135 

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 

February 17, 2012 8:42A.M. 

The meeting of the Federal Deposit Insurance Corporation ("FDIC") Advisory 

Committee on Community Banking ("Committee") was called to order by Martin J. Gruenberg, 

Acting Chairman, FDIC Board of Directors. 

The members of the Committee present at the meeting were: Robert F. Baronner, Jr., 

President and Chief Executive Officer ("CEO"), Bank of Charles Town, Charles Town, West 

Virginia; R. Daniel Blanton, President and CEO, Southeastern Bank Financial Corporation and 

Georgia Bank & Trust Company of Augusta, Augusta, Georgia; Charles G. Brown, III, 

Chairman and CEO, Insignia Bank, Sarasota, Florida; Deborah A. Cole, President and CEO, 

Citizens Savings Bank and Trust Company, Nashville, Tennessee; Carolyn "Betsy" Flynn, 

President and CEO, Community Financial Services Bank, Benton, Kentucky; James H. Gray, 

Chairman, Beach Business Bank, Manhattan Beach, California; Jack E. Hopkins, President and 

CEO, CorTrust Bank, National Association, Sioux Falls, South Dakota; Ann Marie Mehium, 

President and CEO, Summit Bank, Eugene, Oregon; Joseph G. Pierce, President and CEO, 

Farmers State Bank, Lagrange, Indiana; Rebecca Romero Rainey, Chairman and CEO, Centinel 

Bank, Taos, New Mexico; Dorothy A. Savarese, President and CEO, Cape Cod Five Cents 

Savings Bank, Orleans, Massachusetts; Alan Thian, President and CEO, Royal Business Bank, 

Los Angeles, California; and Ignacio Urrabazo, Jr., President, Commerce Bank, Laredo, Texas. 

Walter E. Grady, President and CEO, Seaway Bank and Trust Company, Chicago, 

Illinois, and Matthew Williams, Chairman and President, Gothenburg State Bank & Trust 

Company, Gothenburg, Nebraska, were absent from the meeting. 

Members of the FDIC Board of Directors present at the meeting were: Martin J. 

Gruenberg, Acting Chairman and Thomas J. Curry, Director (Appointive). 

Corporation staff who attended the meeting included: Ruth R. Amberg, Valerie Best, 

Michelle Borzillo, John E. Bowman, Richard A. Brown, Kathleen S. Brueger, Kymberly K. 

Copa, Carolyn D. Curran, Christine M. Davis, Bret Edwards, Robert E. Feldman, George French, 

February 17, 2012 
136 

Alice C. Goodman, Kenyon T. Kilber, Alan W. Levy, Susan Lovelace, Christopher Lucas, RaeAnn Miller, Arthur J. Murton, Paul Nash, Christopher J. Newbury, Mark Pearce, Sylvia H. 

Plunkett, Stephen A. Quick, Claude A. Rollin, Barbara A. Ryan, Maureen E. Sweeney, Sandra L. 

Thompson, James C. Watkins, Cottrell L. Webster, John D. Weier, and Mindy West. 

William A. Rowe, III, Deputy to the Director (Acting Comptroller of the Currency) was 

also present at the meeting. 

Acting Chairman Gruenberg welcomed the Committee, including its new members. He 

said that the previous day’s FDIC-hosted conference, "The Future of Community Banking," had 

been an excellent start for the upcoming year of community banking focused initiatives, and that 

he hoped the issues raised there could be used to deepen the FDIC’s understanding of the 

evolving challenges and opportunities facing community banks. After providing an overview of 

the day’s discussion topics, Acting Chairman Gruenberg introduced Paul Nash, Deputy to the 

Chairman for External Affairs, who moderated the day’s proceedings. In turn, Mr. Nash 

introduced the leaders of the panel, "Review: Community Banking by the Numbers," Arthur J. 

Murton, Director of the Division of Insurance and Research ("DIR"), and Richard A. Brown, 

Chief Economist and Associate Director, DIR. Mr. Murton said that, at the previous day’s 

conference, the FDIC had tried to describe a variety of trends that occurred over the last 25 years 

and noted that deeper investigation into data often revealed complexities not apparent on the 

surface. He invited the Committee to respond to the FDIC’s information, including how to 

define a "community bank," banks’ business models, their ability to raise capital, and the effect 

of technology. Mr. Brown added that the Committee, now familiar with types of data to which 

the FDIC has access, could help guide the FDIC’s research agenda by assisting with articulating 

the important questions and how they should be asked. The discussion at several points referred 

to a slide presentation presented the previous day, "Community Banking by the Numbers." 

Member Pierce said that he applauded the FDIC’s efforts to dig deeper into the data; he 

also noted that he appreciated the revised community bank definition because a definition limited 

to "assets less than one billion dollars" was inadequate. Member Urrabazo recommended that 

the FDIC further explore the relationship between profitability and bank size; he said that he was 

curious to see if community banks can compete with large banks on cost and noted that he was 

concerned about having to devote more personnel to "backroom" tasks rather than customers. 

Member Blanton observed that many analysts discuss what size banks are most efficient but that 

the FDIC has more data to help address the question; he suggested that the FDIC explore the 

issue at a variety of asset size levels. Mr. Murton noted that the FDIC had addressed the issue 

somewhat the previous day when it discussed the components of bank profitability and banks’ 

efficiency ratio (in reality, an inefficiency ratio, he said). He said that the researchers had been 

struck that it was the revenue side (which included non-interest fee income) rather than the 

expense side that differentiated community and non-community bank profitability. 

Member Hopkins suggested that the research make comparisons based on size after 

excluding large banks’ trading revenues, which he viewed as skewing revenue data 

comparability. Member Savarese observed that net interest margins continued to drive the 

business models of many community banks and that, historically, one would expect that the yield 

curve would return to more normalized levels. However, she continued, because of other issues 

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137 

that are occurring (including disintermediation, nontraditional competitors, migration of deposits 

to larger institutions) the historical spread normalization may not occur and it would be 

important to understand the non-interest income component in the retail banking model. 

Member Savarese added that she appreciated the resources that the FDIC was applying to the 

research because it would be easy to draw false correlations based on inadequate research. 

Member Brown observed that although fee income was an important differentiating 

factor between community and large banks, the Call Report does not currently break out fee 

income into many components and suggested that more detailed Call Report information would 

be analytically helpful. Member Pierce had earlier recommended that the FDIC further explore 

the proper classification of loans that had both commercial real estate ("CRE") and commercial 

and industrial ("C&I") loan characteristics. Member Brown later agreed, noting that many loans 

were actually C&I loans but were misleadingly classified as CRE because they used CRE as 

collateral. Mr. Murton and Mr. Brown agreed that a better classification was important and that 

different definitions could result in a different view of business line concentrations among 

community banks. 

Member Mehlum noted that the relationship of a bank’s ownership model and its risk 

management would be a useful research area. Mr. Murton agreed and said that the FDIC was 

looking into outside data resources, including S-corporation information. Member Urrabazo 

suggested that it would be useful to review failed banks to determine at what point the regulator 

had missed an opportunity to take action that may have avoided failure. Acting Chairman 

Gruenberg said that the FDIC Office of Inspector General ("OIG") had produced a summary of 

its failed bank reports which concluded that failed banks often had three common characteristics: 

rapid growth, CRE concentrations and reliance on brokered deposits. He added that, generally, 

examiners had recognized the trends and brought them to bank management attention but that 

institutions often failed to address the problems, thus leading the OIG to suggest that examiners 

could have been more forceful in requiring bank management to address their problems. 

Member Brown recommended that the FDIC explore differences in S-corporation and Ccorporation banks, including their failure rates. He observed that the S-corporation model could 

encourage banks to operate as dividend investments for their owners compared to the Ccorporation model which may have encouraged more rapid growth strategies. Member Brown 

noted that a current legislative proposal would increase the maximum number of shareholders 

allowed for S-corporation status (from 100); he suggested that increasing that threshold would 

encourage a more stable banking industry. Member Blanton indicated that for the last 25 years, 

banks had been viewed as an "equity play" involving rapid growth, which was not a good reason 

for creating new banks; going forward, he thought that banks would return to being viewed as an 

income producing stock. 

Member Baronner suggested that an area of inquiry regarding failed banks could be 

how many customers they had; he suggested that failed de novo banks may have focused on just 

commercial customers whereas the more customers a bank had might indicate a more stable 

deposit base in case of a liquidity problem. He also recommended considering the number of 

failed bank customers to whom the bank had lent the legal maximum, since, if those customers 

could not repay, it would drain a bank’s capital faster. Member Savarese observed that, because 

of the severity of the recent economic collapse, even community banks that consistently adhered 

February 17, 2012 
138 

to a prudent business model may have failed (for example, due to an unavoidable geographic 

concentration), as well as banks that pursued a riskier model which would have failed even in a 

more moderate economic downturn. She noted concern about "throwing out the baby with the 

bathwater" and drawing conclusions against prudent models that nonetheless resulted in failure. 

Member Gray suggested that it would be useful if de novo banks’ proposed business plans were 

subjected to stress testing; regulators reviewing the applications could inquire what the de novo 

banks’ backup business plans would be. 

Member Savarese commented that headlines tended to misleadingly imply that 

community banks failed disproportionately because the headlines often reported merely the 

absolute number of small and large bank failures; however, when failures were viewed as a 

percentage of banks of their size, it became clearer that there was not a disproportionate loss of 

community banks. Acting Chairman Gruenberg said that a statistic from the FDIC research that 

he found notable was that, of the community banks that were continuing to operate after 25 years 

(at the end of 2010), the bank size most likely to be continuing had assets of under $100 million 

at year-end 1985. Committee members discussed possible other characteristics of those small 

banks, including whether they were family-owned, S-corporations, or located in rural areas. 

Acting Chairman Gruenberg indicated that further research was warranted. He noted that the 

FDIC regulates many small institutions and that these sustainability statistics tended to be 

inconsistent with the notion that a bank needed a billion dollars of assets to be viable. He further 

noted that failure statistics based on size could be misleading because not all big institutions that 

could have failed in 2008-9 were allowed to fail. Regarding the interaction of size and future 

viability, Member Mehium said that a concern of hers was the increase in compliance costs. She 

noted that her bank was spending much more today on compliance and that, in a recent 

examination, her bank was encouraged to engage third parties to audit areas in which her bank’s 

performance was already strong. Member Cole agreed that compliance costs were a primary 

challenge and that customers should be a bank’s priority since, without customers, there would 

be no bank and no need for compliance. 

Member Cole also indicated that it was important that the positive information about the 

viability of community banking should be communicated more broadly into communities and not 

limited to a technical report. Member Brown observed that the FDIC’s work needed to be 

detailed because of the scrutiny that it would receive but that effective communication through 

the media required some simplification. He suggested using short communications such as press 

releases or emails that bankers could forward to local media and then to make speaking points 

available for press interviews. Members Savarese, Cole and Brown further suggested that: the 

information be presented positively (for example, focusing on the success rate rather than the 

failure rate); that bankers and their trade associations should be used to carry the message; that 

repetition of important points was key; and that the effort be sustained for the full year of the 

FDIC’s initiative. 

Member Hopkins suggested that it would be worthwhile to clarify that small bank 

failures were not "breaking" the Deposit Insurance Fund ("DIP) by providing statistics that 

compared the impacts on the DIF of failures of banks over and under $10 billion in assets. 

Member Savarese noted that the research presented the previous day indicated that S-corporation 

banks and mutual banks had shown adherence to a community banking model and a lower 

February 17, 2012 
139 

failure rate and commented that the financial system would benefit if more mutual banks were 

encouraged. Member Urrabazo commented on statistics indicating that there had been 

substantially more asset growth in non-community banks than in community banks; he said that 

community banks no longer competed on various business types (such as mortgages, retail 

business and credit cards) and suggested that regulations were one causal factor. Mr. Murton 

said that it was unclear how much of future financial intermediation would be done using the 

regulated banking system and how much would be done through capital market securitization; he 

observed that policy decisions being made in the coming years would affect the outcome. 

Member Flynn observed that she was surprised that BB&T was on a community banking panel 

at the previous day’s conference; she commented that BB&T is not a community bank in her 

view. 

Acting Chairman Gruenberg said that, although a tremendous amount of research 

remained to be done, he felt that the results would be instructive and would tell a positive story 

about the future of community banking. He said that the communications aspect of the FDIC’s 

initiative would be important and carefully considered and that he hoped that it would dispel any 

myth that regulators were not supportive of community banks. Acting Chairman Gruenberg said 

that small institutions had been viable over time and that the public interest was in maintaining as 

many institutions serving their communities as possible. 

Mr. Nash then introduced the FDIC staff that led the second panel, "Discussion: 

Challenges and Opportunities for Community Banks," Sandra Thompson, Director, Division of 

Risk Management Supervision ("RMS"), James Watkins, Deputy Director, RMS, and Sylvia 

Plunkett, Senior Deputy Director, Division of Depositor and Consumer Protection ("DCP"). Ms. 

Thompson focused her introductory comments on the challenges and opportunities associated 

with the current examination process. Mr. Watkins described efforts during 2012 to gather 

information at the conclusion of examinations on topics related to the FDIC ’s community bank 

initiative -- ownership structure, capital-raising activities, the current competitive environment, 

succession management, use of technology and the regulatory process. Based on information 

from this project, Mr. Watkins reported that banks’ capital-raising efforts have focused on 

retained earnings and offerings, among other strategies. Mr. Watkins also observed that 

community banks are tied to their local communities, and the majority of their shareholders, 

accountholders and lending activity are in their local area. He noted that banks are taking 

positive steps regarding recruitment and retention of human talent and succession management 

and are reasonably well staffed to meet regulatory requirements. Mr. Watkins said examiners 

noted relatively few community banks try to be "first to market" in technology, but these 

institutions do remain current on emerging products and technologies. Turning to challenges, 

bankers have responded that earnings and retaining staff are issues of concern. 

Ms. Plunkett then discussed internal DCP and RMS reviews of their examination 

processes which identified five common areas for consideration. The first area was the preexamination planning process which might be made more efficient by tailoring the request list 

for the bank and increasing communication throughout the process. The second area involved 

ensuring that there is good interaction between examiners and bank representatives throughout 

the exam process to avoid surprises at the end. The third area she described concerned 

leveraging technology so that more examination work can be done offsite; if banks and 

February 17, 2012 
140 

examiners can share more information electronically, it could reduce the time spent on the bank 

premises. A fourth area of opportunity was FDIC technical assistance and outreach to banks; for 

example, explaining new and changing regulations and hot topics as they develop. Ms. Plunkett 

said that the final area of consideration was the post-examination process, in which examiners 

confirm that any needed corrections had been successfully made, and may also include contact 

between exams. Ms. Plunkett then reviewed a variety of topics that had been discussed by a 

panel in the previous day’s conference. Among the subjects were the most beneficial aspects of 

the examination process which included: interactions with the examiner; meetings in advance of 

the examination and the relationship/partnership between the bank and examiners. The least 

beneficial aspects included: risk scoping; the perceived change in examination focus from safety 

and soundness to compliance and consumer protection; the perceived decoupling of risk 

management and compliance examination with the advent of the Consumer Financial Protection 

Bureau; the lack of standardized training for bank employees about new regulations; and, the 

tiering of examination procedures based on bank size and complexity. Ms. Plunkett then invited 

feedback on these and other issues. 

Member Flynn said that her bank had just had examinations in all areas but compliance 

and that the FDIC examiners were professional, helpful, and had excellent communication skills. 

Ms. Thompson said that she was pleased to hear that report, that RMS and DCP intentionally 

tried to take a balanced approach to supervision, asking examiners to call situations the way they 

see them while being professional in their deliberations and communications. Member Cole 

observed that bankers may complain about examinations, when in reality, the examination 

process is merely implementing the law’s requirements, which may be the real source of their 

frustration. Member Blanton suggested that, while regulations are being drafted, bankers would 

welcome guidance from regulators about compliance expectations rather than leaving it to banks 

to make the determination and find out later whether they were right or wrong. Members 

Baronner, Flynn and Cole and Mr. Nash then discussed how bankers could provide feedback to 

legislators about the practical impacts of the legislation under consideration. 

Member Baronner inquired about the review of regulations and laws that existed but may no 

longer be useful. Members Flynn and Blanton discussed an example of limits on the number of 

electronic transactions in certain accounts although there were not limits on similar in-bank 

transactions; they noted that the limits frustrated good customers without good reason. Director 

Curry suggested that it would be important to consistently define what "compliance" means and 

then gather information about banks’ actual costs for compliance, however it is defined. A 

process of identifying the benefits of the law or regulation would also need to occur, which could 

then be used to analyze whether a particular provision is cost-effective. Member Savarese 

agreed that a more empirical cost-benefit analysis would be useful and suggested that such an 

analysis also consider the scalability of compliance relative to bank size. 

Member Savarese described some examination concerns that had been raised at a 

bankers’ conference she attended. One problem was that, at the end of compliance examination, 

examiners indicate that they are unable to share the results because it had to be sent to 

Washington first. A second concern was the length of time between the end of a compliance 

exam and the receipt of the written report. Member Savarese also indicated that oral comments 

made during an examination, which tended to be more favorable, often diverged from more 

February 17, 2012 
141 

critical written reports. She also noted that it occasionally took too much time to obtain an 

answer about how to implement a legal requirement as it applied to a customer situation, 

especially when more than one agency was involved in enforcing a law. Member Mehium 

suggested that, when examiners tier an examination, that they consider a bank’s past 

performance as well as size; if a bank was consistently strong in an area for example, then a third 

party audit on that subject might not be necessary. 

Member Hopkins expressed some frustration that examiners appeared to impose higher 

Bank Secrecy Act ("BSA") requirements on small banks that were not imposed on larger ones. 

He reported that, although his bank had invested substantial resources into BSA compliance 

software, the examiner indicated that the bank should conduct an additional manual process that 

Member Hopkins felt could not be imposed on a very large bank. Member Brown said that his 

bank felt it was necessary to request a large amount of BSA compliance information from a 

customer and that the customer perceived it would not have to provide as much if it moved its 

business to a much larger bank where its transactions would be less noticeable. He said that the 

regulators should ensure that banks of different sizes receive the same levels of scrutiny. In 

response to the BSA observations, Mr. Watkins said the FDIC instructs examiners to evaluate 

how the practices conform to the regulation and share best practices when possible. He also 

noted that articles regarding examination-related topics, including BSA, are available to bankers 

and the public in the FDIC’s Supervisory Insights. 

Member Brown said that there seemed to be an increase in examiner "flyspecking" fair 

lending and Community Reinvestment Act examinations. He also reported that there appeared to 

be a change in regulatory requirements where a bank uses a mortgage wholesaler to originate a 

loan and that the change shifted the primary compliance burden from the wholesaler to the bank. 

He said that if his bank was going to be held responsible for the wholesaler’s compliance, his 

bank would need to add an additional procedure to double-check the wholesaler’s work. Ms. 

Plunkett said that she would follow up on this issue. 

Ms. Thompson noted that bankers had reported that earnings had been their primary 

challenge and inquired if, in considering their expenses, community bankers had considered 

sharing back-office processing or technology costs among multiple banks. Member Savarese 

said that there was a lot of discussion on the subject now, including at a meeting of America’s 

Community Bankers. She said that a group of Connecticut-based banks are cooperating to 

provide core back-office systems but that scalability had presented challenges and that there had 

been a product cycle issue. She added that there could be cost efficiencies if a trade association 

or commercial outsourcer provides infrastructure for regulatory compliance, if not the entire core 

system. Member Urrabazo said that the Texas Bankers Association set up a department to 

provide services and legal opinions on compliance matters and that the cost to join was 

reasonable. He added that he perceived that examiners were developing a "gotcha" attitude on 

fair lending and Home Mortgage Disclosure Act reporting; and that bankers’ fear of violating 

those laws caused them to be less flexible in their lending. 

The Committee stood in recess at 10:24 a.m. and reconvened at 10:46 a.m. that same day. 

February 17, 2012 
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Mr. Nash introduced Mark Pearce, Director, DCP, and Jonathan Miller, Deputy Director, 

DCP, who led the discussion of "Why Community Banks Matter: Customer Perspectives." Mr. 

Miller began by discussing five key observations about community banks from the previous 

day’s panel discussion of the same title. The first observation was the nimbleness of community 

banks in meeting consumer needs; for example, their ability to make faster decisions on 

affordable housing deals. The second observation Mr. Miller discussed was their flexibility in 

underwriting consumer or community development loans; for example, being willing to work 

with businesses that larger banks would not find worthwhile. The third observation, he said, was 

their better understanding of the local economy and market, which allowed, for example, 

innovative programs for first-time home buyers and first-time farm loan borrowers in North 

Dakota. Mr. Miller also noted that community banks have a better understanding of local 

circumstances in difficult economic times, such as the farm crisis of the 1980’s. The fourth 

observation, he said, was the importance of relationship banking, which was involved in all of 

his previous examples. Finally, Mr. Miller noted that community banks were especially 

important in rural areas where big banks may not be interested in operating. Mr. Pearce said that 

another topic he would be interested in hearing Committee opinion on was the role of mobile 

banking in the future of community banking and economic inclusion. He observed that mobile 

banking is the wave of the future and may not be cost prohibitive but that it also raised the 

question of how it would impact the face-to-face relationships that have been a feature of 

community banking. 

Member Rainey observed that it would be a challenge, especially in rural areas, for 

community banks to invest in technology while maintaining the infrastructure of "high-touch" 

relationship banking. Member Blanton agreed and noted that there was a challenge in the 

transition from current generation business customers, who preferred to meet with their banker, 

and new generation ones, who do not. Member Mehlum said that current customers already 

relied on technology for part of their banking relationship, such as transfers among accounts, but 

still wanted to meet with their banker for bigger or unusual financing issues; the key, she said, 

was to learn how to do both cost-effectively. Member Pierce agreed and added that using 

technology for transactions actually gives bankers more time for customers who need guidance. 

Members Urrabazo and Savarese indicated that the customer’s experience of the bank and its use 

of technology were key, and that customers prefer technology for some purposes but want to be 

able to reach a banker easily in other situations, such as when they encounter a problem. 

Member Savarese observed that technology allows much more frequent contact between 

customers and their bank and that banks should view each contact as an opportunity to reinforce 

a good relationship; in addition, when customers call with a problem, she suggested that bankers 

should leap at the personal contact opportunity to strengthen customer bonds. 

Member Urrabazo described a situation where there was demand for lower cost housing 

constructed by an organization that he belonged to but that none of the applicants conformed to 

the secondary market lending standards; he said that his organization had converted the housing 

into rentals and would try to improve the renters’ credit eligibility. Member Thian said that his 

bank served many first-generation Asian immigrants and that a challenge that he saw in the next 

10 to 20 years was the transition of their businesses to their American-born children who are 

more computer savvy and may not feel that a niche bank is necessary to their needs. Knowing 

that his client profile would change, he said that infrastructure investment decisions were a 

February 17, 2012 
143 

challenge; his bank currently offers remote capture but not mobile banking. Member Baronner 

said that his bank offered mobile banking and also had a totally electronic account which helped 

drive down costs; he said that the bank also provides customers with incentives to use their debit 

card, and that the debit card interchange fee the bank earned helped cover costs. He continued 

that customers who use multiple electronic services stay with the bank longer and noted that, 

while young people may prefer to conduct all their business electronically, they moved toward 

preferring a personal relationship as they mature. Member Flynn suggested that banks needed to 

offer electronic services to succeed and added that half of her customer communications were 

via texting. She said that, while a building would always be necessary to build relationships, the 

vast majority of customers preferred electronic transactions. 

Member Savarese said that a focus group her bank did indicated that younger people did 

not care about a bank’s community focus, but that it mattered a lot to people aged 45 to 50. She 

suggested that it was important to keep young people engaged long enough until they saw the 

bank’s community focus as different and valuable. Mr. Miller agreed and inquired how 

community banks could encourage young people’s continued engagement such that, when they 

were older, they considered working with a community bank. Member Savarese said that 

encouraging financial education and literacy was important and that there was public openness in 

the wake of the financial crisis. She said that her bank had a financial literacy director who used 

web-based resources, including FDIC’s "Money Smart" program, to provide instruction at all 

grade levels and college. Member Savarese said that her bank was thus positioning itself to be a 

trusted financial advisor and viewed financial education as an opportunity for community banks 

to build relationships with young people. 

Mr. Pearce said that the FDIC worked to expand Money Smart and keep it up-to-date and 

inquired if there were additional things the FDIC could do to better support financial literacy 

efforts. Member Urrabazo said that the FDIC software was outstanding and that he appreciated 

the various languages offered. Member Mehlum said that her bank was part of a consortium 

spearheaded by United Way that was considering the FDIC system in its curriculum 

development; she noted that, by being part of a consortium, her bank could participate in 

financial education in a way that it could not do on its own. Member Savarese suggested that the 

FDIC could identify and publicize best practices in financial education, and that the FDIC could 

encourage states to embed financial education in state curricula so that the younger generation 

does not repeat the mistakes that led to the recent crisis. 

Speaking about cyber-security, Member Urrabazo described a situation where a 

customer’s computer was hacked and used to initiate several thousand illegitimate money 

transfers valued at almost one million dollars. He said that his bank was able to intervene so that 

losses were greatly minimized, but noted that the customer later questioned the bank’s security. 

Member Savarese agreed that customers can blame banks merely because the bank has put a 

product into the electronic marketplace; she said that the problem raised an issue of confidence 

in banks as well as imposing a significant cost. Member Baronner noted that insurance 

companies offered cyber-security insurance that seemed reasonably priced. Mr. Nash noted 

that, in an interconnected world, cyber-security is only as strong as the weakest link; he also said 

that cyber-security was an issue that might see Congressional action this year. 

February 17, 2012 
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Ms. Thompson, Mr. Watkins, and Ms. Plunkett returned to ask the Committee for 

insights on topics related to the future of community banking, including succession planning and 

use of social media. Regarding succession planning, Member Brown noted that his bank uses 

internships in association with area universities. Member Hopkins said his bank and the state 

banking association encourage students to pursue technical school and college degrees in 

banking through scholarships and by assisting schools with curriculum development. Member 

Mehium said her bank makes concerted efforts to include younger adult area business leaders on 

the bank’s board, is involved with a local university banking program, and supports various 

award programs for young people. Member Flynn said that every officer and supervisor at her 

bank has designated short-term and long-term successors, and the bank ensures the designees 

receive appropriate education for future assignments. 

Ms. Thompson asked about community banks’ practices and plans regarding the use of 

social media. Member Blanton said his bank’s adoption of mobile banking has been well 

received, but that the bank was not pursuing social media, such as Facebook, texting, or Twitter 

due to the potential reputation risk. Member Flynn said a section of her bank’s marketing 

department is dedicated to social media, allowing the bank to be proactive when positive and 

negative comments are made about the bank. Member Savarese said her bank recognizes a 

generational shift is occurring and notes that younger people are less inclined to go to bank 

branches. Her bank is on Facebook and has seen opportunities for communicating quickly and 

broadly. Member Pierce said his bank maintains a Facebook presence, primarily to 

communicate information about the institution’s community involvement. Members Cole, 

Hopkins, Brown, Rainey, Mehlum, Barroner, Thian and Urrabazo said their banks do not have a 

social media presence, but most indicated they are monitoring and considering the issue. 

Members Hopkins and Brown discussed the issue of who would want to "friend" a bank and 

whether there could be a backlash against a business using a medium intended to be "social." 

Member Rainey noted that the ongoing expense of having a social media presence was an issue. 

Member Mehium agreed that social media raises a resource issue and observed that her 

customers had expressed more interest in mobile banking which her bank is launching soon. 

Member Thian said his bank, a de novo, does not view social media as a priority. Member 

Brown said that his bank was also cautiously approaching mobile banking and Facebook. 

Ms. Thompson also inquired about the Committee members’ views on extending the 

Transaction Account Guarantee Program, pursuant to the Dodd-Frank Wall Street Reform and 

Consumer Protection Act ("Dodd-Frank Act"). This program will expire at year-end 2012 unless 

extended by Congress. Member Brown said he favored extending the program for one or two 

years to preserve liquidity until the economy normalizes. Member Rainey agreed, adding there 

is now excess liquidity, but the next couple years are unknown and that the program helped level 

the playing field for problem banks that may still be struggling. Member Blanton indicated the 

program had been vitally important when the financial system needed to be stabilized, but it 

ultimately costs the banking industry more because more funds are insured; he said that, 

although he was "on the fence" on the issue, he thought an additional year of the program made 

sense. Member Mehium reported that a consensus at a recent meeting of the Oregon State 

Bankers Association was that it would be helpful to extend the program for another year. 

Member Baronner agreed and added that the program was an important liquidity tool. Member 

Savarese said that, although also "on the fence," she is inclined to favor a short-term extension 

February 17, 2012 
145 

but not a long-term one, which would provide an imprimatur to less-sound institutions. Member 

Flynn said the program is very important to her bank, which has significant municipal deposits; 

she added that the extension should be for three years at a minimum, and preferably for five 

years. Members Thian, Pierce and Cole agreed the program should be extended. 

Member Urrabazo recommended cutting the program because banks were misusing the 

insurance and acquiring funds for the wrong purposes. Further, he said the Texas Bankers 

Association discussed an opt-in version of the program so banks that do not want to pay for 

additional FDIC insurance would not have to subsidize those who do. Member Hopkins said that 

a problem with an opt-in program would be that "too big to fail" banks would opt-out, thereby 

shifting the costs to smaller banks. Member Gray said he favored an extension, but also 

recommended that the FDIC stress test the past three to five years to estimate how much banks 

had paid for the program (which he believed had been relatively expensive). Mr. Nash said the 

FDIC would inquire further into the costs of the program. He also noted that the extension or 

non-extension of the program was the only likely outcome, that Congress is unlikely to change 

the program’s operation. 

Mr. Nash inquired about the future of community banking and banking products and 

services in the next five to ten years. Member Blanton said a major challenge is transitioning to 

the next generation of customers and understanding how to deliver products to them. Member 

Savarese said the future changes to the payments system are either a tremendous opportunity for 

the banking industry or an obstacle because of disintermediation. She suggested the community 

banking industry could differentiate itself by leveraging its regulated nature, transparency, and 

trusted position to offer electronic transactions that are as safe and secure as the current face-toface ones. Member Cole said the future also involves managing the cyberspace platform. 

The Committee discussed various aspects of mortgage banking. Member Flynn said 

mortgage banking remains important in her market. Member Hopkins indicated he was 

concerned about the secondary mortgage market, and his bank is experiencing "push-backs" 

from Government Sponsored Enterprises ("GSE") on foreclosed loans. Members Blanton and 

Pierce expressed concern that community banks’ ability to originate mortgages is in jeopardy 

because big players who formerly aggregated and then sold loans are leaving the market. 

Member Gray added that mortgage lending to the next generation would be complicated by their 

expectation of always using Internet resources to obtain the best deal. Member Savarese said her 

bank is committed to mortgage lending, and the recent crisis had allowed it to regain market 

share because other lenders had retrenched. However, she observed that GSE pushbacks and 

compliance burden are threats. Member Baronner said his bank had found a niche in portfolio 

mortgage lending, for example, providing construction loans for custom homes. He agreed 

secondary market loans are hard to accomplish and create a negative customer experience for 

which the local bank was blamed. 

Member Thian said that focus of his bank, which has a high percentage of Asian 

immigrants, would be on international trade. He said a challenge during the last couple of years 

had been customers who did not use their full credit lines because of broader economic 

uncertainties; on one hand the bank was happy about the resulting lower risk, but also was 

unhappy about the lack of interest being paid. Member Thian said his bank closely monitors 

February 17, 2012 
146 

customers using high percentages of their credit lines and covered some of its risk by 

participating in Small Business Administration ("SBA") programs. 

The panel titled "Lessons Learned and Successful Strategies: The Community Bank of 

the Future," was not separately convened at this meeting. 

The Committee stood in recess at 12:02 p.m. and reconvened at 1:37 p.m. that same day. 

Mr. Nash then began the "Roundtable Discussion" of the day’s meeting by asking the 

Committee members to discuss their local and regional economic and banking conditions and 

expectations; he also invited the new Committee members to describe their institutions. Member 

Mehlum, of Summit Bank, Eugene, Oregon, said that her bank started in 2004, was a locallyowned and business-focused bank with about $130 million of assets and 300 shareholders, of 

whom, about 99 percent live in the local area. Her view was that the Eugene area continued to 

face difficulties, but that Portland real estate values and employment were doing better. Member 

Baronner, of Bank of Charles Town, Charles Town, West Virginia, reported that his bank, begun 

in 1871, has about $300 million of assets in a diverse mix and about 1,100 shareholders. He said 

that his area, not far from Washington, D.C., had been a center of subprime lending for tract 

developments by big banks, that there had been a steep housing price decline and that building 

trade employees had been hard hit. Member Baronner said he believed the area economy was at 

the bottom, that there had been a recent increase in loan volume, that Marcellus shale drilling 

was doing well while southern coal fields were not, and that state finances were sound. 

Member Savarese, of Cape Cod Five Cents Savings Bank, Orleans, Massachusetts, said 

that her bank, formed in 1855, had a traditional focus on savings deposits and residential 

mortgages but had changed over the last 20 years to adapt to its customers’ needs; three-quarters 

of its balance sheet was in residential mortgages but it also has substantial commercial lending, 

as well as other business lines. The bank has a quasi-philanthropic aspect, she said, with a 

foundation that donated money as well as employees devoted to financial literacy and assisting 

non-profit organizations. Member Savarese said that the bank’s local economy, which was very 

seasonal and focused on lodging, had seen a recent uptick in residential real estate purchases. 

Massachusetts has a diversified economy, she said, which had not experienced high growth and 

did not see as significant diminution in values as other areas; still, she did not see much 

economic traction going forward. Member Savarese said that the state was generally overbanked 

which resulted in very low interest margins. Member Thian, of Royal Business Bank, Los 

Angeles, California, noted that his bank, which opened in late 2008, had achieved profitability 

along with significant capital growth. He described his bank as a niche bank intended to serve 

Asian immigrants, with a focus on Pacific Rim trade activities, as well as engaging in C&I and 

CRE lending. He said that his bank was a minority depository institution ("MDI") and 

complimented the MDI program and the FDIC’s responsive assistance. Member Thian noted he 

belonged to the National Association of Chinese Immigrant Bankers, which has about 30 

members from smaller banks, and said that many of them needed more support from regulators 

to improve their compliance operations. 

Member Flynn, of Community Financial Services Bank, Benton, Kentucky, said that her 

bank was 123 years old and that employees owned half the stock; she said that, by utilizing 

February 17, 2012 
147 

technology, the bank had grown significantly in the last couple years without increasing the 

number of employees. She said that Kentucky had experienced only two percent depreciation in 

collateral value and that its unemployment rate was 8.46 percent; she said that her bank’s area 

economy was doing pretty well, in part because there were two universities in its market. 

Member Pierce, of Farmers State Bank, Lagrange, Indiana, said that his bank has assets of about 

$480 million and functioned as a traditional community bank with about 40 percent of its loan 

portfolio in residential lending and 20 percent in agricultural lending. He noted that over 40 

percent of the local population is Old Order Amish and that many of them work in the 

manufactured housing and recreational vehicle industries, and also engage in woodworking. 

Member Pierce said that he believed that the economy had reached a turning point, although it 

would be a long, tough road to recovery; he said that area housing prices had started upward, 

customers were fairly optimistic, loan demand was relatively strong, and that farmers were doing 

well (although he felt that some recent agricultural land prices seemed too high). Member Pierce 

said that he had had a good experience using the FDIC Ombudsman’s office and encouraged 

others to use it if they had examination or other problems. 

Member Cole, of Citizens Savings Bank and Trust Company, Nashville, Tennessee, 

noted that her bank, with about $100 million in assets, was also an MDI which focused on 

lending to churches in Tennessee and in other nearby states. She said that the Tennessee 

economy was doing well and that substantial investment was expected in Memphis in the coming 

year. Member Urrabazo, of Commerce Bank, Laredo, Texas, described his $560 million asset 

bank as a "border bank." He said that the Texas economy was doing well generally, with a 

recent decrease in unemployment to 8 percent. Member Urrabazo said that the area economy 

was doing well because of the increase in import-export business across the Mexican border and 

the drilling of 300 new oil and gas wells in the Eagle Ford shale area. He said that the real estate 

market remained terrible with almost no new home construction occurring, but that C&I lending 

had improved substantially; he expected a difficult but profitable year in 2012. Member Gray, of 

Beach Business Bank, Manhattan Beach, California, said that his bank, formed in 2004, has 

about $300 million in assets. He said that, being in an urban center, it was necessary for his bank 

to determine what it could do well and concentrate on those areas. Member Gray described a 

division of the bank, Doctors Bank, which serves doctors and dentists across the United States. 

He said that the economy where his bank operates was affected by very large banks cutting their 

business customers’ credit lines; his bank obtains many of these former big bank customers 

through personal referrals. He said that his bank was successful in 2011, noting that it had a 

large SBA loan program and does substantial C&I lending, but does not provide mortgage or 

consumer lending. 

Member Hopkins, of CorTrust Bank, National Association, Sioux Falls, South Dakota, 

said that his bank has assets of $675 million and branches in a wide variety of communities in 

order to diversify the economies in which it operates and its loan portfolio. He said that 

agriculture was doing exceptionally well and that the Sioux Falls area was doing well in part 

because it is a medical center and because large financial services have operations there. 

Regarding employment, Member Hopkins said that the problem was finding employees to fill 

jobs. The Minneapolis-St. Paul area continued to suffer, he said, but had reached the bottom; he 

expected a drawn-out improvement that required four to five years to reach previous 

employment levels. Member Brown, of Insignia Bank, Sarasota, Florida, said that his five year 

February 17, 2012 
iE..1 

old bank has about $145 million in assets and was profitable in 2011. He noted that his market 

had experienced 50-60 percent drops in property values but said that homes are now being 

purchased and that, over the last year, the residential loan pipeline had substantially increased. 

Member Brown said that recent economic presentations he attended discussed a trough effect 

which indicated a period of bumpy improvement in southwest Florida and the state as a whole. 

He said that his concerns included potential global banking problems and the foreclosure 

backlog. 

Member Rainey, of Centinel Bank, Taos, New Mexico, said that loan demand was 

historically low and that the loan-to-deposit ratio had dropped below 50 percent. Member 

Blanton, of Southeastern Bank Financial Corporation and Georgia Bank & Trust Company of 

Augusta, Augusta, Georgia, reported that his bank, with $1.6 billion in assets, had merged two 

charters in 2011, thus saving over $300,000 per year. He noted that the bank had a good return 

on investment and built up reserves last year. Member Blanton said that the economy in his part 

of Georgia has good employment and housing markets and that construction loan volume was 

good. Atlanta, however, was still facing very difficult circumstances, with housing prices still 

falling; he said that Georgia had a long distance to travel to recovery and that a substantial 

number of banks could still fail. 

Director Curry thanked the Committee members for their valuable input. Acting 

Chairman Gruenberg said that he thought the meeting and the previous day’s activities had been 

very productive and thanked the Committee. He noted that the FDIC was continuing its 

community banking research and that there would be a significant amount of information to 

discuss at the next meeting. 

There being no further business, the meeting was adjourned at 2:24 p.m. 

051101-elezRobert E. Feldman 

Executive Secretary 

Federal Deposit Insurance Corporation 

And Committee Management Officer 

FDIC Advisory Committee on Community Banking 

February 17, 2012 
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 

February 17, 2012 - 8:42 A. M. 

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

complete. 

Martin J. Gruenberg 

Acting Chairman 

Board of Directors 

Federal Deposit Insurance Corporation 

Dated: May 16, 2012