~7~~:a

The Meeting of the Advisory Committee on Community Banking

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

March 28, 2019 — 9:06 A.M.

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

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

Deposit Insurance Corporation ("FDIC").

The members of the Committee present at the meeting were: Dick J. Beshear, Chairman,

President, and Chief Executive Officer ("CEO"), First Security Bank and Trust Company,

Oklahoma City, Oklahoma; Asif Dakri, Vice Chairman and CEO, Wallis State Bank, Houston,

Texas; Fred DeBiasi, President and CEO, American Savings Bank, Middletown, Ohio;

Christopher Donnelly, President and CEO, Bank of the Prairie, Olathe, Kansas; James J.

Edwards, Jr., CEO, United Bank, Zebulon, Georgia; Keith Epstein, Executive Vice President

("EVP") and CEO, Roxboro Savings Bank, SSB, Roxboro, North Carolina; David J. Hanrahan,

Sr.; Danny J. Kelly, President and CEO, The Hometown Bank of Alabama, Oneonta, Alabama;

Kenneth Kelly, Chairman and CEO, First Independence Bank, Detroit, Michigan; Bruce

Kimbell, President and CEO, First Community Bank of the Heartland, Clinton, Kentucky;

Thomas Leavitt, President and CEO, Northfield Savings Bank, Northfield, Vermont; Lori Maley,

President and CEO, Bank of Bird-in-Hand, Bird-in-Hand, Pennsylvania; Tiffany Baer Paine,

President and CEO, Security Bank USA, Bemidji, Minnesota; Alan Shettlesworth, President and

Chief Operating Officer ("COO"), Main Bank, Albuquerque, New Mexico; Louise Walker,

President and CEO, First Northern Bank of Dixon, Dixon, California; and Len Williams, CEO,

People's Intermountain Bank, American Fork, Utah.

Cathy Stuchlik, Chairwoman and President, Clackamas County Bank, Sandy, Oregon,

and Joseph W. Turner, President and CEO, Great Southern Bank, Springfield, Missouri, were

absent from the meeting.

Martin J. Greenberg, Director, FDIC Board of Directors, was present at the meeting.

Corporation stafFwho attended the meeting included: Lisa D. Arquette, Rebecca A.

Berryman, Valerie Best, Ryan Billingsley, Luke H. Brown, Leonard N. Chanin, Carolyn D.

March 28, 2019
509

Curran, Timothy J. Davin, Chad R. Davis, Christine M. Davis, Doreen R. Eberley, Keith S.

Ernst, Shannon N. Greco, Patricia S. Gurneau, Todd L. Hendrickson, Martin D. Henning, Travis

J. Hill, Nicholas S. Kazmerski, Alicia Lloro, M. Anthony Lowe, Christopher Lucas, Rebecca J.

McAveeney, Brandon Milhorn, Rae-Ann Miller, Shayna Olesiuk, Mark E. Pearce, Lisa K. Roy,

Philip A. Shively, Robert F. Storch, Edward D. Thomas, Bryan E. Wampler, James C. Watkins,

Jeffrey Weinstein, Angela A. Wu, and Katrice L. Yokley.

William A. Rowe, III, Deputy to the Director (Comptroller of the Currency) also attended

the meeting.

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

the members of the Committee who were attending their first meeting: Mr. Kimbell, Mr.

Beshear, Mr. Epstein, Mr. Leavitt, Mr. DeBiasi, and Ms. Maley. The Chairman explained that

members are added to the Committee with a goal of ensuring representation from community

banks across the Country, from cities as well as rural areas.

The Chairman then introduced Mr. Chad R. Davis, Deputy to the Chairman for External

Affairs and the Committee's Designated Federal Officer, who moderated the rest of the day's

proceedings. Mr. Davis advised that the first item on the agenda was an update on FDIC efforts

regarding de novo institutions. He introduced James C. Watkins, Senior Deputy Director,

Division of Risk Management Supervision ("RMS") to deliver the presentation.

Mr. Watkins framed the presentation by stating he would provide an update regarding

de novo metrics, describe deposit insurance application initiatives, and summarize feedback from

two outreach efforts sponsored by the FDIC. With respect to metrics, Mr. Watkins advised that

de novo activity had recently increased, Metrics can be found on the FDIC's Transparency &

Accountability web page, he noted. The Transparency web page was created as a result of

Chairman McWilliams' agency-wide "Trust through Transparency" initiative announced on

October 13, 2018. The Transparency Initiative unites each business area across the FDIC behind

the goals of being accessible, understandable, responsive, and accountable. A key feature of the

initiative is the publication of performance metrics, including turnaround times for bank

applications.

Aside from the Transparency web page, the FDIC announced several additional actions

to promote a more transparent, streamlined, and accountable deposit application process, Mr.

Watkins noted. For example, the FDIC re-published its timeframe guidelines for processing

applications, notices, requests, and other filings submitted on behalf of existing and proposed

institutions. (FIL-81-2018, Dec. 6, 2018.) The FDIC's goal is to act promptly on each filing,

while allowing appropriate time for review and evaluation. Byway of another example, the

FDIC announced a voluntary process to allow prospective organizers the option to request FDIC

review of a draft deposit insurance proposal prior to filing an official application. (FIL-82-2018,

Dec. 6, 2018.) Mr. Watkins explained that the FDIC will review draft proposals in an effort to

identify potential issues, provide preliminary feedback, and work with organizers on their

submissions before submitting a formal application. The process is designed to provide the

FDIC and organizing groups an opportunity to better understand and work through possible

challenges in a collaborative manner before a formal application is filed, he noted. Although the

March 28, 2019
510

process is open to any organizing group, Mr. Watkins observed that the process will be

particularly helpful to those proposals with unusual or complex aspects and for groups seeking

technical assistance. The FDIC expects to provide organizers an update within 30 days of

receiving a draft proposal and, for most proposals, to complete the review within 60 days.

Turning to another example of recent initiatives to strengthen the application process, Mr.

Watkins advised that the FDIC issued an update to its publication entitled Applying for Deposit

Insurance — A Handbook for Organizers of De Novo Institutions. At the same time the FDIC

finalized its Deposit Insurance Applications Procedures Manual and announced the creation of a

"Designated Applications Mailbox" to provide an additional channel for interested parties to ask

questions of designated applications specialists. (FIL-83-2018, Dec. 6, 2018.)

New, Mr. Watkins discussed outreach efforts. He advised that the FDIC has pursued

two important initiatives designed to obtain feedback from industry participants and other

interested parties regarding the deposit insurance application process. First, the FDIC convened

a series of roundtable discussions. Second, the FDIC issued a Request for Information ("RFI").

(FIL-80-2018, Dec. 6, 2018.) With respect to the roundtable discussions, Mr. Watkins advised

that, beginning in December 2018 and through the first quarter of this year, roundtable

discussions were held in each of the six regional offices as well as Washington, D.C. Over 100

individuals participated in the roundtables, including bankers, potential organizers, industry

associations, and other interested parties. He reported that these events are structured axound

three primary points of interest: (1) Participants are asked to provide a "report out" of questions

and concerns about the application process; (2) Discussion is encouraged with respect to

specialty business models and concerns about the application process; and (3) Participants are

encouraged to raise any other suggestions the FDIC could consider for improving the

effectiveness, efficiency, and transparency of the application process. With respect to the RFI,

Mr. Watkins noted that it posed 13 questions and sought feedback on all aspects of the

application process. Some questions posed were particular to specific types of de novo

applications while others concerned the overall application process. Ultimately, the RFI invited

comment regarding any aspect of the application process that commenters believe could

discourage applicants from initiating or completing the process.

Mr. Watkins advised that these outreach efforts generated a substantial number of

comments and suggestions regarding the application process. One commenter suggested the

FDIC consider modifying the requirement that applicants identify a specific physical location at

the time the application is filed. Instead, allow organizers to identify a more general location.

Mr. Watkins noted that there is often a cost associated with locking in a physical location, which

impacts the overall cost of organizing an institution. Another comment involved the possibility

of modifying the application process in order to lower the organizing cost or "burn rate." Other

suggestions concerned ways to enhance communication or share information at earlier stages.

Other commenters requested clarification of capital requirements. Mr. Watkins explained that de

novo banks must have 8 percent capital at the end of the third year of operation. Other

comments (l) raised the possibility of delegating authority to approve applications to the

regional level; (2) sought guidance regarding the FDIC's interpretation of a "substantially

complete" application; (3) asked what constituted a "change in business plan;" (4) encouraged

regulators to take a fresh look at the requirements concerning stock options and stock

compensation in general; (5) asked that forms be made more "user friendly" and automated; and

March 28, 2019
511

(6) encouraged the FDIC to re-visit risk-tolerance issues. Mr. Watkins indicated that each of the

comments will be reviewed, recommendations developed, and action plans issued as appropriate.

Mr. Watkins assured the Committee that the FDIC's goal is to make the deposit insurance

application. process transparent, streamlined, and accountable, and concluded his remarks.

The Committee members and staff then discussed the initiatives outlined by Mr.

Watkins. In response to questions concerning the dollar-amount of capital among the de novo

institutions recently approved, Mr. Watkins indicated there was a broad range of capital and

reminded the Committee that the FDIC's expectation is for 8 percent capital after the first three

years. Member Edwards commended the work the FDIC has done to encourage de novo

formation. He further commented that anything the FDIC could do to provide clarification as to

what constitutes a substantially complete application would be helpful. Mr. Watkins responded

that organizers are encouraged to talk with the FDIC about the process, and that the FDIC is

open to having pre-filing meetings so FDIC staff can help organizers navigate the process.

Member Maley commented that her bank was one of two de novo banks that opened in

2013 and that the order required $16 to $20 million in capital. She reported that her bank opened

with $17 million in capital and three years later they raised another $12 million. She commented

that de novo banks generally require a significant amount of capital. Member Kenneth Kelly

thanked Mr. Watkins for the regional outreach efforts and asked whether there were additional

plans for regional meetings. Mr. Watkins responded that the plan is to digest the information

received from the roundtable meetings to date and then develop an action plan. Member

Kenneth Kelly also asked whether the de novo activity was concentrated in particular areas of

the country or broadly dispersed across the country. Mr. Watkins advised that almost every

FDIC region has had de novo activity, with perhaps more activity in the San Francisco, Atlanta,

and New York regions. He commented that the outreach discussions indicated, in some areas

such as the Midwest, organizers and investors may be evaluating opportunities to acquire an

existing bank instead of forming a new bank.

The Chairman commented that the FDIC is currently exploring the idea of holding

meetings similar to the Advisory Committee on a smaller scale in the regional offices. Member

Shettlesworth commented that his bank has received an inquiry from organizers asking for

advice on starting a de novo bank. Mr. Watkins responded that each FDIC regional office has

specialists who can help. Member Epstein commented that the lack of community banks is

going to negatively impact local communities in the long term. He encouraged the FDIC to

engage the state banking associations as they have a vested interest in de novo activity and may

be able to assist. In response to questions concerning the types of institutions applying for

deposit insurance —whether community bank or industrial loan company or specialty bank — Mr.

Watkins noted that the FDIC is open to different types of business activity and that all proposals

are evaluated against the statutory factors.

Mr. Davis then introduced the next agenda topic, "Community Bank Technical

Assistance Efforts and Related Request for Information," presented by RMS Associate Director

Lisa Roy.

March 28, 2019
512

Ms. Roy began by stating that the FDIC plans to issue a RFI next month relating to

technical assistance efforts for banks. She explained that the purpose of the RFI is to seek public

input on how to ensure technical assistance offerings are effective and valuable. Ms. Roy

welcomed feedback and suggestions on the draft RFI. She explained that she would walk

through the areas in which the FDIC provides technical assistance as well as some draft

questions in the RFI.

Ms. Roy directed the Committee's attention to a slide deck which set forth seven areas

in which the FDIC provides technical assistance. She began with the first area of technical

assistance videos. She explained that the FDIC began issuing technical assistance videos in

2013. She noted that there are videos that specifically target bank directors and other videos

targeted for bank officers and staff. Ms. Roy stated that one of the questions the RFI seeks

feedback on is how institutions use the videos and if institutions could identify which videos are

most helpful for directors and which are most helpful for staff. She reported that in December

2018, the FDIC issued an updated video on the Bank Secrecy Act using a new voice-over format.

Ms. Roy stated that the FDIC moved to this format to reduce cost associated with producing the

videos and also to be able to amend the videos more quickly. Ms. Roy noted that the draft RFI

seeks feedback on the new video format. Ms. Roy also stated that the FDIC is interested in

obtaining feedback on whether there might be additional videos the FDIC should consider

issuing and whether any of the existing videos should be removed.

Ms. Roy next discussed the FDIC's Directors' Resource Center. The Directors'

Resource Center on the FDIC website is organized by product type; videos are in one location,

guidance in another, and rules and regulations in yet another. She explained that one of the

initiatives is moving toward a more topic-based resource center. Ms. Roy then reviewed with the

Committee the proposed topic-based format. She explained that the FDIC is seeking feedback

on this topic-based organization. She noted that a sample topic-based webpage with information

regarding the Bank Secrecy Act ("BSA") will be released around the same time as the RFI so the

public can review the new format and provide comments.

Ms. Roy next discussed the FDIC's director or banker colleges. She explained these are

offered in each of the regions on a varying schedule. She said each regional office determines

the subject matter for that particular one-day event based on questions they have received and

current topics of interest to bankers. Ms. Roy explained that there are several questions in the

RFI regarding director or banker colleges. The questions in the draft RFI ask whether the

individual has attended aone-day event in the last two years and if so, was it helpful; is the

length sufficient to meet his/her needs; and are there topics that should be included in the

banker/director colleges.

Ms. Roy then touched on webinars and teleconferences. She noted that the draft RFI

inquires about whether they are useful, how they can be made more useful, and whether there are

particular topics that should be the focus of future teleconferences or webinars. The draft RFI

also seeks feedback on the manner in which the webinars and teleconferences are announced and

whether there is sufficient notice of the events so bankers can plan to participate. Feedback is

also requested concerning the effectiveness of the materials that are provided and ways to

increase the effectiveness.

March 28, 2019
513

Ms. Roy neat discussed the Community Bank Resource Kit. She explained that the Kit

was originally created in Apri12016. The draft RFI seeks information on the usefulness of the

Kit. Ms. Roy then highlighted regional compliance newsletters. Each of the FDIC's six regions

produces a quarterly compliance newsletter that is sent by email to all state nonmember banks.

The newsletters provide information regarding FDIC initiatives, updates to guidance, common

examination findings, and other topics. She explained the draft RFI also requests feedback on

the newsletters.

Finally, Ms. Roy noted that the draft RFI includes some general questions about which

of the FDIC's technical assistance offerings are most useful and what other methods of technical

assistance the FDIC should consider. Ms. Roy then reviewed the timeline for the RFI. She

noted that the FDIC hopes to issue the RFI next month fora 60-day comment period. Following

analysis of the comments, the FDIC will then determine next steps in early fall of 2019. Ms.

Roy then welcomed any questions or suggestions from the Committee.

Member Shettlesworth commented that, at his bank, the videos are being successfully

used for directors' training. He said in his experience most of the videos are where they need to

be, but some can be perhaps a little lengthy. So perhaps make them more concise.

Member Paine complimented Ms. Roy on her work and indicated that her bank utilizes

the videos and found them to be great. She also commented that the ability to find the videos on

the FDIC website can be challenging. and suggested that we evaluate the search capabilities. She

also commented that, with regard to articles, more concise articles are more helpful if at all

possible. Member Edwards also commented that it would be helpful to clarify how to get to

vaxious items on the FDIC website and try to keep it to two or three clicks.

Chairman McWilliams commented that the FDIC is currently working on revamping

the website and making it more user-friendly.

Mr. Davis introduced the panel for the next topic, "Use of Bank Filings Required Under

the Bank Secrecy Act," as Jamal El-Hindi, Deputy Director, Financial Crimes Enforcement

Network ("FinCEN"); Erik Kiefel, Senior Adviser for Strategy, Policy Division, FinCEN; and

Laura Richardson, Chief of the Trade, Investment, and Fraud Section, Intelligence Division,

FinCEN.

Mr. El-Hindi stated that BSA data plays a critical role in keeping the Country strong

and financial systems secure. FinCEN and law enforcement ofFcials value the information.

provided by community banks through BSA filings and recognize that community banks invest

significant resources to comply with BSA requirements. He explained that when community

banks report suspicious activity involving possible elder fraud, cybercrime, human trafficking,

narcotics trafficking, or terrorism activities, the information provides important leads for law

enforcement investigations. For example, BSA data aids ongoing investigations regarding bulk

cash smuggling, gang activity, transnational organized crime, bribery, health care fraud,

embezzlement, third-party money laundering, and tax evasion. The information gathered

through BSA filings makes it harder for criminals to hide illicit proceeds in the financial system.

March 28, 2019
514

Mr. El-Hindi assured the Committee that BSA data is depended upon by law

enforcement officials throughout the Country. FinCEN provides nearly 500 federal, state and

local law enforcement and regulatory agencies with direct access to the FinCEN database of

BSA records. Within these agencies, there are an estimated 11,000 active users of the data and

149 Suspicious-Activity-Report ("SAR") review teams. The data is accessed through a system

called "FinCEN Query" and, in the last five years, users have made more than ten million

queries. Moreover, all Federal Bureau of Investigation ("FBI") "subject names" are run against

the database; over 21 percent of FBI investigations use the data; 60 percent of organized crime

investigations rely on the data; and 20 percent of international terrorism cases rely on the data.

With respect to SARs, they are screened through over 100 automated "business rules" to identify

reports that merit further review. FinCEN's terrorist-financing business rules alone generate

over 1,000 matches each month, he reported, and these matches are disseminated to law

enforcement and regulatory partners to help identify, track, and disrupt the activities of potential

terrorists.

Mr. El-Hindi then discussed two information-sharing programs known as "Section

314(a)" and "Section 314(b)." Title III of the USA PATRIOT Act of 2001 (P.L. 107-56),

amended the BSA. Section 314(a) of the USA PATRIOT Act requires the Secretary of the

Treasury to adopt regulations to encourage regulatory and law enforcement authorities to share

with financial institutions information regarding individuals, entities, and organizations engaged

in or reasonably suspected of engaging in terrorist acts or money laundering activities. FinCEN

established the Section 314(a) Program through 31 CFR Part 1010.520. In contrast, Section

314(b) of the USA PATRIOT Act provides financial institutions with the ability to share

information with one another, under a safe harbor that offers protections from liability, in order

to better identify and report potential money laundering or terrorist activities. Information

sharing under Section 314(b) is voluntary.

Mr. El-Hindi advised that under Section 314(a) —information sharing between

government and industry — FinCEN reaches out to approximately 40,000 points of contact

within the financial industry on a bi-weekly basis to ask if they have financial data that could

support a significant money laundering or terrorist financing investigation. Typically, when a

financial institution receives such a request, banking staff check for matches with accounts or

transactions. Mr. El-Hindi reported that, of the 17 financial institutions represented at the CBAC

meeting, seven have had at least one positive response to a FinCEN Section 314(a) request. He

emphasized that these situations involve significant terrorism and money laundering cases.

Overall, law enforcement ofFcials identify ten new accounts and 47 new transactions per Section

314(a) request with 95 percent of Section 314(a) requests contributing to arrests or indictments.

With respect to the Section 314(b) program information sharing among financial

institutions —approximately 6,000 financial institutions participate in the program. He

explained that Section 314(b) can be particularly useful to financial institutions in understanding

and identifying their customers' sources of funds which, in turn, helps institutions more

effectively fulfill SAR filing obligations.

March 28, 2019
515

Mr. El-Hindi concluded by stating that, even though FinCEN believes the current

reporting system is good, they are always looking for ways to improve the system and make it

more efficient.

Building upon Mr. El-Hindi's presentation, Mr. Kiefel provided an overview of a

project to map out and catalogue the full value of BSA reporting. He introduced the concept of a

"value chain" and explained that the value of BSA filings is much more than, "Does a single

SAR or Currency Transaction Report ("CTR") lead to a particular investigation?" Rather, the

value of BSA reporting also derives from the ability to aggregate the data, particularly when data

is submitted by an array of stakeholders such as financial institutions, law enforcement officials,

and regulators. In addition, a BSA filing might appear to have minimal value on the day it is

filed but, in ten years, it could be a crucial piece of an investigation. The project is therefore

designed to clarify the "characteristics" of the value provided by BSA data; identify

stakeholders; determine how the various stakeholders draw upon the data; and determine how the

overall "value chain" can more effectively be used going forward. Mr. Kiefel emphasized that

FinCEN wants to better understand everyone's perspectives on the value of BSA data and looks

forward to hearing from stakeholders at all levels of the reporting process. In order to illustrate

that the aggregated data, that is, the totality of the reporting, is being used in a value-added way,

Mr. Kiefel introduced Ms. Richardson and advised that she would provide an example of how

the aggregation of SAR data has contributed to the fight against "Elder Financial Exploitation"

("EFE") or exploitation of the elderly.

Ms. Richardson explained that financial institutions can specifically report an EFE by

selecting an EFE-dedicated checkbox on the SAR form. For purposes of this example, FinCEN

analysts read a statistically representative sample of the hundreds of thousands of SARs filed,

tallied the data, and started seeing themes in the narratives. This review led to the finding that

the number of EFE SARs filed during the period 2012-2017 has grown; theft and scams are the

most common types of crimes committed against the elderly; and crimes against the elderly are

most often committed by family members and non-family caregivers. After further discussing

statistics related to filers and users of FinCEN data, Ms. Richardson provided two additional

examples where data-aggregation led to better protections for the elderly: (1) A report issued by

the Consumer Financial Protection Bureau ("CFPB") analyzed over five years' worth of SARs

identifying elderly exploitation and thereby raised public awareness; and (2) a Department of

Justice sweep or roll-up oftechnology-supported scams targeting the elderly helped stop

criminals from preying on the elderly. Ms. Richardson assured the Committee members that the

data they contribute goes into a system that is extremely valuable for a large audience of

government users. She said she regularly hears from law enforcement users of the BSA system

that, if not for the system, they would not have found the information they needed. The panelists

closed their formal remarks by thanking the banking community for their important contributions

in securing BSA data.

In the discussion that followed, the Committee members suggested that soliciting

feedback from the state banking associations might be helpful. Mr. El-Hindi agreed and said that

state banking agencies have, indeed, reached out to FinCEN, and they've engaged in a dialogue.

The Committee members also asked if there. is a better way for banks to aggregate the BSA data.

Mr. El-Hindi responded that CTR information is also very important and that CTR reporting is

March 28, 2019
516

objective while SAR filing is subjective. The Committee members then engaged in a discussion

of threshold reporting requirements and whether the threshold could be increased. Mr. El-Hindi

responded that the $10,000 filing threshold is still relevant, particularly in the context of

terrorism where lower-dollar amounts are more often utilized, If threshold values are raised,

FinCEN would lose that data, he suggested. In short, Mr. El-Hindi suggested, it is important to

look at, not just the $10,000 reporting threshold, but at the data generated by that lower-dollar

threshold; however, Mr. El-Hindi noted that FinCEN is studying thresholds. With respect to

Section 314(b) information sharing, one Committee member acknowledged that his bank uses it

and it does help to make better decisions. He also asked about the CTR exemption process. Mr,

El-Hindi responded that the exemption process is governed by regulation; if a customer meets

certain requirements, the customer can be exempted.

Another Committee member advised that his smaller community bank has limited

operational resources with just 14 employees. Five of those employees participate in filing

SARs and CTRs, and at least three other individuals review each SAR and CTR. In addition, the

bank hires athird-party company to come in once a quarter and review 100 percent of the CTRs

and SARs. He commented that this is excessively costly for a small bank and it would be

appreciated if anything could be done to reduce the burden on small banks. Mr. El-Hindi

responded that this is one of the reasons the CBAC forum is welcomed as an opportunity for

FinCEN to engage with the industry and relay how valuable the information provided by banks

is and why it needs to be collected. He further responded that FinCEN is always looking for

ways to lessen the burden on smaller banks, resource sharing being one of them.

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

stood in recess at 10:36 a.rn.

The meeting reconvened at 10:51 a.m. that same day, at which time Mr. Davis introduced

the next agenda item titled "Committee Member Discussions of Local Banking Conditions."

The Committee members, in turn, described the opportunities for and challenges faced by their

community banks.

Generally, members expressed continued concern about the increase in deposit rates and

the impact on smaller banks. As a result of increased rates, banks are seeing their costs of funds

increase which, in turn, puts pressure on profitability margins. Other members commented that

the bump that sma11 business received as result of the tax cut has now been absorbed into the

market. Member Hanrahan commented that the low, flat yield curve remains a concern.

Several members commended the FDIC for bringing the issue of de novo banks to the

forefront. Regarding de novo banks, Member Hanrahan commented that the biggest challenge

would not necessarily be raising new capital or obtaining regulatory approval but rather

generating a return on investment that makes sense. In this way, he suggested, the yield curve is

a challenging condition for an e~sting bank and very challenging for a new bank. Smaller banks

are considering how to supplement non-interest income and other fee structures that will

compensate and generate a return on equity that will be suitable for the bank's investors.

March 28, 2019
~.~r~

Member Williams commented that starting a new bank presents a tough business case and

explained that the costs to start a de novo bank are high. He also commented on the costs to

develop new products and services and suggested that the key to success is fording good fintech

partnerships.

Other members commented that they are experiencing intense competition for loans and

deposits. Member Epstein mentioned that the relaxing of credit standards by other competitors is

~~Z~TILK~iii11

Member Walker thanked the Chairman for attending the Western Bankers CEO

Conference and provided the following feedback from the Conference participants:

1. The FDIC safety and soundness examinations have been refreshing, performed in a

collaborative, fair and transparent manner.

2. The focus on the elimination of the outdated Financial Institution Letters ("FILs")

and supervisory memos has been positive.

3. It would be helpful for the FDIC to take a closer look at the Community

Reinvestment Act ("CRA") requirements with a focus on consistency, what counts, what doesn't

count, the definition of an assessment area, and the large bank asset threshold.

4. BSA compliance continues to be costly and burdensome for smaller banks. She

suggested that solutions which reduce the filing burden of CTRs would be helpful as well as

considering a "seasoned customer" exemption.

5. She also raised the issue of clarification with respect to banking and the cannabis

industry. There is currently an effort to form a public bank in California so they would welcome

the opportunity to meet with the FDIC and gain a perspective on the manner in which these

entities would be insured.

6. Relating to capital proposals, capital ratios of 8 percent are preferred to 9 percent and

keep the framework simple and optional.

7. Regarding the Truth-in-Lending Act ("TILA") and Real Estate Settlement

Procedures Act ("RESPA") Integrated Disclosure ("TRID") rule, an exemption from TRID for

construction loans would be helpful since it would allow more banks to participate in

construction lending, which is important given recent disasters in California.

8. Certain rural banks received regulatory criticism for out-of-market lending, and these

banks feel the criticism is unwarranted because there is not much of a market where they are

located.

9. Finally, clarification would be welcomed regarding what the FDIC considers to be

"stable funding."

March 28, 2019
518

Following Member Walker's summary, other members described challenges for

growing their banks' core deposit base. Member Leavitt described challenges with appealing to

the next generation of customers. Member Williams discussed the impact of the adoption of the

current expected credit loss ("CECL") standard and suggested that the impact maybe greater

than some banks anticipate. Member Paine said that her bank has had success with sharing

services with banks in other towns, including audit and compliance services.

Following additional comments from members regarding banking conditions in their

communities, Mr. Davis announced that the meeting would recess for lunch. Accordingly, at

12:10 p.m., the meeting stood in recess.

The meeting reconvened at 1:07 p.m. that same day, at which time Mr. Davis

introduced the next panel discussion on "Supervision Update," with: Doreen. Eberley, Director,

RMS; Rae-Ann Miller, Associate Director, RMS; Robert Storch, Chief Accountant, RMS; and

Ryan Billingsley, Corporate Expert (Capital Markets), RMS. Chairman McWilliams thanked the

staff from RMS for their tireless efforts since her appointment as Chairman to review guidance

and rulemakings.

Ms. Eberley gave a brief overview of the panel's presentation, noting that Ms. Miller

would provide an update on the reciprocal deposit final rule issued December 18, 2018, and the

advanced notice of proposed rulemaking ("ANPR") requesting comments on all aspects of the

brokered deposit and interest rate restriction regulations, also issued December 18, 2018; that

Mr. Storch would discuss recent Call Report revisions and implementation of the CELL

methodology; and that Mr. Billingsley would address the community bank leverage ratio.

Ms. Miller began by explaining that the effect of recent changes to the regulations is

that reciprocal deposits will no longer have to be reported as brokered deposits on the Call

Report. She noted that there are two limitations to that reporting: (1) a general cap under which

institutions that are well capitalized and have a composite condition of outstanding or good —

which corresponds to CAMELS ratings "1" or "2" generally as of their last examination or

that have not obtained a waiver from the FDIC, may except from being reported as brokered

deposits qualifying reciprocals up to the general cap of 20 percent of the institution's liabilities

or $5 billion dollars, whichever is less; and (2) a special cap under which institutions that are not

well capitalized or not in outstanding or good condition may accept qualifying reciprocal

deposits up to a special cap, which is the lesser of either the general cap or the average of

reciprocal deposits held during the last four quarters since the institution was well capitalized and

in outstanding or good condition. She explained that there are some other limitations to be

cognizant of in the law and the regulation, including that less than well capitalized institutions

that do have the exemption are still subject to statutory interest rate restrictions on all deposits,

including reciprocal deposits not reported as brokered, and the exempted deposit cannot consist

of funds obtained for the institution directly ar indirectly by or through a deposit broker before

submission of placement into the deposit placement network.

March 28, 2019
519

Ms. Miller noted that the ANPR issued December 2018 provides a significant amount

of data and information and asked for comments on all aspects of the brokered deposit

regulation, with the comment period remaining open through May 7, 2019; and that the FDIC

was interested in all comments, particularly those related to sweep deposits, deposit listing

services, the statutory exceptions set forth, and how the statutory exceptions were interpreted.

She advised that the ANPR includes some discussion of the definition of the national rate, as

well as specific questions on classifications of deposit brokers and brokered deposits and the

FDIC's interpretation of the law, including how it is applied and the calculation of the rate

restrictions.

Noting that the ANPR addresses a national rate cap, Member Epstein asked if there has

been consideration of a regional rate cap. In response, Ms. Miller indicated that comments on a

regional rate cap could be submitted. Member Donnelly commented on the effects of the data

used to set rates for different markets in different regions, noting that his bank with two locations

in the same city is competing with every credit union in the city, as well as online brokers

advertising deposit rates that are considerably higher than his market. He asked whether the

FDIC has examined this change in the environment. Ms. Miller responded, explaining that the

peg was last changed in 2009 because of changes in the market. She stated that the law requires

the FDIC to set a national rate but it provides a mechanism that allows a bank to apply for a local

rate determination. She noted that the rate restrictions were there for a reason and apply when an

institution becomes troubled; that there needs to be a balance between being punitive and being

reasonable; and that the FDIC welcomes all ideas in response to the ANPR.

Next, Mr. Storch provided a brief update on recent developments related to accounting

and regulatory reporting. He began by noting that the effective date of the FASB's accounting

standard on credit losses that introduces the CECL methodology was getting closer every month;

that the earliest mandatory effective date was on January 1, 2020, for Securities and Exchange

Commission ("SEC") filers, but that early adoption was permitted in the first quarter of 2019;

and that, in response to the accounting change, the federal banking agencies under the auspices

of the Federal Financial Institutions Examination Council ("FFIEC"), have finalized a number of

revisions to the Call Report to accommodate the CELL methodology and the separate change for

credit loss accounting for available-for-sale debt securities. He advised that these revisions were

announced in a FIL from the FFIEC in early March 2019; and that because the FASB's credit

losses accounting standard includes different effective dates for three categories of institutions

depending on their characteristics and includes this year's early adoption, the changes to the Call

Report will begin to take effect March 31, 2019, but will not be fully phased-in until year-end

2022. He explained that there will be gradual changes in the terminology as the allowance for

loans and leases losses becomes the allowance for credit losses on loans and leases; and that,

after the institution adopts the new accounting, there will also be allowances for credit losses on

held-to-maturity debt securities and available-for-sale debt securities. He also explained that,

because of the different effective dates for different institutions, the Call Report forms, through

the use of footnotes and the Call Report instructions, will address which accounting terms and

Call Report data items are applicable to which institutions during the period the industry

transitions to the new accounting standard. Although the Call Report revisions will begin to

appear in the first quarter 2019 Call Report, he emphasized that an institution is not required to

adopt the CECL methodology any sooner than the effective date applicable to such institution

March 28, 2019
520

under the accounting standard. He advised that the Call Report changes taking effect in the first

quarter 2019 also relate to the final rule recently issued by the agencies that provides for an

optional three-year phase-in of the initial, or day-one, impact on regulatory capital of adopting

the CECL methodology; that the Call Report regulatory capital schedule will include a new

"Yes/No" item to indicate whether an institution that has adopted CELL has the CELL election

in effect as of the quarter-end report date, and, if it does, the form and instructions will explain

where the various transitional amounts should be included in the regulatory capital schedule

during the three-year phase-in period; and that these transitional amounts only affect regulatory

capital, and not the amounts that the institution that has adopted the new credit losses accounting

standard reports on the Call Report balance sheet and income statement.

Mr. Storch advised that the agencies also have issued a notice of proposed rulemaking

("NPR") for an optional community bank leverage ratio ("CBLR") for qualifying institutions

that, for illustrative purposes, includes a potential reporting format for a CBLR reporting

schedule that could be included in the Call Report; and that the agencies' capital policy staffs

have been working with the FFIEC's Task Force on Reports to develop a proposed one-page

CBLR reporting schedule, which they expect to be issued for comment within a few weeks. He

then provided a brief overview of the process that the agencies go through under the Paperwork

Reduction Act ("PRA") to implement the CBLR reporting schedule as part of the Call Report,

noting that the agencies are required to publish a Federal Register notice for the proposed CBLR

reporting schedule and related deposit insurance assessment revisions fora 60-day public

comment period; that the agencies will next determine whether the proposed CBLR revisions to

the Call Report should be modified in response to any comments and to align the proposed

CBLR revisions with the final rule on the CBLR and the related assessment revisions; and that,

as required by the PRA, the agencies will then publish a second Federal Register notice fora 30-

day comment period and submit the final revisions to the Call Report to the U.S. Office of

Management and Budget for review and approval, with the final CBLR reporting requirements

taking effect the same quarter as the effective date of the final CBLR rule.

Mr. Storch then turned back to the FASB's credit loss accounting standard, advising

that, since the standard was issued in 2016, the agencies first issued a joint statement on the

standard that same month, and then, in December 2016 and September 2017, the FDIC issued

Frequently Asked Questions ("FAQs") on the standard with the 2017 document incorporating the

FAQs originally issued in 2016. He explained that the focus of the FAQs is on the application of

CECL and other aspects of the new accounting standard, as well as related supervisory

expectations; that the agencies have developed some additional FAQs, which have been

combined into a single document with the existing FAQs; and that the agencies expect to issue

this expanded set of FAQs very soon. He also explained that, in the latest FAQs document, the

agencies have updated the responses to three previously issued questions affected by the FASB's

November 2018 amendment to the effective date of the standard for those institutions that are not

public business entities ("PBEs") to reflect this new effective date of the standard for these

entities in the responses to those questions; that the effective date amendment means that nonPBEs that have a calendar year fiscal year would begin reporting credit loss under CECL in the

first quarter 2022, rather than in the fourth quarter 2021; that the new FAQs document includes

minor editorial technical changes to certain previously issued FAQs; and that it will also signal

that the agencies plan to issue proposed supervisory guidance on the allowance for credit losses

March 28, 2019
521

under CELL before year-end 2019. He advised that the supervisory guidance would replace the

agencies' 2001 and 2006 allowance policy statements for institutions as they adopt the

accounting standard over time; and that until that time each institution should continue to follow

current U.S. GAAP on impairment and the allowance for loans and lease losses, and refer to the

two existing policy statements. He concluded by advising that the agencies will be hosting an

interagency webinar for bankers on the weighted average remaining maturity method, or

"WARM" method, for estimating allowances for credit losses on April 11, 2019, with

representatives from the FASB, the SEC, and the Conference of State Bank Supervisors

participating in the webinar.

Member Epstein asked if the FDIC has estimated how the average provision will be

affected across the industry, including how much will have to be added to the allowances. In

response, Mr. Storch advised that the expectation is that most banks would have to increase their

allowances because the new model is forward-looking and takes into account the expected

lifetime credit losses of loans and held-to-maturity debt securities, in addition to the modification

to available-for-sale securities; that it is difficult to forecast the overall effect because it would

depend on the composition of each bank's portfolio, their underwriting practices, their allowance

levels going into the effective date, and their forecasts for the credit risk drivers that are key

factors in estimating collectability; and that, rather than an overall estimate, the agencies have

used a "sensitivity analysis" that analyzes the effect on a bank's capital ratios of having to

increase their allowances by varying percentages.

Noting that there are a number of options for the method used to calculate the allowance

going forward, Ms. Eberley asked Mr. Storch to briefly address how the FDIC is training

examiners regarding the methodology. Mr. Storch responded by noting that there is a multi-year

training initiative to ensure that examiners understand the standard and the supervisory

expectations; and that the standard does not have a single permissible approach, but was

designed to provide fle~bility and scalability to institutions because the FASB recognized that

the standard needs to be operational regardless of an institution's size and its complexity. He

also noted that the choice of method is up to the institution; and that, assuming that the institution

has good documentation and controls around the method selected by the institution, the

examiners should be focused on evaluating how well the institution is doing with the method it

has employed.

Member Donnelly asked what the expectations were regarding the documentation to

support the bank's methodology. In response, Mr. Storch advised that the documentation

support discussed in the 2001 policy statement for the current incurred-loss methodology would

carry forward to the CECL methodology; and that the extent of documentation support is going

to be tailored to the size and complexity of the institution.

Member Edwards asked if Mr. Storch could further explain the CBLR and the 9 percent

threshold, noting that more banks could qualify if the threshold ratio was lowered to 8 percent.

In response, Mr. Billingsley explained that the FDIC is considering the threshold amount as part

of the deliberative process.

March 28, 2019
Mr. Billingsley then briefly discussed the CBLR proposal, noting that it is designed to

be an optional framework for banks; that there was some discretion in how to define a

"qualifying community bank" under the statute; that one mechanism to opt in to the framework

outlined in the NPR is by completing the one-page Call Report; and that there are a few factors

that would make a bank a qualifying community bank, including the statutory factor of total

assets of less than $10 billion, off-balance sheet exposure of less than 25 percent of total assets,

trading assets and liabilities less than 5 percent of total assets, mortgage servicing assets of less

than 25 percent of tangible equity, and certain deferred tax assets ("DTAs") of less than 25

percent of tangible equity. He also explained that the FDIC opted for simplicity in the ratio

itself; that the numerator is the community bank leverage ratio tangible equity, which is not Tier

1 capital and is different than the existing framework; and the denominator is average assets,

which is the same as what banks currently use for their Tier 1 leverage ratio. He briefly

discussed some of the comments received to date on the NPR, noting that there has been a

preference for a lower ratio; that some comments expressed concern about the introduction of the

PCA proxy; and that other comments expressed a preference to stick with Tier 1 capital as the

numerator.

Member Hanrahan commented that an 8 percent rather than a 9 percent CBLR would be

a very good proxy for a bank that exceeds the well-capitalized PCA standards. In response, Mr.

Billingsley explained that part of the rationale for selecting the qualifying criteria is that, if a

bank has a number of the qualifying criteria in the e~sting system with the risk-based capital

framework, then the bank's risk-based capital requirements will increase; and that one of the

stated goals in developing the CBLR framework is not to allow a reduction in capital through

this framework.

Member Donnelly observed that, if his bank chooses not to opt in, then it will be treated

differently if the bank drops below a 9 percent capital ratio than if the bank had opted in. Mr.

Billingsley responded by explaining that, if a bank has a declining CBLR, it may want to do

some proactive thinking about switching back to risk-based capital because its risk-based ratios

may be higher and it will provide an extra capital cushion over the PCA threshold. Member

Donnelly commented that it appears as if a layer of complexity and work has been added to an

otherwise fairly simple calculation of capital. Member Shettlesworth commented that, even if a

bank opts in to the CBLR framework, it will still need to track all capital ratios; and that the only

potential benefit of opting in might be a shortened Call Report.

Ms. Eberley then introduced the panel's next presenters, advising that Lisa Arquette,

Associate Director, RMS, would present an update on anti-money laundering ("AML)

developments; that Martin Henning, Deputy Director, RMS, would present an update on supply

chain risk, as well as recommendations regarding contractual provisions with service providers;

and that Luke Brown, Associate Director, Division of Depositor and Consumer Protection

"DCP"), would present an update on changes in the flood insurance regulation.

Ms. Arquette began by recalling that, in October 2018,. she provided the Committee

with an update on the recently-issued interagency statement related to sharing BSA and AML

resources. Ms. Arquette also highlighted an interagency statement issued in December 2018 to

encourage innovation approaches and technology in the BSA/AML area. She also informed the

March 28, 2019
Committee of two additional statements to be issued in the future. She explained that the first

statement would be issued by the FDIC along with the other federal banking agencies and

FinCEN. She noted that this statement is an attempt to be transparent with the industry regarding

how the FDIC conducts BSA/AML examinations; that the BSA/AML examination process is a

risk-focused approach that begins with reviewing a bank's risk assessment and independent

review; and that, provided they cover all of the bank's customers, products, services, geographies

in which it operates, as well as the bank's risk for money laundering, terrorist financing, and

other illicit financial risk, the examiners will leverage that information and tailor the scope of the

examination. She emphasized that the better the bank's own assessment is in identifying its risk

profile, the less time the BSA/AML examiners need to spend onsite. She noted that the

statement will provide more transparency regarding the steps involved in this risk-focused

process.

Ms. Arquette then explained that the second statement would be issued by the federal

banking agencies, and it would relate to the FDIC's authority under section 8 of the FDI Act to

enforce BSA requirements. She indicated that the statement will provide clarity for those

situations where the FDIC would have to take a formal enforcement action relating to the BSA;

she explained that formal actions are required where there are significant breakdowns in BSA

compliance programs. She noted that a bank has to have a BSA officer, independent testing,

training, and internal controls that are risk-based and reasonably designed to maintain

compliance with the BSA requirements, together with a customer identification program and

customer due diligence program to understand the nature and purpose of the bank's customers

and those relationships; and that, if there is a significant, systemic failure in any one of those

components, the banking agencies are required to take a formal action. She put the issue into

perspective by explaining that the FDIC performs a BSA review during every safety and

soundness examination; and that, out of more than 1,500 exams in 2018, the FDIC took eight

formal actions.

Ms. Arquette then briefly discussed recent developments related to hemp production

and hemp-derived products. She noted that, in 2014, the Agricultural Act permitted industrial

hemp research that was authorized by certain states, and it legalized growing and cultivating

industrial hemp for research purposes in states where such growing and cultivating was legal

under state law. She further explained that the new Farm Bill enacted in December 2018 treated

hemp like other agricultural products; it explicitly allows for the transfer ofhemp-derived

products across state lines for commercial and other purposes and places no restrictions on the

sale, transport or possession ofhemp-derived products, provided those products are produced in

a manner prescribed by law. She clarified that hemp cannot contain more than 0.3 percent of

delta-9 tetrahydrocannabinol ("THC") and that hemp that meets the 0.3 percent THC criteria has

been removed as a controlled substance and no longer violates federal law. She explained the

importance of these changes, noting that, if a bank has amarijuana-related business as a

customer, then the bank is required to file a SAR, because cannabis or marijuana violates federal

law; and that a bank that has a customer engaged in cultivating or growing industrial hemp, in

the absence of any other indicia of criminal activity, would not have to file a SAR, because the

derivative hemp that meets the 0.3 percent THC criteria is not a controlled substance.

March 28, 2019
524

In response to comments from Committee Members Kimbell and Donnelly, Ms.

Arquette emphasized that banks that have customers involved inhemp-related businesses still

have the customer due diligence requirements —the banks need to understand the nature and

purpose of the customer accounts and make sure the business is complying with the state

licensing requirements and regulations.

New, Mr. Henning then briefly discussed two areas that the FDIC is currently focused

on concerning IT and cyber security risks —supply chain risk and strong contracts. He advised

that regarding the supply chain the risks are very similar to any third-party service provider.

He noted that, in June 2018, the Office of Foreign Assets Control ("OFAC") released a statement

that identified several companies and three individuals; that one of those companies, Digital

Security, was designated by OFAC for providing technological support to the Russian

Intelligence Services, and Digital Security owned and controlled a second company, ERPScan;

and that this appears to be the first time a company has been sanctioned by OFAC. He briefly

explained that ERPScan was offering security services for enterprise resource planning products

that would map out or scan a bank's IT infrastructure; and that, in response to these service

offerings being reported, the FDIC took two actions: (1) it checked to verify that the two

companies were not in the FDIC's IT service provider database which is built through bank

reporting under the Bank Service Company Act; and (2) it collaborated with the other federal

banking agencies to issue a joint statement and press release in November 2018 that

recommended assessing, identifying, and mitigating any risks associated with these sanctions.

Mr. Henning then proceeded to discuss the second area of focus —strong contracts,

particularly contracts with a bank's core service provider. As an example, he explained that a

bank's ability to alert customers to a heightened risk of identity fraud resulting from a breach at a

service provider is dependent on the service provider alerting the bank to the incident; and that

the specifics around incident notification should be explicitly referenced in the contract, with

terms that are well understood and measured by both parties. He provided a second example,

noting that a bank's ability to respond to and recover from a cyber incident is increasingly

becoming dependent on the service provider's ability, rather than the bank itself, as banks move

away from hosting their core services themselves; and that this needs to be explicitly referenced

in the contract with terms that are understood by both parties. He also noted that, in 2016, the IT

examination procedures focused more closely on the review ofthird-party IT contracts. He also

stated that the FDIC's examiners are highlighting weaknesses with third-party IT contracts more

often today than prior to 2016. He concluded by advising that the FDIC meets periodically with

the leaders of technology service provider companies and that the FDIC has emphasized and

continues to emphasize the need for contracts to mature and strengthen in these two areas.

Mr. Brown then discussed changes in the flood insurance regulation. He noted that a

2018 study found that more than 95 percent of residential flood insurance policies sold in the

United States are purchased through the federally-sponsored National Flood Insurance Program;

and that the study estimated that private flood insurance policies in the United States account for

about 3.5 to 4.5 percent of the market. He advised that the Biggert-Waters Flood Insurance

Reform Act directed the FDIC, OCC, FRB, FCA, and the NCUA to issue regulations requiring

lenders to accept private flood insurance policies, as defined by the Act; that the final rule was

issued in February 2019; and that the primary issues addressed by the final rule are lenders'

March 28, 2019
mandatory acceptance of the private flood insurance policies, lenders' discretionary acceptance

of private policies, and coverage by mutual aid societies.

He explained that the first key issue covered by the final rule is lenders' mandatory

acceptance; and that the final rule requires lenders to accept private flood insurance policies that

meet both the statutory definition of private flood insurance and the mandatory purchase

requirement. He noted that the final rule includes a compliance aid provision which allows

banks to conclude that a private flood insurance policy meets the definition of private flood

insurance without further review of the policy if the policy contains a written statement

indicating that the policy meets the definition of private flood insurance; and that the lender may

choose not to rely on the statement and choose to separately review the policy and determine

whether it meets the definition. He continued, explaining that the second key issue concerned

lenders' discretionary acceptance of private flood insurance policies; that the final rule permits

institutions to exercise their discretion to accept certain private flood insurance policies that do

not meet the statutory definition of private flood insurance, subject to four conditions: (1) the

policy provides coverage in the amount required by the flood insurance purchase requirement;

(2) it is provided by an insurer that is licensed, admitted, or not disapproved by a state insurance

regulator; (3) it covers both the mortgagor and the mortgagee as loss payees; and (4) it provides

sufficient protection for the loan consistent with general safety and soundness principles.

He briefly discussed another key component of the final rule concerning mutual aid

society plans, explaining that lenders are permitted to use their discretion to accept a plan

provided by a mutual aid society, provided the plan meets the following criteria: the lender's

primary supervisory agency has determined that such plans qualify as flood insurance under the

Biggers-Waters Act and the plan provides flood insurance in the amount required by the flood

insurance purchase requirement, covers both the mortgagor and the mortgagee as loss payees,

and provides sufficient protection for the loan consistent with general safety and soundness

principles. He concluded by noting that the effective date of the final rule is July 1, 2019.

Mr. Davis new introduced Anthony Lowe, FDIC Ombudsman, Office of the

Ombudsman ("00"), to give an update regarding the post-examination survey process.

Mr. Lowe advised that the FDIC implemented the survey in 2002. (FIL-116-2002, Oct.

3, 2002.) The survey is part of the FDIC's effort to continuously improve the quality and

efficiency of the examination process and ensure examinations are a beneficial tool to achieve

safety and soundness standards and regulatory compliance. The survey centers on the

examination report and asks questions pertaining to the clarity of the transmittal letter and the

usefulness of the examination recommendations. Mr. Lowe explained that, at the conclusion of

an examination, the appropriate division director sends separate correspondence to the bank

describing the survey process. The correspondence includes a unique identifier number the bank

can use to complete the survey electronically. The survey solicits information regarding five

broad categories: the pre-examination process, the examiners, the examination process, the

examination report, and other observations or information. The FDIC's Division of Insurance

and Research aggregates the survey data and shares the results with the division directors.

March 28, 2019
526

After outlining the response rates to the surveys, Mr. Lowe observed that there is no

empirical data underlying the response rates but that anecdotal evidence suggests some bankers

are concerned with confidentiality. Although the current survey process is completely

confidential, the 00 and the divisions plan to revamp the process in an effort to eliminate

concerns regarding confidentiality. First, the 00 will assume responsibility for sending out the

survey. Second, in order to increase response rates, the 00 plans to send apre-survey notice and

a later, reminder notice. Third, the 00 will take additional steps to protect the feedback process

and ensure that, if a bank asks to be contacted, the survey information will be redacted and only

the contact information will be provided to the divisions. Fourth, the survey questions will be

updated as appropriate. Mr. Lowe then invited the Committee members to share their comments

regarding the survey process.

Member DeBiasi commented that the survey was not too lengthy and was surprised that

the response rates were low. Member Epstein advised that it might be a good idea to

communicate right up front that the survey takes just 10 to 15 minutes to complete, and that

might increase response rates.

Mr. Davis announced that the meeting would take amid-afternoon break. Accordingly,

at 2:36 p.m. the meeting stood in recess.

The meeting reconvened at 2:47 p.m. that same day. Mr. Davis introduced the

presenters of the next panel, "2017 FDIC National Survey of Unbanked and Underbanked

Households," as Keith Ernst, Associate Director, DCP; Alicia Lloro, Senior Financial

Economist, DCP; and Jeffrey Weinstein, Senior Financial Economist, DCP.

Mr. Ernst began the presentation by explaining that one of the FDIC's responsibilities is

to assess participation in the banking system. Over the years, survey research has become a key

tool in this area, and the survey used by the FDIC is the product of collaborative work between

the FDIC and the U.S. Census Bureau. Mr. Ernst stated that the survey provides a reliable frame

of reference for understanding the extent and nature of participation in the banking system and

for beginning to think about opportunities to expand economic inclusion. Mr. Ernst then

introduced Mr. Weinstein to present a summary of the 2017 survey results.

Mr. Weinstein advised that the fifth biennial household survey was conducted in June of

2017; the sample was nationally representative with over 35,000 respondents; estimates are

available at national and state levels and for larger metropolitan statistical areas ("MSAs"). He

explained that a household is classified as unbanked if no one in the household had a checking or

savings account. A household is classified as underbanked if it had a checking or savings

account and used one of the following products or services from an alternative financial services

provider in the past 12 months: money orders, check cashing services, international remittances,

payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title

loans.

March 28, 2019
527

Mr. Weinstein observed that in 2017, 6.5 percent of U.S. households (8.4 million) were

unbanked. This, he said, was the lowest unbanked rate since the survey began in 2009. Mr.

Weinstein stated that the decline in the unbanked rate from 2015 to 2017 can be explained almost

entirely by improvements in socioeconomic circumstances of U.S. households. Regarding

underbanked households, he said that in 2017, 18.7 percent of U.S. households (22.4 million]

were underbanked. This was a decline of 1.2 percentage points from 2015 and can be

attributable, in part, to improvements in socioeconomic circumstances of U.S. households. He

stated that, as in previous years, unbanked and underbanked rates continued to vary considerably

across the population and were higher among lower-income households, less-educated

households, younger households, black and Hispanic households, households headed by a

working-age individual with a disability, and households with variable income.

Mr. Weinstein then discussed changes in unbanked rates for certain populations. For

instance, recent declines in unbanked rates were particularly sharp for younger households.

Unbanked rates for black and Hispanic households have also sharply declined in recent years.

Looking at geographic variation, unbanked and underbanked rates varied widely across states

with rates generally highest in the South. Mr. Weinstein next discussed the reasons households

gave for being unbanked, noting the primary reason cited was simply not having enough money

to keep in an account. The survey results also showed a sharp increase in the use of mobile

banking and a substantial decline in the use of bank tellers as the primary methods of account

access.

Ms. Lloro then presented the survey results for bank branch visits among banked

households in the last 12 months. Ms. Lloro stated that in 2017, 86 percent of banked

households visited a bank branch at least once and 35.4 percent visited 10 or more times. She

also pointed out that ATM-only visits are not included in the data. She reported that the results

showed that households in rural areas were more likely to visit a bank branch and neaxly half

visited ten or more times. Branch visits were prevalent even among banked households that used

mobile or online banking as a primary method of account access, with about 25 percent of these

households having visited a bank branch 10 or more times in the past 12 months.

Ms. Lloro advised that the 2017 survey included questions to capture the full range of

credit products that are likely reported to the major credit bureaus. About 20 percent of

households had no mainstream credit in the past 12 months. As a result these households likely

do not have a credit score and likely face substantially reduced access to mainstream credit.

Differences in rates of no mainstream credit were especially pronounced by income. Of

households with income of less than $15,000, about half had no mainstream credit in the past 12

months, compared with only 4.3 percent of households with income greater than $75,000. She

emphasized that the results showed large differences by disability status and race/ethnicity.

About 40 percent of households headed by a working-age individual with a disability had no

mainstream credit.. Approximately one-third of black and Hispanic households had no

mainstream credit, compared to 14 percent of white households.

Ms. Lloro then focused on three selected findings: (1) New underwriting technologies

may help expand access to small-dollar credit; (2) Physical access to bank branches remains

important even as the use of mobile and online banking has increased; (3) Targeted strategies for

March 28, 2019
528

outreach or product design may help sustain increases in bank account ownership during

economic downturns and increase access for population segments with high unbanked rates. Ms.

Lloro concluded by indicating that the full report, appendix tables, executive summary, and other

materials can be found on the web page, economicinclusion.gov.

Following the presentation, the Committee members and staff discussed the 2017

survey results at length. Member Kenneth Kelly asked whether there was data regarding the cost

associated with being unbanked. Mr. Ernst replied that the FDIC does not have that specific data

and that the data varies widely across different geographic regions and individual circumstances.

He agreed that, while cost is a very important element, control and convenience are also

important elements. Member Kelly also suggested that if the FDIC could communicate the costs

associated with being underbanked, then consumers may better understand the message about

financial literacy. Member Shettlesworth asked how services such as PayPal and stored value

cards are related to the unbanked and underbanked equation. Mr. Ernst responded that PayPal

and prepaid caxds operate in a "gray zone" and, in fact, one of the innovations being looked at for

the next survey is to capture data regarding bank customers who maybe using a prepaid card

managed by a bank.

With respect to households who reported they did not have bank accounts because they

had insufficient funds, Mr. Ernst explained that, for households earning less than $15,000 per

year, almost half of these households do have a bank account. Thus, the question becomes

whether other low-income households forego bank accounts due to their perception of potential

expenses rather than the reality of costs. Turning to the issue of consumer education and

financialliteracy, Mr. Ernst advised that the FDIC is involved in a range of financial literacy

efforts, including the Money Smart program, which the FDIC developed, Member Epstein then

asked if other banks had launched successful inclusion efforts and whether that information

could be shared. Mr. Ernst responded that there have been two previous research projects, the

first being a pilot program launched by the FDIC and called "Safe Accounts," and the second

being an in-depth study of the strategies used by banks to expand economic inclusion.

Mr. Davis then introduced Brandon Milhorn, Chief of Staff, to discuss the activities of

the Subcommittee on Supervision Modernization.

Mr. Milhorn noted that the 2019 Annual Performance Plan issued by Chairman

McWilliams outlined the FDIC's goals and priorities for the year. Many of those goals related to

the efficiency and effectiveness of the FDIC, including being responsible stewards for the

Deposit Insurance Fund, embracing and reinvesting in technologies at the FDIC, and cutting the

cost of compliance for regulated institutions. An important question facing the FDIC and the

banking community, he suggested, is: "Where will the indusiry be ten years from now and what

does the FDIC need to do to prepare for that future, especially in the areas of training,

technology, and workforce deployment?"

Mr. Milhorn observed that bank regulators must identify risks early, take steps to

mitigate risks, and obtain the information needed for policy makers to make good decisions with

respect to those risks. To better address these challenges, the FDIC created the Subcommittee on

Supervision Modernization to support the FDIC's Advisory Committee on Community Banking

March 28, 2019
529

by considering how the FDIC can leverage technology, refine processes to make the examination

program more efficient, all while managing and training a geographically dispersed workforce.

To achieve these goals, the subcommittee will review the examination process, review the way in

which the FDIC deploys staff, consider how staff is trained and how technology is used in the

process, consider the type of data the FDIC needs from supervised institutions and how that data

is used in the supervision process, and examine how the FDIC can become a more effective

supervisor over the course of the next several years, leveraging technology and refining the

examination processes.

Mr. Milhorn reported that the subcommittee consists of fifteen members, including

individuals from various banks and technology service providers, former regulators,

technologists who can advise on how data and technology are being used, and an expert on

distance learning. He advised that the subcommittee has met once and received a briefing

regarding the fundamentals of the FDIC and how it carries out its various missions. The

subcommittee identified several areas to explore, he reported, including the training

environment, how the FDIC conducts loan reviews, and how the FDIC receives data and shares

data with banks. Mr. Milhorn suggested the subcommittee will ultimately produce a report for

consideration by the CBAC.

Mr. Hanrahan added that the FDIC assembled a good cross section of professionals and

that the first meeting provided an overview of the FDIC examination process and the use of

technology. Mr. Milhorn agreed that it was important to have a variety of banks represented on

the subcommittee, from heavy-users of technology to those that do not use as much technology.

Chairman McWilliams then thanked the Committee members and the presenters.

There being no fiurther business, the meeting was adjourned at 3:30 p.m.

Robert E. Feldman 

Federal Deposit Insurance Corporation

Executive Secretary

And Committee Management Officer

FDIC Advisory Committee on Community Banking

March 28, 2019
Minutes

of the

Meeting of the FDIC Advisory Committee on Community Banking

of the

Federal Deposit Insurance Corporation

Held in the Board Room

Federal Deposit Insurance Corporation Building

Washington, D.C.

Open to Public Observation

March 28, 2019 — 9:00 A.M.

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

complete.

McWi

oard of Directors

Federal Deposit Insurance Corporation