play.

22 But information like that if there are 
188

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 local or state government economic development 

2 authorities that may have those types of forecasts, 

3 local universities, the economics departments may 

4 have that type of information. So those types of 

5 sources particularly for community institutions

6 where the information is more localized than 

7 certainly national would be reasonable sources of 

8 information to -- on which you can base the 

9 qualitative adjustments you might think are 

10 appropriate for your particular portfolios or 

11 subportfolios within the entire loan portfolio.

12 MEMBER EPSTEIN: Thank you for the 

13 suggestion.

14 MS. EBERLEY: Bob, one other question 

15 that came up this morning was just a concern that 

16 while there's an appreciation that there are lots 

17 of options in terms of the methods that may be used 

18 to calculate the allowance going forward, would 

19 examiners then have a preference for one 

20 methodology over another. So can you address how 

21 we will be training examiners and that it's the 

22 institution's choice?
189

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MR. STORCH: Thank you. We have a 

2 training program, a multi-year training initiative 

3 that we have underway that takes us well into 2021 

4 to get our examiners up to speed on understanding 

5 the standard and what our expectations should be.

6 The standard was designed to provide 

7 quite a bit of flexibility and scalability of 

8 institutions because the FASB recognized and we the 

9 agencies collectively pushed this way and I know 

10 community bankers as a whole did as well, that the 

11 standard needs to be operational regardless of the 

12 size of the institution and its complexity. 

13 And that's why the standard doesn't 

14 have a single permissible approach. It allows 

15 various methods and to mention this WARM method 

16 isn't mentioned in the standard, but that's part 

17 of the reason why the FASB issued its Q&A document.

18 So, what we've tried to suggest even in 

19 the FAQs we've issued so far is that the choice of 

20 method is up to the institution. What is the best 

21 fit for your circumstances? Different methods may 

22 be appropriate for different parts of your 
190

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 portfolio. It isn't necessarily the same method 

2 for every type of loan in your portfolio.

3 So that would be the expectation of 

4 these examiners as well that there's not one 

5 standard method that has to be applied by all 

6 institutions. 

7 Each institution has the choice and 

8 assuming you've got good documentation and 

9 controls around the method you selected, the 

10 examiners, especially during the initial 

11 examinations should be looking at that and seeing 

12 how well you're doing with the method you've 

13 employed.

14 As we get more experience in looking at 

15 institutions, we may see some practices that look 

16 like they're out of bounds and not really within 

17 the confines of the standard and that's where I 

18 would think the examiners may raise concerns. 

19 But we're going to need some experience 

20 with the standard before we'll be in a position to 

21 identify practices that may not quite be 

22 acceptable.
191

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER WILLIAMS: Question for you, 

2 Bob. You mentioned the stated maturity and using 

3 that for the loss configuration. 

4 That's quite a differential between a 

5 stated maturity on a 30-year mortgage versus an 

6 average life which is seven years or less and the 

7 reserve differential on that would be huge.

8 We've had some discussions with our 

9 auditors about that. The average life is where 

10 we're heading as long as we can document where that 

11 is.

12 My concern would be is if it was 

13 interpreted as stated maturity you're going to have 

14 banks playing with maturity dates. Put a two-year 

15 call on a mortgage loan because you can't reserve 

16 30 years worth of hold back on it and those kind 

17 of things.

18 Any thoughts on or discussion going on 

19 on that kind of thing? Because we don't want that 

20 to happen.

21 MR. STORCH: The standard uses the term 

22 contractual term, but it makes it very clear that 
192

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 you need to take into consideration expected 

2 prepayments. And residential mortgages with 

3 30-year contractual terms are sort of the poster 

4 child for that.

5 So a very substantial portion may well 

6 pay off in 7 years, but based on experience you know 

7 that some are going to last 10, 12, maybe 1 or 2 

8 actually 30 years. 

9 But the predominant loss expectation 

10 would be for that prepayment-adjusted term. And 

11 at least the loss curves I've seen, most losses 

12 occur two to three to four years out and after that 

13 they really tail off.

14 And even with forecasting, you're not 

15 forecasting out 7 years or 30 years. It's a 

16 reasonable supportable forecast period. And then 

17 you revert to sort of your long-term average 

18 historical loss rate which again after three or 

19 four years is probably fairly low.

20 So that's the expectation in the 

21 standard and that's the message we'll be giving to 

22 examiners as well. And hopefully you're getting 
193

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 consistent feedback on that from your auditors as 

2 well.

3 MEMBER WILLIAMS: It's been a little 

4 interesting. We switched auditors because we had 

5 a local group that wasn't a bank auditor and total 

6 differing opinions.

7 MEMBER DONNELLY: Just a question on 

8 documentation requirements. You mentioned 

9 documented, well documented. Somebody else 

10 talked about documentation.

11 What are the expectations at the field 

12 level, the exam level for documentation support, 

13 whatever methodology? I've got probably 100 

14 people a week calling and saying I can give you this 

15 little simple spreadsheet that will work just fine. 

16 Well, I don't buy that.

17 So what -- to support my analysis what 

18 kind of documentation on the average life are you 

19 going to want to see and how much over time do we 

20 retain?

21 I see this -- from the calculation done 

22 it doesn't appear to be that difficult. The 
194

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 documentation of the process seems to be -- I mean 

2 2 years from now, or 18 months after you come back 

3 in for an exam what do you need to see 18 months 

4 ago that I had to make my assumptions as I bring 

5 those things forward. I hope that makes sense.

6 I've been worried about documentation 

7 for the calculation itself.

8 MR. STORCH: The 2001 allowance policy 

9 statement that I mentioned focuses on 

10 documentation. Of course that's under today's 

11 incurred-loss methodology.

12 But most of the concepts in there about 

13 the expectations for documentation would carry 

14 forward to CECL. 

15 And the other key element is that the 

16 extent of documentation support really is tailored 

17 to the size, the complexity, and risk profile of 

18 the institution as well.

19 So for your institution the extent of 

20 documentation is going to be a lot less than we'd 

21 expect from a $100 billion or a $1 trillion 

22 institution with a much more complex portfolio.
195

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 So in thinking about the new areas, the 

2 forward-looking information, the lifetime loss we 

3 look for documentation about how -- what your own 

4 experience is. If you're using internal data like 

5 on an annualized charge-off basis today perhaps for 

6 incurred loss, what are the numbers showing?

7 How did you demonstrate your estimate 

8 of what the contractual term would be? Either it's 

9 like the mortgage case we just talked about, or your 

10 commercial loans where they have a one- or two-year 

11 term. Is there much of a prepayment experience 

12 there?

13 The documentation for you as a 

14 community bank in that area would be not -- we 

15 wouldn't look to see as much. We'd look to see that 

16 you have something to support those.

17 For forward-looking information, just 

18 like with current conditions today, what objective 

19 data are you looking at? What bankruptcy 

20 statistics or unemployment statistics? If you're 

21 an ag lender what crop prices you're using?

22 And then where did you go to get the 
196

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 forecast information and how did you interpolate 

2 it to make your qualitative adjustments?

3 For a smaller bank again perhaps just 

4 narrative explanation of how you looked at the 

5 forecast and objective data to translate that based 

6 on your experience and your experience with credit, 

7 how that translates into the qualitative 

8 adjustments you're making to the historical 

9 numbers.

10 So a narrative explanation which many 

11 smaller banks use today to explain how they got to 

12 their ending numbers for the allowance are just 

13 bringing in the additional inputs that are required 

14 in explaining where they came from and how you 

15 arrived at them. I think that's what we'll be 

16 looking for.

17 And to the extent we're putting out this 

18 updated supervisory guidance as a proposal, we'd 

19 be looking for industry comment.

20 So if we've gone overboard in any areas, 

21 or we haven't been clear enough in any areas about 

22 our expectations, that will be the opportunity to 
197

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 provide us with input that we can take into 

2 consideration and make a better product for our own 

3 examiners and for you going forward.

4 CHAIRMAN MCWILLIAMS: Jim.

5 MEMBER EDWARDS: Jim Edwards with 

6 United Bank in Georgia.

7 Shifting back to the CBLR conversation,

8 I'm curious if there are any continuing discussions 

9 about that, the 9 percent figures.

10 I understand that the legislation 

11 basically requires that the regulatory agencies 

12 find that level between 8 and 10.

13 And fortunately our bank would be able 

14 to qualify for this capital level under the new 

15 framework. But there are about another 25 banks 

16 in Georgia that could qualify if that ratio was 8 

17 percent.

18 So I'm curious if there's any further 

19 conversation about that to allow additional banks 

20 to potentially be able to participate. 

21 As I talk to bankers around the country,

22 it's a much larger number than just the 25 in 
198

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Georgia that could potentially participate.

2 And because of the -- it also might 

3 encourage other banks to go ahead and opt for the 

4 new proposal and the regulatory relief that it 

5 provides if that minimum was lower, because you'd 

6 have a little more buffer there if you went into 

7 a downturn in terms of not having to deal with some 

8 of the let's just call them maybe more egregious 

9 PCA-type restrictions if you fall below that.

10 And I know there is a process for how 

11 you can opt out of it once you go into it, but that's 

12 not going to be a very easy process I think because 

13 you're going to have to sort of run two systems to 

14 be able to hop back onto the old program if you do 

15 that.

16 So just curious if there's continuing 

17 conversation about that at all and appreciate you 

18 letting me voice my concerns about it.

19 MR. STORCH: Might I suggest that Ryan 

20 cover that?

21 MR. BILLINGSLEY: Actually, I was 

22 listening this morning while I was working on other 
199

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 things, and I heard a lot of comments over here 

2 about community bank leverage ratios so I'm 

3 prepared to take on those comments.

4 So, let me answer that question real 

5 quickly and then I'll get into my nuts and bolts.

6 So I think the answer to your question 

7 is are we considering things like that, the answer 

8 is yes. And that's just part of the deliberative 

9 process.

10 The comment period closes April 9. 

11 We're obviously right in the middle of that.

12 The comment you raised is something 

13 we've already actually received so I count -- this 

14 morning I took a count of the comments on our public 

15 website. I counted 162 comment letters, 9 unique 

16 letters. So the comment you made has already been 

17 -- we've already gotten that one. So we're already 

18 internalizing that one.

19 Since you mention it, I'll just jump 

20 right into it, the PCA issue you raised. The 

21 proposal lays out a -- so it's an optional 

22 framework, right.
200

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 So a bank may elect to use it and opt 

2 out at a later date. Separately, there is a PCA 

3 proxy framework that's proposed like you 

4 mentioned. So if you drop below 9, you can live 

5 in this alternative PCA framework or you can go back 

6 to risk-based.

7 I would view that as a bit of a key 

8 switch if you will. So you control the key. So 

9 at any bank if you see your ratio dropping to 10, 

10 9 and a half, whatever, you might want to think 

11 about turning the key before you hit that category.

12 It's really designed to provide 

13 optionality. It's not intended to be penalizing 

14 so to speak. It's intended to provide 

15 optionality.

16 But we hear your point on the PCA 

17 framework and the level.

18 One other thing I would add is I would 

19 kind of look at the proposal as a package. So 

20 you're right to say that if you drop the ratio to 

21 8, more banks can qualify. I think a letter we got 

22 from ICBA suggests that maybe 600 additional banks 
201

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 nationwide are in that 8 to 9 range.

2 So they take into consideration other 

3 factors. Kind of look at the whole thing as a 

4 proposal. So there's other ways a bank may not 

5 qualify. They might trip other filters so to 

6 speak.

7 But fair comments and I think more to 

8 come on that.

9 I can go through the nuts and bolts of 

10 the proposal real quickly for those who might not 

11 be as familiar, but it sounds like you're very 

12 familiar with it.

13 MEMBER EDWARDS: It's a little 

14 complicated, so I'll be glad to hear you simplify 

15 it for me.

16 MR. BILLINGSLEY: Sure. So the NPR 

17 was issued in November. The comment period closes

18 April 9. You should have about 10 slides or so in 

19 your deck that were part of a teleconference that 

20 the FDIC hosted in late December. Happy holidays.

21 I'm not going to go through those, but 

22 that's out there in the public domain. We used 
202

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that to host the webinar.

2 So, Jim just brought up the statutory 

3 range. It says we're supposed to establish this 

4 ratio between 8 and 10. Obviously we picked 9.

5 We had a little bit of discretion over 

6 how to define what is a qualifying community bank 

7 that maybe would like to use this.

8 And then we also had to develop 

9 procedures for what happens if you drop below 9. 

10 And that's sort of a PCA proxy opt-in/opt-out that 

11 Jim was referring to.

12 So for starters, it is an optional 

13 framework. We're envisioning this, like Bob 

14 mentioned, the way you would opt in is just to 

15 complete this one-page call report and that would 

16 be the mechanism that you would opt in to the 

17 framework.

18 As far as definition of a qualifying 

19 community bank goes, there's just a few factors 

20 that would make a bank qualifying.

21 Number one was given to us by the 

22 statute, total assets less than $10 billion. So 
203

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 we took that one at face value.

2 We added a few more based upon what the 

3 statute directed us to consider. So one of those 

4 is -- I'll just go quickly through those.

5 One is off-balance sheet exposures of 

6 less than 25 percent of total assets. Total 

7 trading assets and liabilities of less than 5 

8 percent of total assets.

9 Mortgage servicing assets of less than 

10 25 percent of tangible equity. And certain DTAs, 

11 mainly the temporary difference DTAs, of less than 

12 25 percent of tangible equity.

13 As far as the nuts and bolts of the ratio 

14 itself, we opted for simplicity. So in the 

15 numerator is this thing called community bank 

16 leverage ratio tangible equity. It's not tier 1, 

17 it's different than the existing capital 

18 framework. It's intended to be accounting based, 

19 very straightforward.

20 You can think of it as the equity block 

21 in your balance sheet, taking out intangibles, 

22 certain DTAs and neutralizing for AOCI. It's very 
204

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 straightforward.

2 And then the denominator would be 

3 average assets just like we use today in your tier 

4 1 leverage ratio.

5 So the idea is if the rule were final 

6 you could elect -- if you meet those criteria and 

7 you have a CBLR over 9 you could fill out this 

8 simplified call report and that would be the 

9 framework you would be in.

10 So I'll briefly touch on a few of the 

11 comments we've gotten so far.

12 There has been a preference for a lower 

13 ratio. Like Jim mentioned, there's been some 

14 advocacy for 8 percent.

15 There's been some concern about the 

16 introduction of the PCA proxies which Jim also 

17 raised.

18 And then the other comment we've gotten 

19 that I think has been fairly consistent thus far 

20 has been a preference to stick with tier 1 capital 

21 in the numerator rather than create something new 

22 which is interesting.
205

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 I think those are the main ones we've 

2 gotten. I will stop here in the interest of time 

3 and happy to discuss other issues or more concerns 

4 or questions.

5 Did I address your --

6 MEMBER EDWARDS: You did. Thank you. 

7 And I appreciate your continued inspection of it. 

8 Thank you.

9 MEMBER HANRAHAN: Ryan, I'm sure 

10 you're better at math than I am, but it seems to 

11 me that an 8 percent CBLR would be a pretty good 

12 proxy for a bank that would be north of the 

13 well-capitalized PCA standards. Do you disagree 

14 with that and could you also comment on how you got 

15 to 9 percent?

16 MR. BILLINGSLEY: Yes, your math is 

17 pretty good. 

18 No, I think that's kind of why what I 

19 said earlier, we kind of viewed this as a package. 

20 So, part of the rationale for picking the 

21 qualifying criteria, and this is kind of laid out 

22 in the rule itself, is that in the existing system 
206

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 we have in risk-based capital, if you have a lot 

2 of those particular things that I just mentioned 

3 your risk-based capital requirements go up.

4 So there's this kind of balance between 

5 -- one of our stated goals was not to allow for a 

6 reduction in capital through this framework, but 

7 just to introduce something simple.

8 So one could envision a reduction in 

9 capital requirements for an institution that has 

10 a lot of those things I just mentioned. And then 

11 there's a question mark whether or not that's the 

12 intention here.

13 So I think when you take the 9, when you 

14 take all of those factors together you're right to 

15 say that for most banks that's a slightly higher 

16 capital requirement. And that probably holds true 

17 at 8 depending on how you jigger with those 

18 criteria.

19 But that's all a part of the calculus 

20 for how do you ensure that this framework doesn't 

21 -- we don't see a decline in the amount of capital 

22 that banks currently hold as a result of picking 
207

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 this framework.

2 Those are some of -- that's all going 

3 to be part of the deliberative process. But I take 

4 your point that 8 percent for many banks is still 

5 more than they're required to hold today.

6 MEMBER EDWARDS: You make a great point 

7 there. I guess I just would point out that if 

8 you're concerned about -- certainly everybody 

9 would agree this is not about lowering -- providing 

10 an avenue to lower capital. I totally get that.

11 But if you're concerned about sort of 

12 weeding out those banks that have those 

13 complexities it seems like you could figure out a 

14 way to adjust these factors maybe more or whatever 

15 and deal with that to make sure that that's 

16 accomplishing the goal which is laudable, but yet 

17 opening up maybe the window for other -- the vast 

18 majority of non-complex community banks that 

19 wouldn't fall into that anyway. So just a further 

20 comment.

21 MR. BILLINGSLEY: I think that's a fair 

22 comment. To be honest, a lot of the comments we've 
208

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 gotten so far have been focused on numerator, PCA 

2 and the level and less on the criteria. So we're 

3 hoping to get some more feedback on that to kind 

4 of put it all together.

5 MEMBER EDWARDS: Thank you.

6 MEMBER DONNELLY: Ryan, a comment. As 

7 I read through the document I read that if I -- and 

8 I would like you to tell me that I'm not thinking 

9 correctly.

10 If I opt in, and I appreciate you saying 

11 I could have a key to turn it on, turn it off. That 

12 in itself is another question.

13 But it reads to me that if I don't opt 

14 in, I will be treated differently if I drop below 

15 9 percent than if I have opted in. I didn't realize 

16 the switch was that easy.

17 So, is that an accurate statement? I'm 

18 going to be treated different even though I have 

19 the exact same capital level if I didn't opt in.

20 MR. BILLINGSLEY: I would say that 

21 we're envisioning it as an optional framework. So 

22 if you elect not to use it, that's a perfectly 
209

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 reasonable business choice.

2 MEMBER DONNELLY: And I understand

3 that.

4 MR. BILLINGSLEY: Right, and then you 

5 will be looked at under the risk-based framework 

6 just as you are today.

7 MEMBER DONNELLY: But if I opt in and 

8 both me drops below 9 percent I'm treated 

9 differently if I've opted in or if I haven't opted 

10 in.

11 MR. BILLINGSLEY: I see. So you're 

12 saying I've opted in and I drop below 9, how are 

13 you going to treat me? Yes.

14 MEMBER DONNELLY: I read that that I'm 

15 treated differently so this tells me that I need 

16 to consider not to opt in just because I don't want 

17 to be treated differently --

18 MR. BILLINGSLEY: I think --

19 MEMBER DONNELLY: -- if I did opt in.

20 MR. BILLINGSLEY: I think that goes to 

21 Jim's concern directly about what's the outcome of 

22 dropping below 9 in this parallel PCA framework. 
210

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And I think that is the concern we're hearing.

2 That is potentially a punitive impact 

3 of the leverage ratio as proposed.

4 I can tell you that's -- that wasn't the 

5 intention. The intention was to create 

6 optionality. 

7 So I think just to be transparent I 

8 think -- the way I think of this working is that 

9 if a bank has its CBLR declining it's probably going 

10 to want to do some proactive thinking about 

11 switching back because there's a good chance to 

12 Dan's point that its risk-based ratios might be 

13 higher, it will provide an extra cushion over any 

14 PCA threshold.

15 So you would think that there would be 

16 some planning going on heading to 9, so that in 

17 practice maybe this parallel PCA framework doesn't 

18 actually have an impact on said institution.

19 But you can see where maybe there's a 

20 huge and sudden loss, maybe it might help us with 

21 respect to how to categorize such a bank in the PCA 

22 framework because they can't produce a risk-based 
211

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 ratio for some period of time.

2 I think we're trying to solve for that 

3 procedural aspect of this through this proposal and 

4 I think that's where we're expecting to get a lot 

5 of comments like Jim's about did we get it right, 

6 can we tweak it, how can we make this more 

7 practicable? Does that help?

8 MEMBER DONNELLY: And I track that. I 

9 understand. I'm pretty simple and it seems to me 

10 that it's just a flat number that if you're below, 

11 I mean you don't have to opt in or opt out. You 

12 just have capital and it's X and you've been 

13 calculating it for a long time.

14 If I drop below that X, I now have to 

15 do my stuff.

16 MR. BILLINGSLEY: Right.

17 MEMBER DONNELLY: It just seems like 

18 we've added a layer of complexity and more work to

19 track -- because I agree, and I appreciate the 

20 opportunity to turn it on and turn it off. That 

21 creates more work that we're trying to avoid the 

22 work. At least that's how I'm anticipating. 
212

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Thank you.

2 MR. BILLINGSLEY: Sure.

3 MEMBER SHETTLESWORTH: I just have one

4 quick comment on that. Whether we opt in or opt 

5 out, we haven't made that determination yet. I 

6 don't know if we're all that excited about it.

7 Even if we do opt in, I can't imagine 

8 that we wouldn't be tracking all capital ratios 

9 every single month because if you ever get close 

10 to that 9 percent, then you'd have to know where 

11 you're going to stand.

12 So we're perpetually going to have to 

13 provide and report that information ongoing in all 

14 capital ratio analyses that we have.

15 And so what I'm sensing is the only 

16 potential benefit is a possible shortened call 

17 report which might be helpful, but it's not going 

18 to make or break anything.

19 I like the spirit of the conversation, 

20 I just am not sure if it's -- from what I know about 

21 it today I'm not sure if it's quite delivering on 

22 what we were hoping for.
213

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MR. DAVIS: Okay. All right, so if we 

2 could move to our next group. From the Division 

3 of Risk Management Supervision, we have Associate 

4 Director Lisa Arquette who oversees our Anti-Money 

5 Laundering and Cyber Fraud Branch, and Deputy 

6 Director of Operational Risk Martin Henning.

7 From our Division of Depositor and 

8 Consumer Protection, we have Associate Director 

9 Luke Brown, who oversees consumer protection 

10 policy.

11 MS. EBERLEY: Okay, great. And as 

12 they're getting seated, I'll share with you what 

13 they're going to be speaking about.

14 Lisa has an anti-money laundering 

15 update. Martin is going to discuss supply chain 

16 risk as well as recommendations regarding 

17 contractual provisions with service providers.

18 And then to wrap us up, Luke's going to 

19 talk about some changes in the flood insurance rule 

20 which were issued in February. So, Lisa.

21 MS. ARQUETTE: Great. Thank you, 

22 Doreen. And good afternoon. I appreciate the 
214

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 invitation to be here.

2 You can either follow along with the 

3 slides or not. I think that I'm just going to talk 

4 high-level.

5 In October I was here providing an 

6 update on the recently issued interagency 

7 statement related to sharing BSA resources. And 

8 I believe Jamal El-Hindi mentioned that today.

9 It's really recognizing that community 

10 banks with low complexity probably would benefit 

11 or could benefit if they have collaborative 

12 arrangements with other banks to share independent 

13 testing for instance, swapping out resources, 

14 training, et cetera.

15 And we also issued a statement in 

16 December of 2018 regarding innovation in the 

17 BSA/AML space. So long as a bank is compliant with 

18 Bank Secrecy Act requirements, we think that it is 

19 a good thing to innovate, to look for ways to 

20 improve. It's not a requirement, but it was a 

21 statement that was issued to really encourage,

22 where appropriate, innovation, and we look forward 
215

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 to being full partners with banks as they walk 

2 through innovative steps and approaches and 

3 technology, et cetera.

4 But today what I'm going to cover are 

5 two additional statements that we plan to issue 

6 along with the other federal banking agencies and 

7 one with the federal banking agencies and FinCEN.

8 The first is an attempt to be very 

9 transparent in how we conduct BSA/AML examinations 

10 for the benefit of the industry. We've had a lot 

11 of feedback about the perception that our examiners 

12 spend a lot of time at your institutions, do an 

13 awful lot of transaction testing, evaluate all 

14 customer types, look at all products and services. 

15 And I'm seeing heads nodding.

16 But in fact, we think it's important to 

17 emphasize that we have a risk-focused approach to 

18 the BSA/AML examination, and we're going to 

19 emphasize that with our examiners as well.

20 But it starts with looking at your risk 

21 assessment, looking at your independent review and 

22 so long as those cover all customers, products, 
216

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 services, geographies in which you operate, it 

2 covers your risks for money laundering, terrorist 

3 financing and other illicit financial risks, we're 

4 really going to leverage that information, tailor 

5 the scope of our exam, and the better job that you 

6 do in identifying your risk profile, the less 

7 amount of time we're going to spend onsite.

8 And that's generally how it works. We 

9 think it's time to emphasize that one more time, 

10 to share that with you and to share some of the steps 

11 that we take to risk-focus our examinations.

12 So we plan to get a statement out soon. 

13 That would be within the next couple of months 

14 regarding risk-focused approach.

15 The next statement that we plan to issue 

16 will be the federal banking agencies. FinCEN 

17 won't be joining us because it's really relative 

18 to our authority to require banks to have a BSA 

19 compliance program, to supervise, to make sure that 

20 banks are compliant with BSA requirements, and then 

21 there are certain requirements that we have as 

22 regulators to enforce BSA requirements.
217

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 We issued guidance in 2007 and this is 

2 really nothing new. There are no new 

3 expectations. This relates to our authority under 

4 section 8(s) of the Federal Deposit Insurance Act, 

5 but it clarifies. 

6 We've had many, many years of 

7 experience in this space and we think that we owe 

8 you some clarification regarding circumstances 

9 under which we would have to take a formal action.

10 So we are emphasizing for the benefit 

11 of everybody in here and other banks that this is 

12 not related to technical and isolated problems in 

13 a bank. 

14 This is not related to a couple of 

15 issues related to CTR filings, or a couple of SAR 

16 issues. 

17 It really is related to the significant 

18 issues that represent a breakdown in the BSA 

19 compliance program.

20 So for instance, a bank has to have a 

21 BSA officer, independent testing, training, 

22 internal controls that are risk-based and 
218

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 reasonably designed to maintain compliance with 

2 BSA requirements.

3 You also have to have a customer 

4 identification program and a customer due 

5 diligence program, essentially understanding the 

6 nature and purpose of your customers and those 

7 relationships. And I know that you do that. 

8 You've been doing that for years. So this is 

9 really nothing new.

10 But if there is a failure in any of those 

11 components, again significant, systemic failure,

12 the banking agencies are required to take a formal 

13 action.

14 But to put it into perspective, we have 

15 to conduct a BSA review at every safety and 

16 soundness exam, and we conducted well over 1,500 

17 last year. And we took eight actions. That's a 

18 really small portion of the institutions that we 

19 examine. In fact, it's about 0.05 percent of the

20 institutions. 

21 So this isn't anything that should 

22 alarm anybody. It's really just a clarification 
219

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of our authority to enforce BSA requirements 

2 because again we think that it's important that the 

3 industry understands that it's not the little 

4 technical issues that we might have as an 

5 examination finding, but rather it's the 

6 significant and the systemic problems.

7 So look for that within the next couple 

8 of months as well.

9 And finally, and I understand that this 

10 is a bit of interest to the group here maybe, what's 

11 the difference between hemp and cannabis, or hemp 

12 as a derivative.

13 CHAIRMAN MCWILLIAMS: Don't answer. 

14 This is being filmed, just be careful.

15 (Laughter)

16 MS. ARQUETTE: I'm going to read from 

17 my notes since this is being filmed. 

18 But in 2014 the Agricultural Act 

19 permitted industrial hemp research that was 

20 authorized by certain states. So certain states 

21 excelled in growing hemp and researching the 

22 benefits of hemp.
220

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 It legalized growing and cultivating of 

2 industrial hemp for research purposes in states 

3 where such growth and cultivation was legal under 

4 state law, notwithstanding existing federal 

5 statutes that would otherwise criminalize the 

6 conduct. That was 2014.

7 Fast forward to 2018. In December of 

8 2018, the new Farm Bill, and I didn't know we would 

9 be looking at farm bills but we have. The new Farm 

10 Bill addressed hemp as well. Made it a little more 

11 mainstream and it's treated like other 

12 agricultural commodities in many ways.

13 The new Farm Bill explicitly allows the 

14 transfer of hemp-derived products across state 

15 lines for commercial and other purposes, and it 

16 puts no restrictions on the sale, transport, or 

17 possession of hemp-derived products so long as 

18 those items are produced in a manner consistent 

19 with law. 

20 Okay, what is that? Hemp cannot 

21 contain more than 0.3 percent delta-9 

22 tetrahydrocannabinol. So that means that 
221

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 essentially -- we call it THC. It has to be grown 

2 and cultivated to have a certain amount of THC. 

3 And in those instances, hemp is used for a lot of 

4 things -- rope, clothing, different types of 

5 products.

6 This has been removed as a controlled 

7 substance and it no longer -- hemp itself that meets 

8 that criteria no longer violates federal law.

9 This is important because cannabis or 

10 marijuana requires that an institution if you have 

11 a marijuana-related business as a customer you're 

12 required to file a suspicious activity report 

13 because cannabis or marijuana violates the 

14 Controlled Substance Act.

15 However, this derivative that meets the 

16 criteria that I just mentioned, 0.3 percent THC, 

17 is carved out and it is not a controlled substance.

18 So if you had a customer for instance 

19 that was engaged in cultivating, growing, selling 

20 industrial hemp, you would not on the face of that 

21 customer, without any other indicia of criminal 

22 activity, you would not have to file suspicious 
222

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 activity reports.

2 For all other cannabis-related 

3 customers, your other marijuana-related 

4 customers, you file SARs. And you've been doing 

5 that since 2014. So that's nothing new.

6 Any questions on that?

7 MEMBER KIMBELL: Bruce Kimbell, First 

8 Community Bank in Clinton, Kentucky.

9 Last year, we experienced our first 

10 hemp production in Kentucky for a -- really on a 

11 very large commercial scale.

12 Since that point in time, we've just 

13 seen the number of processors, the number of 

14 entities move into the state has just really 

15 blossomed with a lot of various processing 

16 companies coming in that are going for the CBD oils 

17 and then also coming along too for -- we had a 

18 gentleman yesterday not too far from our bank come 

19 in and is going to be using it for flooring. It's 

20 a product that's grown, and we had a couple of 

21 customers last year that grew.

22 It's a quite detailed process to get 
223

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 registered and to do all that. But it really does 

2 seem to be taking off.

3 Now, will it ever replace the 

4 conventional crops? No, probably not. But it 

5 does seem to have its place and at least at this 

6 point in time the hard part for us in the banking 

7 world for our part is just trying to determine who's 

8 real and who's not real from the purchaser side.

9 Because they ask a lot of our growers. 

10 Some do and some don't. And some it's a rather --

11 quite expensive crop to grow, number one. If you 

12 grow it for the oil it's a very labor-intensive. 

13 It's very -- Kentucky too is famous for tobacco 

14 production back in the day. And so very similar 

15 to that. 

16 So there's a lot of learning to do on 

17 all of our parts in trying to decide who the players 

18 are and who's legitimate and who's not. We're 

19 counting on state government and those folks too 

20 to help guide us through the process of who's real 

21 out here.

22 But right now we're still in a stage 
224

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 where there's lots of money chasing the product now 

2 still, and we're trying to find out just who are 

3 the legitimate players out here. So it is 

4 something we're all having to deal with right now. 

5 And we're being very cautious, but 

6 still, yet too thankful to Senator McConnell and 

7 all that getting that put in the Farm Bill so they 

8 can move forward and so that we could hopefully --

9 hopefully it will give our growers another viable 

10 alternative to have in their arsenal there of 

11 things that they can do to make a living. So that's 

12 where we're at.

13 MS. ARQUETTE: Thank you for the 

14 feedback. I would suggest that you still have the 

15 customer due diligence requirements and that's 

16 what you just described, the challenges that you 

17 face in making sure and understanding that you know 

18 the nature and purpose of the customer's account. 

19 And so I appreciate you bringing that up.

20 MEMBER DONNELLY: Are you seeing any 

21 particular mistakes that banks are making? In 

22 Kansas, we have five different states around us 
225

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that have all different levels, and it's not the 

2 hemp that's the issue.

3 But they're all different levels and 

4 they cross over the border. I'm a couple of 

5 minutes from Missouri, and their rules are 

6 different than my rules.

7 What are mistakes that banks are making 

8 in opening accounts or not properly doing the 

9 reporting?

10 MS. ARQUETTE: So related more 

11 importantly to the marijuana-related customers and 

12 not the hemp customers? Is that what you're 

13 asking?

14 MEMBER DONNELLY: Yes.

15 MS. ARQUETTE: Because there's a 

16 spectrum, right.

17 MEMBER DONNELLY: There's a whole 

18 range of what goes between marijuana and hemp and 

19 what can come in between.

20 MS. ARQUETTE: Yes. So the FinCEN 

21 guidance required that banks follow the state 

22 license -- that banks make sure that their 
226

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 marijuana-related businesses follow the state 

2 licensing requirements. Most states have an 

3 infrastructure where they do some level of 

4 supervision related to those businesses.

5 And so making sure that the businesses 

6 comply with the state regulations.

7 And there are an awful lot of banks that 

8 file SARs for marijuana-related businesses so we 

9 recognize that they generally have banking 

10 accounts.

11 It's rare that we've seen mistakes 

12 related specifically to those types of customers, 

13 but rather the bank may have weaker risk management 

14 practices overall related to their customer base 

15 in general, rather than just marijuana-related 

16 customers.

17 So we haven't seen specific problems 

18 just with those types of customers because banks 

19 largely have done a pretty good job making sure that 

20 their customers are compliant with the state law 

21 and that they have been licensed and that they are 

22 complying with state requirements.
227

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And back when FinCEN issued the 

2 guidance, they had embedded some red flags if you 

3 will, or the Department of Justice enforcement 

4 priorities.

5 So banks have done a good job making 

6 sure that their businesses really aren't going that 

7 extra step and doing things that would indicate 

8 other criminal activity. So we haven't seen 

9 specific problems largely with our banks.

10 MR. HENNING: Well, good afternoon. 

11 My name's again Martin Henning. One of the things 

12 I work on is IT risks and cyber risks as well. As 

13 Doreen mentioned, there are two topics I heard also 

14 this morning that it's useful for you to hear what's 

15 on our minds in terms of examination priorities, 

16 supervisory priorities.

17 These are two things that we're very 

18 focused on at the moment.

19 The first one we title supply chain 

20 risk. The risks here are very similar to any 

21 third-party service provider.

22 But the thing I want to point out today 
228

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that's really noteworthy we think at least to start 

2 in a good direction is an OFAC statement and press 

3 release in addition last year in June.

4 So, sort of the bottom line to begin 

5 with is ownership and control of companies with 

6 whom you do business, particularly IT services 

7 companies, is a risk worth considering more 

8 carefully today than ever before. That's not 

9 news.

10 But in June 2018 OFAC had a press 

11 release that identified several companies and 

12 three individuals. The companies that we took 

13 note of and considered may have business in banking 

14 was a company named Digital Security.

15 Digital Security was designated by OFAC 

16 for blocking -- for providing material and 

17 technological support to Russia's federal security 

18 service.

19 And a second company on the list was ERP 

20 Scan which is a company owned and controlled by 

21 Digital Security. So the first company mentioned.

22 And the thing that's interesting about 
229

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 this. We researched and talked to FinCEN. We 

2 believe this is the first time that an IT technology 

3 company has been sanctioned by OFAC. That hasn't 

4 happened before.

5 When -- the difference for us and for 

6 you between a company that's been sanctioned by 

7 OFAC and one that hasn't, just considering starting 

8 a contract with is obviously monumental. There's 

9 a huge difference.

10 Our examiners can do something with 

11 this information. You can do something with this 

12 information.

13 In the case of ERP Scan, I think this 

14 was a company -- literally a company selling 

15 security services for enterprise resource planning 

16 products. So if you envision a better way to get 

17 into the nuts and bolts of a company's IT 

18 infrastructure I can't think of it. 

19 We're going to scan everything that's 

20 going on inside your data center.

21 So, I think the unique thing here though 

22 is the -- when you think of entities going on the 
230

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 OFAC list there's compliance folks in your 

2 organizations who deal with that who probably have 

3 never had to have a conversation with the IT folks 

4 before.

5 And that's the thing that's new. To 

6 the extent that the U.S. government can do this 

7 again and again, and identify these kinds of 

8 companies, that's a collaboration and a 

9 communication channel that obviously needs to 

10 exist in order for you to be able to take action.

11 What we did last year in response to 

12 this, the first thing we did is we checked our 

13 database of service providers built through bank 

14 reporting under the Bank Service Company Act.

15 It's a requirement for you to tell us 

16 when you sign a new contract. We've got those 

17 companies in the database. Do these two companies 

18 appear anywhere? And the answer was for us that 

19 we found nothing.

20 The second action we took was to 

21 collaborate with the other banking agencies to 

22 issue a joint statement and press release which we 
231

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 did in November of 2018 that recommended 

2 identifying, assessing, and mitigating any risk 

3 associated with these sanctions. Basically the 

4 plan just requires a high degree of collaboration 

5 across the financial institution's OFAC 

6 compliance, fraud, security, IT and other risk 

7 functions.

8 So trying to get that point out. You 

9 know what to do when somebody goes on the OFAC 

10 sanction list. That's the unique component of 

11 this one.

12 The second topic is basically strong 

13 contracts. Again, sort of the bottom line is the 

14 security and resilience of a bank is more tied than 

15 ever to companies with whom you contract like your 

16 core banking service provider. 

17 For example, your ability to alert 

18 customers to a heightened risk of identity fraud 

19 resulting from a breach at a service provider is 

20 dependent on the service provider alerting you to 

21 the incident that they just had.

22 The specifics around incident 
232

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 notification are important enough to be explicitly 

2 referenced in the contract and with terms that are 

3 well understood and measured by both parties. 

4 That's one example.

5 Do you know and does your contract 

6 document when you're going to be notified of an 

7 incident affecting customer data?

8 A second example, your ability to 

9 respond and to recover from a cyber incident is more 

10 and more dependent on service provider ability 

11 rather than just your own.

12 Many are moving away from hosting their 

13 core services themselves to the core provider being 

14 the host. This puts your resilience eggs more in 

15 their basket which makes it important enough to be 

16 explicitly referenced in the contract and with 

17 terms that are well understood and measured by both 

18 parties.

19 The most mature banks even include 

20 business continuity testing terms in their 

21 contracts.

22 So again, these are risks that you're 
233

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 aware of. Challenges in negotiating important 

2 contract terms for a smaller client. The material 

3 service provider is an issue that I think the CBAC 

4 raised in this room a few years ago.

5 Again, just switching this around to 

6 what are we doing about this risk. In the IT exam 

7 procedures we provided our examiners in 2016, we 

8 instruct them to more carefully look at contracts 

9 and our research indicates they are highlighting 

10 weaknesses more often today than they did prior to 

11 2016.

12 Some of you in the room, maybe more of 

13 you than not at this point have been examined using 

14 those new examination procedures. The feedback 

15 we've heard is fairly positive although very 

16 comprehensive. Sometimes those are at odds with 

17 each other from your perspective, but I think the 

18 second time through that will be easier for our 

19 examiners.

20 But those new procedures do have them 

21 looking at contracts a little bit closer.

22 Also, with regard to what we're doing 
234

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 with our colleagues at the Federal Reserve and the 

2 Office of the Comptroller of the Currency, we're 

3 examining the strength of contracts in the two 

4 example areas across the more significant 

5 technology service providers.

6 So, we have a collaborative team that 

7 examines on a constant basis the most significant 

8 service providers in the country and basically a 

9 horizontal focus for us starting this year is on 

10 their contracts with banks. Pulling those either 

11 directly from a sample set of banks or from the 

12 service provider themselves and looking into these 

13 two areas particularly.

14 Again, the feedback we heard in the CBAC 

15 and we've heard outside of this group as well is 

16 it's very difficult for you, especially the smaller 

17 you are to have an impact on those kinds of 

18 contracts and relationships you may have had for 

19 many years.

20 So our thinking is let's look at it from 

21 the other side of the coin.

22 Finally, we meet periodically at round 
235

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 tables with the leaders of these companies. I can 

2 tell you we have emphasized the need for contracts 

3 to mature and strengthen in these areas very 

4 pointedly.

5 We have these meetings basically once 

6 every two years. The last one was at the end of 

7 2017. Comments were made very, very directly in 

8 the opening of that round table. Our next one is 

9 going to be this December. So again, focusing on 

10 the service provider side to emphasize our desire 

11 for contracts to mature in these areas and to get 

12 more specific.

13 So, lastly I'd say we are considering 

14 communicating broadly to state non-member banks on 

15 this topic and really just want to give you a 

16 preview of our thinking on that second topic and 

17 get any feedback you have.

18 That's what I've got and I'd be happy 

19 to answer any questions you have.

20 MR. BROWN: Okay. I'm going to talk 

21 about flood insurance. The agencies issued a 

22 final flood insurance rule last month.
236

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 According to a 2018 Wharton study, more 

2 than 95 percent of the residential flood insurance 

3 policies sold in the U.S. are purchased through 

4 federally sponsored national flood insurance 

5 program.

6 The study also estimated that private 

7 flood insurance policies in the U.S. account for 

8 about 3.5 to 4.5 percent of the market.

9 Consequently, one of Congress's 

10 primary objectives in passing the Biggert-Waters 

11 Flood Insurance Reform Act was to simulate the 

12 private market.

13 The act directed the FDIC, the OCC, the 

14 FRB, FCA and NCUA -- hopefully I didn't miss an 

15 agency in that list -- to issue regulations 

16 requiring lenders to accept private flood 

17 insurance policies as defined by the act.

18 So we issued the regulation last month. 

19 The primary issues addressed by the final rule are 

20 lenders' mandatory acceptance of private flood 

21 insurance policies, lenders' discretionary 

22 acceptance of private policies.
237

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 And this might be of interest to Lori. 

2 We also focused on mutual aid society. I see that 

3 she's nodding there.

4 The first key issue covered by the final 

5 rule is lenders' mandatory acceptance as I 

6 mentioned. The final rule requires lenders to 

7 accept private flood insurance policies that meet 

8 both the statutory definition of private flood 

9 insurance and the mandatory purchase requirement.

10 Because of the concerns that many 

11 institutions had about the lack of resources and 

12 expertise for independently verifying the 

13 documents that are required under the rule, the 

14 agencies decided to provide lenders with a 

15 compliance aid to help them determine whether a 

16 policy actually meets the definition of private 

17 flood insurance.

18 Now that definition you might be aware 

19 is quite complex. It's got seven key parts. It's 

20 got subparts. So the agencies thought it was 

21 important and the complications around that 

22 definition were clear in the public comments that 
238

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 we received.

2 Specifically, the compliance aid 

3 allows a lender to leverage the expertise of a 

4 private flood insurance issuer who provides a 

5 written statement indicating that the policy meets 

6 the definition of private flood insurance.

7 This statement can be relied upon 

8 without further review of the policy by the lender.

9 However, the lender may choose not to 

10 rely on the compliance aid and the lender may 

11 instead just separately independently review a 

12 policy and determine whether it meets the standard.

13 The second key issue that I mentioned 

14 is lenders' discretionary acceptance of private 

15 flood insurance policies.

16 The final rule permits institutions to 

17 exercise their discretion to accept certain 

18 private flood insurance policies that do not meet 

19 the statutory definition subject to certain 

20 restrictions of course.

21 As a result, a lender may accept a 

22 private policy that does not meet the standard 
239

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 definition under the statute under the four 

2 conditions I'm about to describe -- provides 

3 coverage in the amount required by the flood 

4 insurance purchase requirement, is provided by an 

5 insurer that is licensed, admitted or not 

6 disapproved by a state regulator, and covers both 

7 the mortgagor and the mortgagee as loss payees and 

8 provides sufficient protection of the loan 

9 consistent with general safety and soundness 

10 principles.

11 The final key component of the rule as 

12 I mentioned is mutual aid society plans. Lenders 

13 are also permitted to use their discretion to 

14 accept a plan provided by a mutual aid society, if 

15 the plan meets the following criteria.

16 The lender's primary supervisory 

17 agency has determined that the plan qualifies as 

18 flood insurance for the purposes of the 

19 Biggert-Waters Act, provides coverage in the 

20 amount required by the flood insurance purchase 

21 requirement, covers both the mortgagor and the 

22 mortgagee as loss payees, and provides sufficient 
240

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 protection of the loan consistent with general 

2 safety and soundness principles.

3 The effective date of the rule is July 

4 1, 2019. Happy to answer any questions.

5 MR. DAVIS: Great. Well, thank you 

6 very much. I gained a few minutes here on the time 

7 so I'm going to ask Anthony to please come up. 

8 We're going to grab one of the sessions 

9 that we had to delay from the morning. Anthony is 

10 our ombudsman and he is going to speak to the 

11 post-examination survey process change.

12 And Anthony, if we could do about 10 

13 minutes? Does that work?

14 MR. LOWE: Good afternoon, everyone. 

15 I want to talk with you just briefly about the --

16 talk a little bit about the FDIC's post-examination 

17 survey process. And I am going to jump around and 

18 just go to a couple of the slides just for reference 

19 purposes.

20 The current process that we have was 

21 implemented back in 2002. So I'm already on slide 

22 number 2, and it was basically done for a couple 
241

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 of reasons, primarily so that we could improve the

2 quality and the efficiency of the examination 

3 process and also to ensure that the exams provided 

4 a beneficial tool to achieve safety and soundness 

5 standards and regulatory compliance.

6 A primary portion if you were to look 

7 at the surveys which I hope most of you have had 

8 an opportunity to look at and maybe even complete 

9 at some point in time, it centers around the 

10 examination report with questions pertaining to 

11 the clarity of the transmittal letter, the written 

12 guidance and the usefulness of the examination

13 recommendations for improving operations. So 

14 again that's a primary purpose of the survey.

15 So the way the current survey is done 

16 if you look at slide number 3 every time that we 

17 complete an examination be it risk, compliance, or 

18 the combined compliance and CRA at the completion 

19 of that exam when it's transmitted to the bank 

20 there's a separate correspondence that comes out 

21 either from the risk or the compliance division 

22 director that includes correspondence that talks 
242

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 about the survey process.

2 And it includes a unique identifier 

3 number that banks can use to go online to complete 

4 the survey.

5 We do include a hard copy of the survey 

6 in the event that a bank wants to complete the 

7 survey that way. 

8 The survey does include five broad 

9 categories talking about the pre-examination 

10 process, the examiners, the exam process, the exam 

11 report, and then an overall and kind of optional 

12 category where banks can include some catch-all 

13 type of information.

14 Once that data is completed and the bank 

15 submits it through FDIC Connect, it's eventually 

16 aggregated by our Division of Insurance and 

17 Research and provided to the Divisions of Risk 

18 Management and DCP in an aggregated manner and also 

19 anonymous without any specific identifiers to an 

20 individual bank with one exception.

21 If a bank does specifically ask for a 

22 follow-up contact, the entirety of the survey is 
243

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 provided to the responsible division. And I'll 

2 come back and talk about that particular issue here 

3 in just a moment.

4 If you go to slide number 4, this is 

5 where I want to spend just a couple of minutes and 

6 want to talk with you and try and get some responses 

7 here in just a minute.

8 If you do have any questions, please do 

9 bring those forward at any point in time.

10 Over the last six years, this shows what 

11 the response rates have been with regard to the 

12 surveys. On the risk side, they've been in the 30 

13 to 35 percent. For 2018, they were at 33 percent. 

14 And on the compliance side, they've been around 

15 40-45 percent. For 2018, it was at 44 percent.

16 There's no specific empirical data to 

17 say what is the reason for this rate of return. I 

18 don't know if bankers think it's burdensome, if 

19 it's time-consuming, if they don't think it's of 

20 any value added, but I can tell you when I've been 

21 talking with individual bankers, with some of the 

22 trade associations who have talked with their 
244

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 memberships, and information that's come from 

2 contacts that my regional ombudsmen have had over 

3 the last year and a half, they've indicated that 

4 some bankers are concerned about the 

5 confidentiality or lack of confidentiality with 

6 this process, and that they see that the survey goes 

7 out from the divisions, that it also is eventually 

8 received directly -- indirectly back to the 

9 divisions eventually.

10 So there's a concern about there being 

11 to some degree a conflict of interest here with the 

12 process.

13 And also one thing that we have been 

14 hearing with my group is that banks are concerned 

15 if we do give candid responses will this come back 

16 at some point and potentially be used against us 

17 at a future examination.

18 So we want the survey to be a useful tool 

19 both for bankers and for the FDIC. We would like 

20 to see these response rates to be improved.

21 The Ombudsman Office as we go forward,

22 if you flip over to slide number 5, later this year 
245

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 is going to be working with RMS and DCP and some 

2 of our other divisions to revamp the process to some 

3 degree.

4 First off, the ombudsman is going to 

5 assume responsibility for sending out the surveys. 

6 When the examinations are completed, we'll be 

7 sending out the letters soliciting input from the 

8 banks with regard to the examination process.

9 A couple of things that we're going to 

10 do a little bit different right off the bat is that 

11 we are going to send out before the survey actually 

12 goes out a pre-survey notice. Probably 30 days, 

13 maybe 45 days, before the survey goes out just to 

14 say hey, examination is going to be completed soon, 

15 we want you to know that we do want your feedback 

16 and then the survey will eventually go out with the 

17 examination report.

18 We're also going to be sending out a 

19 reminder notice probably 45 days or so after the 

20 survey goes out again to let you know that this 

21 feedback is extremely important to us.

22 Also, we're going to build in a process 
246

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 that if a bank does request a follow-up contact that 

2 before we send that information over to the driver 

3 divisions or whoever's going to do the follow-up,

4 that we find that information and before it goes 

5 forward that we redact that information and only 

6 the contact information will be provided to the 

7 driver divisions. None of the survey information 

8 will be going forward.

9 We're also eventually going to take a 

10 look at some of the survey questions, and we'll be 

11 communicating potential changes to the industry.

12 So, I did want to go through this. I 

13 know I went through it quickly, but I did want to 

14 get to the point so I could ask you questions and 

15 see if you have completed the survey. If you have 

16 not, why not? If you have suggestions.

17 MEMBER DEBIASI: Anthony, I find it 

18 quite astonishing that that response rate is that 

19 low. If I recall, the survey is not that in-depth 

20 I don't believe if I recall correctly. We're not 

21 talking a lot of time commitment.

22 MR. LOWE: It's basically the five 
247

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 categories, I think it's a total of 26 questions. 

2 There's a couple of nuanced differences between the 

3 risk and compliance, but they're basically the 

4 same. You could probably do them in 15 minutes or 

5 less because you just ask do you agree or disagree, 

6 the depth of your agreement or disagreement with 

7 the 26 questions. So it should not take a lot of 

8 time. So I'm assuming you have completed yours.

9 MEMBER DEBIASI: That's correct. At 

10 least I wouldn't admit it if I didn't.

11 (Laughter)

12 MEMBER LEAVITT: We've issued our 

13 survey attached to the report of examination 

14 confidentially to the members of the board so that 

15 they can see that. And then VP of risk management 

16 collates from board and senior management some 

17 sense what those responses are and then she 

18 completes on behalf of our organization and I 

19 approve and we submit. So that's the process that 

20 we use. It seems fairly straightforward.

21 MR. LOWE: And you use FDIC Connect to 

22 submit it? Okay.
248

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER LEAVITT: We will be. We're in 

2 that process right now.

3 MR. LOWE: Okay.

4 MEMBER EPSTEIN: I would encourage you 

5 to communicate the fact that it should only take 

6 10, 15, 20 minutes to complete the survey.

7 I know we've done some surveying of 

8 customers and would-be customers and if you express 

9 right up front that it's a minimal time commitment 

10 then your response rates are much higher. So you 

11 may just want to mention that when you initially 

12 submit these to various banks.

13 MR. DAVIS: Anybody else?

14 MR. LOWE: If you have any other 

15 suggestions or comments, my contact information is 

16 on the last slide. So I appreciate the time. 

17 Thank you.

18 MR. DAVIS: Thanks, Anthony.

19 CHAIRMAN MCWILLIAMS: If I can just add 

20 something, please. So please utilize Anthony's 

21 office. We have an Office of the Ombudsman for a 

22 reason. And it's -- Anthony is doing extended 
249

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 outreach and his folks are engaging as well.

2 But we don't have it just as a 

3 perfunctory function. We have it because it's 

4 supposed to be real and it's supposed to be 

5 meaningful. So if you have any recommendations,

6 either provide them to Chad, Anthony, or myself.

7 But we're looking to strengthen the 

8 role of the ombudsman and the appeals process as

9 well at the FDIC. Thank you.

10 MR. DAVIS: Great. With that it's 

11 break time. If I could borrow five minutes from 

12 it and ask that people still be here at 2:45 then 

13 we'll try and get in the last two sessions. Thank 

14 you.

15 (Whereupon, the above-entitled matter 

16 went off the record at 2:36 p.m. and resumed at 2:47 

17 p.m.)

18 MR. DAVIS: So we are going to move back 

19 into the morning part of the agenda one more time. 

20 We've got a briefing on the results of the 2017 

21 National Survey of Unbanked and Underbanked 

22 Households from the Division of Depositor and 
250

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Consumer Protection. We have Associate Director 

2 Keith Ernst and Senior Financial Economist Alicia 

3 Lloro and Jeffrey Weinstein. Thank you.

4 MR. ERNST: Great, thank you, Chad. 

5 Good afternoon, everyone. 

6 One of the responsibilities we have at 

7 the FDIC is to assess participation in the banking 

8 system. 

9 Over the years, survey research has 

10 become a key staple of our approach in this area,

11 and so we're really pleased to share with you the 

12 results from our latest survey that we released 

13 just in the fourth quarter.

14 The survey is the product of diligent 

15 work by a small group of researchers including 

16 Jeffrey and Alicia who work together with our 

17 partners at the Census Bureau to really ensure that 

18 the work meets rigorous standards. It provides a 

19 reliable frame of reference for understanding the 

20 extent and nature of participation in the banking 

21 system and for beginning to think about the 

22 opportunities to expand economic inclusion.
251

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 We have a relatively short presentation 

2 of results. We'll offer a few thoughts about the 

3 implications from the findings after which we'll 

4 look forward to addressing your questions and 

5 hearing your observations.

6 And I'll just, I'll say for us it's a 

7 real treat to get to share this information with 

8 you. We look forward to the opportunity for 

9 engagement, and I hope you get as much out of the 

10 presentation as we do. Thank you.

11 MR. WEINSTEIN: Okay. Thank you, 

12 Keith. So this presentation is going to highlight 

13 some of the findings from the 2017 FDIC National 

14 Survey of Unbanked and Underbanked Households. 

15 And our full report is going to cover additional 

16 topics.

17 So as Keith mentioned, in partnership 

18 with the U.S. Census Bureau, the FDIC conducted its 

19 fifth biennial household survey in June 2017.

20 The goals of the survey are to provide 

21 reliable estimates of unbanked and underbanked 

22 populations as well as insights into how banks 
252

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 might better meet the needs of these consumers.

2 The sample is nationally 

3 representative with over 35,000 respondents and 

4 estimates are available at the national and state 

5 levels and for larger metropolitan statistical 

6 areas, MSAs.

7 So a household is classified as 

8 unbanked if no one in the household had a checking 

9 or savings account. 

10 And a household is classified as 

11 underbanked if it had a checking or savings account 

12 and used one of the listed on this slide transaction 

13 or credit products or services from an alternative 

14 financial services (AFS) provider in the past 12 

15 months.

16 In 2017, 6.5 percent of U.S. 

17 households, 8.4 million, were unbanked. The 

18 unbanked rate in 2017 fell to the lowest level since 

19 the survey began in 2009.

20 The 0.5 percentage point decline in the 

21 unbanked rate from 2015 to 2017 can be explained 

22 almost entirely by changes in household 
253

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 characteristics across survey years, particularly 

2 improvements in the socioeconomic circumstances of 

3 U.S. households including income, educational 

4 attainment, and employment status.

5 However, if we look at the longer term 

6 decline from 2011 to 2017, only about half of this 

7 decline can be explained by changes in household 

8 characteristics across survey years, the longer 

9 term decline.

10 In 2017, 18.7 percent of U.S. 

11 households, approximately 24.2 million, were 

12 underbanked. The underbanked rate declined by 1.2 

13 percentage points from 2015, and approximately 

14 half of this decline can be explained by 

15 improvements in the socioeconomic circumstances of 

16 U.S. households.

17 As in previous years, unbanked and 

18 underbanked rates varied considerably across the 

19 population. 

20 For example, unbanked and underbanked 

21 rates were higher among lower-income households, 

22 less-educated households, younger households, 
254

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 black and Hispanic households, households headed 

2 by a working age individual with a disability, and 

3 households with variable income, income that 

4 varied from month to month.

5 Just to give you a flavor of changes in 

6 unbanked rates for certain populations, I'll go 

7 through this pretty quickly.

8 Unbanked rates in 2017 were lower than 

9 or similar to unbanked rates in recent years for 

10 most segments of the population.

11 Recent declines in unbanked rates have 

12 been particularly sharp for younger households as 

13 shown in the graph here.

14 Unbanked rates among black and Hispanic 

15 households have also declined sharply in recent 

16 years. However, despite these improvements,

17 unbanked rates for younger households and for black 

18 and Hispanic households remain substantially 

19 higher than the overall unbanked rate in 2017.

20 So looking at geographic variation. 

21 As in previous years, unbanked rates in 2017 varied 

22 widely across states with unbanked rates generally 
255

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 highest in the south.

2 Unbanked rates ranged from 1.5 percent 

3 in Vermont and Minnesota to 15.8 percent in 

4 Mississippi. And although not shown here,

5 underbanked rates in 2017 also varied widely across 

6 states.

7 So the 2017 survey asked unbanked 

8 households about the reasons why they did not have 

9 a bank account. Findings are similar to those 

10 reported in previous years.

11 So if we look at the top two bars, in 

12 2017 more than half of unbanked households, 52.7 

13 percent, cited do not have enough money to keep in 

14 an account as a reason for not having a bank 

15 account, the most commonly cited reason.

16 And this reason was also the most 

17 commonly cited main reason for not having an 

18 account, the light blue bar, 34.0 percent.

19 Three in ten unbanked households cited 

20 don't trust banks as a reason for not having an 

21 account, the second most commonly cited reason. 

22 And this reason was also the second most commonly 
256

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 cited main reason for not having an account.

2 And if we look across the different 

3 reasons, if we look at the light blue bars, we can 

4 see that account fees are too high was the third 

5 most commonly cited main reason for not having a 

6 bank account.

7 So moving on to some information about 

8 banked households. So as in earlier surveys,

9 banked households were asked about the methods they 

10 used to access their accounts in the past 12 months.

11 We can see from the graph that use of 

12 mobile banking as a primary method of account 

13 access increased sharply from 5.7 percent in 2013 

14 to 15.6 percent in 2017.

15 On the other hand, if we look at the top 

16 set of bars, use of bank tellers as a primary method 

17 of account access declined substantially from 32.2 

18 percent in 2013 to 24.3 percent in 2017.

19 However, even with the decline in the 

20 use of bank tellers, this method remains the second 

21 most commonly cited -- the second most prevalent 

22 primary method of account access after online 
257

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 banking.

2 And I would now like to turn the 

3 presentation over to Alicia to talk more about bank 

4 branch visits.

5 MS. LLORO: Thanks, Jeffrey. So in 

6 addition to asking banked households about the 

7 methods that they access their accounts by, we also 

8 asked them specifically about bank branch visits.

9 And in 2017, 86 percent of banked 

10 households visited a bank branch at least once. So 

11 that means that they spoke with a teller or other 

12 employee in person at a bank branch.

13 And about one-third visited a bank 

14 branch 10 or more times. Since we get this 

15 question a lot, I want to iterate that it doesn't 

16 count ATM-only visits. So they had to speak with 

17 a teller or other employee in the branch.

18 So we found that bank branch visits were 

19 especially prevalent in rural areas as nearly half 

20 of households in rural areas visited 10 or more 

21 times.

22 We also found that bank branch visits 
258

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 were prevalent among households that use mobile or 

2 online banking as their primary method of account 

3 access. About one quarter of these households 

4 visited a bank branch 10 or more times in the past 

5 12 months.

6 Turning now to credit, the 2017 survey 

7 included questions to capture the full range of 

8 credit products that are likely reported to the 

9 major credit bureaus. We call this mainstream 

10 credit.

11 The most common credit product was a 

12 credit card followed by mortgages, auto loans and 

13 student loans. About 20 percent of households had 

14 no mainstream credit in the past 12 months. As a 

15 result, these households likely do not have a 

16 credit score and likely face substantially reduced 

17 access to mainstream credit.

18 Differences in rates of no mainstream 

19 credit were especially pronounced by income. For 

20 households with less than $15,000, about half of 

21 them had no mainstream credit in the past 12 months. 

22 This is compared to only 4.3 percent with 
259

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 households greater than $75,000 in income.

2 We also found large differences by 

3 disability status and race and ethnicity. About 

4 40 percent of households headed by a working age 

5 individual with a disability had no mainstream 

6 credit.

7 And then looking at race and ethnicity,

8 about one-third of black and Hispanic households 

9 had no mainstream credit compared to 14 percent for 

10 white households.

11 So one thing you might be thinking, are 

12 these racial and ethnic differences really 

13 reflecting differences in incomes? And so I just 

14 told you the differences by income were striking.

15 But if we look across income levels, we 

16 see the pattern persist. So for example, for 

17 households with income fifty to seventy-five 

18 thousand dollars, black and Hispanic households 

19 are more than twice as likely as white households 

20 not to have mainstream credit. A similar pattern 

21 for households with at least $75,000 in income. 

22 Hispanic households are about twice as likely and 
260

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 black households about three times as likely not 

2 to have mainstream credit as white households.

3 Looking at geographic differences, the 

4 map looks quite similar to that for the unbanked 

5 rates. Rates are quite high in the south. The 

6 state with the lowest rate of no mainstream credit 

7 is Minnesota at 8.1 percent. The state with the 

8 highest rate at nearly 40 percent is Mississippi.

9 Looking now at just mainstream small 

10 dollar credit, which we define as a credit card or 

11 a personal loan or line of credit from a bank, we 

12 find that some households may not have their small 

13 dollar credit needs met fully by banks.

14 So we classify a household as having 

15 unmet demand for mainstream small dollar credit if 

16 they applied for a credit card or a personal loan 

17 or line of credit from a bank and was either denied 

18 or not given as much credit as applied for.

19 If the household thought about applying 

20 for a credit, but didn't do so because they thought 

21 they might be turned down, or if they used one of 

22 the credit AFS products, such as a payday loan or 
261

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 a pawn shop loan.

2 We found in 2017 that 12.9 percent of 

3 households had unmet demand. 

4 Staying current on bills is one measure 

5 of creditworthiness, and we find that 57.2 percent 

6 of these households stayed current on bills in the 

7 past 12 months. You have to excuse me, I've been 

8 getting over a cold.

9 So from our findings, we have three 

10 selected implications here.

11 The first one is that new underwriting 

12 technologies may help expand access to small dollar

13 credit. Account balances and transactions may 

14 facilitate underwriting of small dollar credit for 

15 banked consumers.

16 A second is that physical access to bank 

17 branches remains important even as use of mobile 

18 and online banking has increased.

19 And then finally, targeted strategies 

20 for outreach or product design may help sustain 

21 increases in bank account ownership during 

22 economic downturns and increase access for 
262

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 population segments with high unbanked rates.

2 Okay, and then to wrap up, we want to 

3 advertise our website which is 

4 economicinclusion.gov. 

5 Here you can find our full report with 

6 the household survey results along with an 

7 executive summary and many, many appendix tables.

8 We also have a custom data table in case 

9 our appendix tables don't include a statistic that 

10 you're interested in. You can query our data 

11 yourselves.

12 And then we also have some new five-year 

13 estimates which help us provide more estimates for 

14 smaller geographies and to help us fill out state 

15 tables with more data.

16 And with that I'd like to pass it back 

17 to Keith.

18 MR. ERNST: Great. Thank you, Alicia 

19 and Jeffrey. 

20 I hope one of the things that comes 

21 through in the presentation is this is not just for 

22 us an effort to take a census of unbanked or 
263

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 underbanked households, but really to try and to 

2 deliver some insights into their circumstances 

3 with a thought that by providing those insights we 

4 can think a little bit constructively and start the 

5 conversation around what the opportunity looks 

6 like to expand opportunity and their participation 

7 in the banking system.

8 Whether that's thinking about the unmet 

9 demand for small dollar credit or thinking about 

10 the reasons households give for not having a bank 

11 account it's information that we're bringing to the 

12 table on an every other year basis.

13 And as Alicia has highlighted here 

14 trying to do our best to make accessible in a 

15 variety of formats.

16 Look forward to at this point taking 

17 questions from you about the effort, about the data 

18 points you've heard, taking your suggestions, your 

19 observations and reflections on your experiences 

20 thinking about these issues as well.

21 MEMBER K. KELLY: Do you happen to have 

22 any data that demonstrates the cost associated with 
264

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 being unbanked?

2 And what I mean when I say that is for 

3 me to go and cash my check at a check cashing place 

4 what does that cost?

5 Help me if you have some data on that 

6 to kind of understand the economics of that. And 

7 you see it, it impairs the economics of those who 

8 are less fortunate economically and just looking 

9 at that and also a little bit through ethnicity.

10 If you don't have that that's fine, but 

11 I just wanted to know if there's any research on 

12 that.

13 MR. ERNST: Right. We don't have that 

14 data specifically. Those costs vary quite a bit 

15 across different geographies and different 

16 circumstances.

17 It's not something that we focused on. 

18 We can say on the basis of some of the survey results 

19 we see is that families certainly do have a 

20 sensitivity to the cost of financial services.

21 And in qualitative research we've done 

22 with consumers, affordability is one of the key 
265

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 dimensions that they think about. 

2 But there are other dimensions like 

3 control and convenience that come into play as 

4 well. So it's obviously cost is an important 

5 element of the equation.

6 I take also from your comment the 

7 observation that many households could benefit 

8 from a banking relationship maybe where some of 

9 those fees wouldn't be as costly.

10 I know we had a little bit of a 

11 conversation at lunch about that and I think that's 

12 exactly right. I think part of the thought behind 

13 this is thinking about how more families can 

14 experience the benefits of a productive banking 

15 relationship.

16 MEMBER K. KELLY: Right. And so for 

17 me, it comes to the foundational principle of 

18 financial literacy, right. And if I have the 

19 numbers, it's very easy to comprehend that if I'm 

20 doing check cashing it costs me X percent, but if 

21 I have a bank account -- and maybe it does have a 

22 fee, but if I have things that offset that fee it's 
266

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 a wiser decision. On top of the convenience and 

2 other things that may be a factor.

3 So if there can be some form of an 

4 analysis that's, again, could be average across the 

5 nation or whatever those numbers may be I think it 

6 helps to communicate the message there from a 

7 financial literacy perspective.

8 MR. ERNST: Thank you.

9 CHAIRMAN MCWILLIAMS: We have already 

10 submitted questions for the 2019, right? They are 

11 in the process. 

12 If you don't see, Ken, any of these 

13 questions built in it's because our questions were 

14 due and we have submitted them.

15 MEMBER K. KELLY: Certainly.

16 CHAIRMAN MCWILLIAMS: So it may be 

17 2021.

18 MEMBER K. KELLY: No problem. Thank 

19 you.

20 MR. ERNST: I think we can also look for 

21 secondary sources. To the extent that we can bring 

22 information back to the table, we can look at 
267

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 secondary sources and think about other 

2 opportunities to learn about these efforts. But 

3 that's exactly right.

4 One of the things that's interesting 

5 about survey research is you sort of never stop. 

6 You're constantly thinking ahead to the next 

7 iteration and how to sort of improve upon your 

8 instrument. Thank you.

9 MEMBER SHETTLESWORTH: Concerning the 

10 unbanked or underbanked, does that include or where 

11 does PayPal and stored money cards come into? I 

12 have a follow-up question for the bulk of those 

13 deposits that are not in the banking industry what 

14 that problem is.

15 MR. ERNST: Prepaid cards in 

16 particular are an area that occupy a bit of a gray 

17 zone. And most of the I think devices you're 

18 talking about would fall into that space.

19 And generally the instrument takes the 

20 approach that -- what we're asking about is a 

21 primary banking relationship. So for prepaid 

22 cards that are managed primarily by a non-bank 
268

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 organization, they would not be included as banked 

2 consumers in our survey. 

3 One of the innovations we're trying to 

4 bring to the next survey which will be in the field 

5 this June is to make sure we can capture banked 

6 customers who may be using a prepaid card managed 

7 by the bank.

8 Right now those customers, it's a 

9 relatively small proportion of prepaid card users, 

10 but they're in a gray zone. And we can identify 

11 that they're using a prepaid card, but we just 

12 haven't had the questions in place to be able to 

13 capture them as banked customers. That is one of 

14 the changes we're looking to bring forward in the 

15 next instrument.

16 MEMBER SHETTLESWORTH: Chris Donnelly 

17 and I were last week at a Federal Reserve Bank of 

18 Kansas City for a similar advisory meeting and I 

19 believe they told us $18 billion is the number. 

20 Does that sound right?

21 MEMBER DONNELLY: Eighteen billion in 

22 Venmo.
269

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 MEMBER SHETTLESWORTH: Okay, so just 

2 in Venmo. And so when I see a chart like that, I 

3 appreciate it, right. So we don't have -- this 

4 basically says it's hard to bank with banks because 

5 they charge us fees for that stuff.

6 So this is a black mark on the banking 

7 industry, and I get real frustrated when I hear 

8 stuff like $18 billion with Venmo or whatever that 

9 number is.

10 Well, it's not hard to keep costs down 

11 when you don't have the regulatory compliance 

12 burden that banks like us do. And so that's one 

13 point of frustration.

14 But then the other point is what happens 

15 -- everything is fine until we have an extra session 

16 and the $18 billion goes to zero because of some 

17 glitch, right?

18 And so I'm just curious. I don't think 

19 that's necessarily the FDIC's problem, but you can 

20 see how that's going to be a huge problem not if,

21 but when, one of those big failures triggers a lot 

22 of consumer losses.
270

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 So is that something that's discussed 

2 at the FDIC?

3 MR. ERNST: So not in the context -- so 

4 in the context of this particular survey, we're 

5 trying to understand sort of consumer choices and 

6 what's motivating them.

7 I think your question goes more to sort 

8 of the integrity of the payment system and what's 

9 happening there. I can assure you there are a lot 

10 of -- a lot of energy and thought is given to 

11 understanding the payment system developments and 

12 the payment systems and the implications for 

13 consumers and for industry as well.

14 But for this particular panel of folks 

15 you have here, we're focused very much on sort of 

16 the consumer choice and what's driving that choice. 

17 So your question is maybe just a little afield for 

18 this group.

19 MEMBER DONNELLY: Keith, just one 

20 quick question. Fifty-two percent, almost 

21 fifty-three percent say that the reason they don't 

22 have an account is they don't have enough money.
271

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Can you translate that to a real number, 

2 or is the data even available for that?

3 MR. ERNST: So that question in 

4 particular is one that has been difficult for us 

5 to interpret.

6 Based on some work we've done through 

7 testing for this next round, we are going to adjust 

8 that question. So rather than being that 

9 nebulous, it's going to be changed to ask whether 

10 you feel like you don't have enough money to meet 

11 minimum deposit requirements.

12 So that we can understand really what 

13 the source of that concern is. And there's some 

14 indication that that may be at play, but we'll get 

15 at that through the new question.

16 MEMBER DAKRI: Just a follow-up on that 

17 question too. Is there a baseline that you guys 

18 think exists out there of those who really don't 

19 have enough money.

20 When I read that what I look at is this 

21 says I get my paycheck Friday, I go cash it, I buy 

22 groceries, I buy whatever and then I'm done. I 
272

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 don't have any more money left over.

2 Not so much what you guys were talking 

3 about there. I think it's more I just don't have 

4 the money.

5 MR. ERNST: The really interesting 

6 question coming out, one of the interesting 

7 questions coming out of our survey is we observe 

8 households even at the very lowest income 

9 thresholds asked about the survey. Households 

10 earning less than $15,000 a year, almost half of

11 those households if I'm remembering the statistic 

12 correctly have a bank account.

13 So even among the very lowest income 

14 households in our survey, we do see families 

15 maintaining account ownership.

16 I think the really interesting question 

17 is what is it about their experiences, what is 

18 differentiating their choices from the choices of 

19 otherwise similarly situated households that 

20 aren't maintaining. 

21 Is it a question of perception of 

22 expense more than reality? Is it some other 
273

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 dimension along which they're interested? We 

2 highlighted the importance of the availability of 

3 branch services.

4 What is it that's making the 

5 difference? And I think that's one of the sort of 

6 unanswered areas that we're trying to learn more 

7 about.

8 MEMBER WALKER: Excuse me. To follow 

9 up on Kenneth's question and looking at the states 

10 and the different color coding, were you able to 

11 kind of tell or can you tell from the data those 

12 states that like in Minnesota that maybe offer 

13 financial education in different -- like in the 

14 schools?

15 Because there are some states that 

16 don't provide it at all and that's an issue.

17 MR. ERNST: Sure. You certainly 

18 highlight a topic in which the FDIC has a lot of 

19 interest given our development of the Money Smart 

20 financial literacy curriculum.

21 I don't know that we know enough about 

22 the state of financial literacy programs in schools 
274

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 across the nation in connection with our data to 

2 have an answer for you today.

3 And I'm looking over at Jeffrey and 

4 Alicia to see if they have a thought on this in 

5 particular. It's an area we could follow up and 

6 explore more, and it's certainly an area where we 

7 have put some programmatic resources in our 

8 community affairs program into supporting the 

9 integration of financial literacy in schools.

10 Money Smart itself is mapped to 

11 curriculum so that school systems can adopt it and 

12 integrate it into their programming. But taking 

13 a look and understanding more about that 

14 relationship would be interesting.

15 MEMBER WALKER: Yes, and there's 

16 others as well besides schools. Older adults.

17 MR. ERNST: Absolutely.

18 MEMBER PAINE: Alicia, you said that we 

19 could get local information on the state level on 

20 the website. Is that correct? 

21 MS. LLORO: Yes. So there's 

22 information. We report for every state and then 
275

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 certain MSAs we provide estimates for as well. Not 

2 all MSAs.

3 MEMBER PAINE: We do have in our 

4 situation -- and I know we're Minnesota. We're the 

5 bomb, right?

6 (Laughter)

7 MEMBER PAINE: But the challenge for us 

8 is we do have a portion of our population that 

9 actually is unbanked. We have three Native 

10 American reservations that have some challenges 

11 with their banking relationships or lack thereof.

12 And so we need -- I don't know if it gets 

13 that granular as far as region or just state. You 

14 know, where can we help and address and move 

15 forward. And so that would be helpful to us.

16 MR. ERNST: So we do have, as Alicia has 

17 indicated, the state-level responses and they are 

18 broken out for different demographic groups where 

19 we have enough observations to provide a reasonably 

20 precise estimate.

21 We have over 35,000 responses to this 

22 survey which makes it the largest survey of its 
276

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 kind. It enables us to sort of drill down deep.

2 We do eventually hit into limits where 

3 some population segments are just not well 

4 represented enough. I just don't know offhand 

5 whether we'll have that particular data item, but 

6 we can look.

7 MEMBER PAINE: Thank you.

8 MEMBER EPSTEIN: I'd just like to say 

9 appreciate this information. It's certainly --

10 it's telling and it's encouraging in that most of 

11 the trends are favorable and would agree that it 

12 boils down to financial literacy.

13 And in many cases I suspect some of the 

14 unbanked or underbanked come from families where 

15 their parents or grandparents were unbanked or 

16 underbanked.

17 And some of our efforts to -- education 

18 initiatives in the school and so forth, hopefully 

19 sort of a two-pronged approach.

20 One is financial literacy in terms of 

21 the math and so forth, but also just a chance for 

22 the students to engage with a banker and help them 
277

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 understand that bankers are not beyond reproach, 

2 or bankers are not only interested in speaking to 

3 people that have wealth and sort of break down some 

4 of those perceptions.

5 But with that said I don't know -- this 

6 may be beyond the scope of your survey, but if there 

7 are any particular inclusion initiatives that 

8 other banks have launched that have been 

9 successful, sharing that information would be 

10 terrific because we all have a vested interest in 

11 doing this because it's the right thing to help 

12 these families enter into the banking system.

13 And also of course it's going to expand 

14 our base of customers and we're all interested in 

15 that.

16 MR. ERNST: Let me say we have two 

17 previous research products that I think may be 

18 responsive to your question.

19 So first the FDIC ran a pilot looking 

20 at a product called Safe Accounts which were 

21 checkless checking accounts designed with 

22 overdraft and NSF with the thought being without 
278

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 the checks and without those fees it may be a little 

2 bit easier for some of these families to navigate 

3 that account.

4 What we found at the time and what's 

5 been borne out by more recent research from the 

6 Federal Reserve Bank of St. Louis is the evidence 

7 that those accounts were feasible and popular with 

8 consumers.

9 And so that is one report that can be 

10 linked to from this. We can provide it of course 

11 as well.

12 The other study we did was a deep dive 

13 look into the strategies that banks were using to 

14 expand economic inclusion among a subset of banks 

15 that had earned a reputation in that area.

16 And one of the messages that came 

17 through clearly in that effort was the need to have 

18 a strategy to build trust and connection and 

19 relevance with target communities.

20 The message we heard from banks 

21 directly, but also from community partners, was 

22 that the product itself was necessary, but probably 
279

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 not enough in and of itself to build that bridge, 

2 that those strategies were an important part of the 

3 equation.

4 So those are two immediate things that 

5 come to mind as responsive. I don't know how they 

6 strike you or if they're intuitive or if they raise 

7 other questions for you, but we'd be glad to 

8 respond.

9 MEMBER EPSTEIN: Any specifics that 

10 would help us in terms of execution rather than the 

11 trial and error that we have been experiencing. If 

12 there's certain programs or initiatives that have 

13 been highly successful, then we'd love to duplicate 

14 it.

15 MR. ERNST: One thing I would say. So, 

16 in our Safe Accounts report, we provide some tables 

17 to talk about institutions' experiences retaining 

18 those accounts with the types of balances that ran 

19 through those accounts.

20 The Federal Reserve Bank of St. Louis 

21 has additional information that can help you 

22 understand sort of the nature of the transaction 
280

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 activity in those accounts that might give you a 

2 sense of what you might expect performance to be 

3 through accounts designed like that, targeted at 

4 households like this.

5 MR. DAVIS: Thank you very much. 

6 MR. ERNST: Thank you all.

7 MR. DAVIS: We have one more session 

8 that I think would be good to get in today. So I'd 

9 like to welcome our chief of staff Brandon Milhorn.

10 He's going to discuss the FDIC's

11 Subcommittee on Supervision Modernization. This 

12 is actually a subcommittee of this committee so I 

13 thought it would be interesting for the committee 

14 members to hear about this.

15 The subcommittee met earlier this month 

16 and was established to advise all of you on the 

17 particular topic. 

18 And I'm also if he doesn't mind going 

19 to put David on the spot as a member of the 

20 subcommittee to also perhaps chime in on this as 

21 well. So, thank you.

22 MR. MILHORN: So, thank you very much. 
281

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 When we set out our goals, when the chairman set 

2 out our goals for the FDIC in 2019, many of them 

3 related to the efficiency and effectiveness of the 

4 FDIC being responsible stewards for the Deposit 

5 Insurance Fund which provides us a budget which is 

6 funded by banks' fees, embracing and reinvesting 

7 in technologies at the FDIC, and also cutting the 

8 cost of compliance for our regulated institutions. 

9 So that we're getting the benefits of an efficient, 

10 effective supervisory model that protects risk and 

11 mitigates that risk, but doing it in a way that 

12 doesn't overburden the institutions we supervise.

13 So one of the ways -- our examination 

14 teams are already doing a fabulous job of scoping 

15 their examinations. Whether it's our DCP 

16 examiners on the consumer compliance side, efforts 

17 that our RMS team is making on its exam including 

18 risk scoping on the front end and forward-looking

19 supervision -- all initiatives that have taken 

20 place over the last several years.

21 But the question that I wanted to answer 

22 was where are we going to be 10 years from now. 
282

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 Where are we going to be 5 years from now, where 

2 are we going to be 10 years from now and what do 

3 we need to be doing now from a training standpoint, 

4 from a technology standpoint, from a workforce 

5 deployment standpoint that gets us to where we need 

6 to be?

7 As I've talked I know to some of you my 

8 background is not banking. My background is 

9 homeland security and intelligence.

10 But the challenges that we face in many 

11 ways are the same. How do you identify risk early, 

12 how do you take steps to mitigate it, that you get 

13 good information to policy-makers to make 

14 decisions about that risk.

15 And so we set out to create a 

16 Supervision Modernization Subcommittee for the 

17 Community Bank Advisory Committee.

18 The goal of that subcommittee is to pull 

19 apart our examination process, look at how we 

20 deploy our staff, how we train our staff, how we 

21 use technology in the process, what data we need 

22 from our supervised institutions, how we use that 
283

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 data in the supervision process, and how we can 

2 become more effective supervisors over the course 

3 of the next several years using technology and by 

4 reexamining our processes.

5 That initiative kicked off in January. 

6 We identified 15 members. Five members are from 

7 banks from various sizes and shapes, from a 

8 technology -- from a size standpoint, from an 

9 adoption of technology standpoint.

10 We identified several former 

11 regulators to participate and a former examiner, 

12 two former regulatory attorneys, a couple of 

13 technology service providers with backgrounds to

14 sort of give us advice on where technology is 

15 heading, and seven pure sort of technologists who 

16 could just advise on how we're using data, how we're 

17 using technology.

18 And an expert on distance learning,

19 because we want to know how we can better train our 

20 workforce in that environment.

21 And so the questions that we've asked 

22 the subcommittee is real simple. The goal of the 
284

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 FDIC as I said is the early identification and 

2 mitigation of risks at our institutions and across 

3 the financial system.

4 And as I've said many times I know to 

5 some of you and at the subcommittee meeting, the 

6 examination, the conduct of an examination is not 

7 the goal of the FDIC. It is a tool of the FDIC in 

8 completing its mission.

9 Now, there are statutory requirements 

10 to conduct full-scope onsite examination, but what 

11 that means and certainly what that means over time 

12 given our technology is going to change and going 

13 to evolve.

14 And what we want to look at is how we 

15 can use data, how we can use technology not only 

16 to reduce the cost of compliance for our 

17 institutions, but also provide a better work-life 

18 balance for our employees and to be better 

19 supervisors and better at mitigating risk.

20 So the goal of the subcommittee is 

21 simply put that broad.

22 And we've conducted one meeting where 
285

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 we looked at sort of the fundamentals of the FDIC, 

2 who we are, how we do our mission. Get some sort 

3 of FDIC 101 training for the non-banking experts 

4 that we have on the committee.

5 At that meeting, we identified several 

6 areas where we want to look more deeply, whether 

7 it's our training environment, whether it's how we 

8 conduct loan reviews, whether it's how we get data 

9 from banks and share data with banks being part of 

10 that component.

11 Our subcommittee is going to divide up, 

12 dive in on those particular topics with the goal 

13 of informing the FDIC's budget build as we head into 

14 2020 and also ultimately producing a report that 

15 this committee could consider as recommendations 

16 to produce to the Chairman and the Board so that 

17 we can continue to improve and continue to evolve 

18 as an agency. 

19 So that is, I think, broadly stated the 

20 goal of the subcommittee and I'd be happy to take 

21 any questions. Or David, if you want to expound?

22 MEMBER HANRAHAN: That was a great 
286

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 summary. I don't think I can add a whole lot to 

2 that.

3 I will say that the FDIC assembled a 

4 really good cross-section of people only about 

5 one-third of whom are bankers for this 

6 subcommittee. I'm honored to serve on it.

7 And Brandon and Kathy Moe did a really 

8 good job at our first meeting level setting for the 

9 non-bankers in the room how the FDIC conducts its 

10 supervision and examinations.

11 And I'm sure those non-bankers were 

12 working hard to keep up with all of the banking 

13 acronyms that we all know by second nature.

14 By the same token, as the discussion 

15 began to turn towards tech, my head began to hurt 

16 as I tried to absorb some of the things that the 

17 data scientists and technologists in the room began 

18 to discuss.

19 One of the interesting things that 

20 Brandon did during our first meeting was show a 

21 couple of photographs on that screen of what a 

22 typical bank exam room looks like. And it had a 
287

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 conference table with stacks of loan files this 

2 high, and a bunch of examiners huddled around it 

3 working hard.

4 And I said in the meeting probably a 

5 little too loud that's exactly what an exam looks 

6 like at Capital Bank of New Jersey with our paper, 

7 our unscanned paper loan files piled high.

8 And I think I caught a few eye rolls 

9 around the table from the technologists that were 

10 there. In fact, the term Luddites kind of came out 

11 once. How unsophisticated some of us have been 

12 with our lack of loan imaging, for example.

13 But it's going to be I think a very 

14 interesting and important work that the FDIC is 

15 doing and I'm proud to serve on the subcommittee.

16 MR. MILHORN: Thank you. It was very 

17 important for us to get a sense of not just from 

18 banks like David's all the way up to more 

19 technology-driven and larger complex institutions 

20 because that is the -- sort of the core of the group 

21 of banks that the FDIC supervises. 

22 We come in all shapes and sizes and that 
288

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 is -- we tried to capture that on the subcommittee. 

2 And we have to adopt supervisory processes that 

3 take that into account.

4 MR. DAVIS: Great. Any questions? 

5 MEMBER LEAVITT: I would just say I'm 

6 not sure what the variability is in the room among 

7 states relative to FDIC and state banking 

8 authorities alternating exams, but going to an 

9 18-month cycle for many of us, that means we may 

10 not see the FDIC onsite but every 36 months.

11 I don't know how others are going to 

12 feel when I say this, but that's almost too 

13 infrequent.

14 So, this idea of establishing a bridge 

15 in if not realtime certainly more frequent batches 

16 of exchange of information so that when we do get 

17 an onsite it's a meaningful, qualitative process 

18 and not simply a validation of quantitative metrics 

19 that could be exchanged and fed back and forth in 

20 a more frequent cycle.

21 MR. MILHORN: There's never going to be 

22 a substitute for that face-to-face meeting with 
289

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 your examination team. That relationship is very 

2 critical.

3 But one of the things as I step sort of 

4 in from the outside and look at the examination 

5 process, I'm struck by the fact that it's very point 

6 in time. It's that 18-month cycle. It's those 

7 quarterly call reports.

8 And I think back to my experience in 

9 areas like cybersecurity where, you know, 20 years 

10 ago maybe we were okay with that annual report on 

11 cybersecurity. Then that become a monthly report.

12 Then we thought well you know, we need 

13 to identify risk on a much more timely fashion and 

14 moved to continuous monitoring.

15 And so the question I think, in my mind,

16 is how do you balance that ongoing dialogue, that 

17 shared understanding of risk at the institution and 

18 with the FDIC.

19 How do you get on the same page with data 

20 without imposing a too significant burden on the 

21 institutions where our examination team, our 

22 supervisory team can have that dialogue-based 
290

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 supervision where you're in contact much more often 

2 and leading to a very focused examination on only 

3 those matters that can't be conducted without data.

4 And that to me is the key question that 

5 we're trying to answer. And then as you roll out 

6 from that what's the technology needed, does our 

7 training model have to change, does how we're 

8 deployed change? 

9 What does the skill set of our workforce 

10 look like? Do we need a bunch of people who have 

11 experience in finance, or do we need data 

12 scientists? 

13 And those are all questions that we're 

14 wrestling with in the context of the subcommittee.

15 MEMBER EDWARDS: So I agree with the 

16 comments about -- I hope this doesn't take away from 

17 in-person examinations. I think that's important 

18 to do that.

19 I might be able to get by with a 

20 three-year visit. 

21 (Laughter)

22 MEMBER EDWARDS: Not that I don't enjoy 
291

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 the conversations that we have. I'm just kidding.

2 But having said that, I commend you guys 

3 for just taking an absolutely fresh look at this,

4 because I think the more effectively that the FDIC 

5 can peer into all of our portfolios on a realtime 

6 basis and have an understanding of what's going on 

7 nationally, the better able you're going to be able 

8 to identify sort of mega trends about what's 

9 happening and do your job better, and also help us 

10 be aware of trends that are emerging.

11 So, I'm excited about the process and 

12 look forward to hearing how it works out.

13 MR. MILHORN: Thank you.

14 MR. DAVIS: Anything else? All right. 

15 We've reached the end of the program. Director 

16 Gruenberg, any comments?

17 BOARD DIRECTOR GRUENBERG: I'm good.

18 MR. DAVIS: Okay. Chairman 

19 McWilliams?

20 CHAIRMAN MCWILLIAMS: I'll literally 

21 take 20 seconds. Thank you. I know you have banks 

22 to run and you gave us plenty of your time and 
292

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 phenomenal feedback.

2 I want to make sure that these committee 

3 meetings are as helpful to you as they are to us, 

4 and I want to make sure that we continue improving 

5 that dialogue.

6 So Chad will be reaching out to you to 

7 get any input on how we can be even better next time.

8 And again, thank you. I know you have 

9 planes to catch and I can't wait to see you next 

10 time. 

11 (Whereupon, the above-entitled matter 

12 went off the record at 3:30 p.m.)

13

14

15

16