366

April 7, 2016

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

April 7, 2016 – 9:00 A.M.

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

was called to order by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation 

(“FDIC”) Board of Directors.

The members of the Committee present at the meeting were: Cynthia L. Blankenship, 

Vice Chairman and Chief Operating Officer, Bank of the West, Grapevine, Texas; Pedro A. 

Bryant, President and Chief Executive Officer (“CEO”), Metro Bank, Louisville, Kentucky; 

Roger Busse, President and CEO, Pacific Continental Bank, Eugene, Oregon; Leonel Castillo, 

President and CEO, American Bank of Commerce, Provo, Utah; Christopher W. Emmons, 

President and CEO, Gorham Savings Bank, Gorham, Maine; Jack Hartings, President and CEO, 

The Peoples Bank Co., Coldwater, Ohio; Jane Haskin, President and CEO, First Bethany 

Bancorp, Inc., Bethany, Oklahoma; Mark Hesser, President, Pinnacle Bank, Lincoln, Nebraska; 

James Lundy, CEO, Western Alliance Bank, Phoenix, Arizona; Arvind Menon, President and 

CEO, Meadows Bank, Las Vegas, Nevada; Mary Ann Scully, Chairperson, President and CEO, 

Howard Bank, Ellicott City, Maryland; David Seleski, President, CEO and Director, Stonegate 

Bank, Fort Lauderdale, Florida; Gwen Thompson, President and CEO, Clover Community Bank, 

Clover, South Carolina; John Tolomer, President and CEO, The Westchester Bank, Yonkers, 

New York; and Derek Williams, President and CEO, Century Bank and Trust Company, 

Milledgeville, Georgia. 

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

Gruenberg, Chairman, and Thomas M. Hoenig, Vice Chairman.

Corporation staff who attended the meeting included: Willa M. Allen, Julianne F. 

Breitbeil, Richard A. Brown, Susan Burhouse, Debra A. Decker, Patricia B. Devoti, Willie B. 

Donaldson, Doreen R. Eberley, Bret D. Edwards, Diane Ellis, Kristie K. Elmquist, Keith S. 

Ernst, Ralph E. Frable, Shannon N. Greco, Lawrence Gross, Jr., Barbara Hagenbaugh, Leon 

Hartley, Nicholas Kazmerski, Sally J. Kearney, Matthew I. Kepniss, Christopher Lucas, Roberta 

K. McInerney, Kathy L. Moe, Mark S. Moylan, Benjamin L. Navarro, Yazmin E. Osaki, Mark E. 
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April 7, 2016

Pearce, Sylvia H. Plunkett, Claude A. Rollin, Barbara A. Ryan, James P. Sheesley, Robert F. 

Storch, Scott D. Strockoz, James C. Watkins, Smith T. Williams, and Angela A. Wu. 

William A. Rowe, III, Deputy to the Chief of Staff and Liaison to the FDIC, Office of the 

Comptroller of the Currency was also present at the meeting. 

***

Chairman Gruenberg opened the meeting by welcoming the Committee members and 

participants. He then provided an overview of the meeting agenda, advising that first a summary 

of the panel presentations from the April 6, 2016 Community Banking Conference would be 

provided. Next, there would be an update on the Deposit Insurance Fund. Following that, in

the afternoon session, staff from the Division of Depositor and Consumer Protection (“DCP”) 

would provide a report on research in the area of mobile financial services. Finally, there would 

be a presentation on recent developments at Financial Accounting Standards Board (“FASB”)

and issues relating to the current expected credit loss proposal of FASB. Chairman Gruenberg 

then introduced Barbara A. Ryan, Chief of Staff and Deputy to the Chairman and Chief 

Operating Officer, who would be the moderator for the day’s proceedings.

Ms. Ryan introduced the panelists for the first session entitled, “Reflections on the 

Community Banking Conference”: Doreen Eberley, Director, Division of Risk Management 

Supervision (“RMS”), Diane Ellis, Director, Division of Insurance and Research (“DIR”), 

Kristie K. Elmquist, Regional Director, Dallas Regional Office and Mark S. Moylan, Deputy 

Director, RMS. 

Ms. Elmquist provided a summary overview of her panel on the community banking 

model including; (1) the business model of community banks, (2) the challenges faced by 

community banks, and (3) the strategies community banks use to ensure success including best 

practices for managing risk and remaining viable. She reported that, her panel generally took 

the view that the community banking model remains a viable, profitable business model and is 

highly relevant to the financial system. Further, community banks are in a unique position to 

establish relationships with local customers and meet their unique needs. 

Ms. Elmquist next highlighted several of the challenges her panel focused on. She 

explained that the first challenge the panel addressed was operating in a low interest rate 

environment. To deal with this challenge, two key strategies included: (1) having good modeling 

and monitoring to manage interest rate risk exposure, and (2) looking for ways to be efficient 

through controlling expenses. The second challenge involved banks competing for loans. To 

meet this challenge, the panel reported using a variety of different strategies, first seeking to fill 

credit needs outside the normal credit model, particularly with small business lending 

opportunities. Ms. Elmquist provided some examples discussed by her panel including; filling 

the credit needs for entities not necessarily equipped to be a lender or a collector, creating a new 

student loan program for parochial and private schools and offering government guaranteed 

programs such as FHA, VA, and SVA. She stated that her panel further discussed ways to help 

local customers, particularly small business owners, become involved in larger projects through 

issuing letters of credit such that they can obtain bonding to accomplish the goal. Further, she 

reported that her panel discussed the importance of understanding the local market and being 
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April 7, 2016

willing to meet the unique loan requests such as making mortgage loans on houses constructed 

out of unique products. Ms. Elmquist then reported that her panel discussed the challenges of 

banking to the next generation of customers, millennials. 

Ms. Elmquist next summarized her panel’s discussion concerning best banking practices

including; knowing and adapting to market change, providing flexible service and providing 

open access to decision makers. Additionally, she reported that her panel discussed creating a 

culture of risk management within their employees by having them adopt and use critical 

thinking in making business decisions. Along these lines, Ms. Elmquist reported that her panel 

stressed best practices such as: (1) developing emerging leaders and involving them in the 

business making process, (2) encouraging employee involvement in community activities and 

establishing a relationship with the regulator, and (3) centralizing credit, underwriting, collection 

processes and recognizing the interrelationship of risks. 

At this point, Ms. Elmquist opened the discussion up for comments and questions from 

the Committee members. There was an extended discussion on the issues raised and in general, 

the committee found the panel helpful, insightful and relevant to what the Committee is seeing in 

the marketplace. They all agreed that the panel echoed the opening statement from the 

Chairman that the community banking model remains relevant, viable and strong. 

Ms. Ryan then introduced the next speaker, RMS Director Doreen Eberley, who provided 

an overview of the regulatory developments panel. Ms. Eberley reported that her panel 

provided insight into how the regulatory process has adapted to industry change through 

regulatory relief activities such as the Economic Growth and Regulatory Paperwork Reduction 

Act (“EGRPRA”) outreach events. Ms. Eberley next outlined her panel’s discussion relating to 

FASB, the current expected credit loss model and how it will be implemented. She talked about 

the importance of leveraging FinTech innovation, technology and the increased focus on 

cybersecurity. Ms. Eberley discussed her panel’s presentation concerning risk management 

practices, shared services, commercial real estate, and prudent risk management for commercial 

real estate, including concentration risk. Ms. Eberley mentioned the post-crisis OIG evaluation 

that looked at institutions heavily concentrated in Acquisition, Development and Construction 

(“ADC”) loans and commercial real estate. Ms. Eberley pointed out that the OIG evaluation 

found that certain of these institutions remained healthy due to better underwriting practices and 

focusing on market fundamentals. 

Ms. Eberley next summarized her panel’s discussion regarding technology service 

providers and the FFIEC. Specifically, she discussed the importance of ensuring the technology 

service provider has enough capital for research and development to prepare for cybersecurity 

threats and changes in rules and regulations. Finally, Ms. Eberley provided a summary of the 

panel discussion concerning the Current Expected Credit Loss Model (“CECL”) and the 

Community Reinvestment Act (“CRA”). 

Ms. Eberley then opened the discussion up to the Committee for comments and questions 

following which there was an extended discussion of the issues raised by the regulatory 

developments panel. 
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Member Blankenship mentioned that it would be helpful to have a continuing dialogue of 

how community banks assess risk and what the appropriate risk model is based on where 

community banks are most vulnerable, such as cybersecurity. Member Seleski agreed and 

stressed the importance of staying abreast of evolving risks and working close with the regulator.

Member Bryant then asked for the number of service providers currently under 

examination to which Mr. Moylan answered that there are currently fifteen (15) multi-regional 

data processing service providers that are examined on a continuous basis. Mr. Moylan also 

mentioned that the service providers are rated on a one-to-three year cycle. Mr. Moylan stated 

that these service provider examinations are conducted on an interagency basis with the Federal 

Reserve and the OCC.

Vice Chairman Hoenig then asked whether the community banking industry in general, 

either through the ABA or the ICBA, has discussed developing their own service provider to 

process services. Member Blankenship responded by indicating that this is in fact one of the 

more common requests the ICBA receives and the challenge is individual banks becoming

locked into multi-year contracts. Member Blankenship advised that the ICBA has been 

looking at it as a business model and from their view it might be easier to co-opt one of the major 

providers; one of the fundamental challenges being what type of leverage the industry really has 

vis-à-vis the service providers. 

Member Scully offered that one reason community banks have been able to remain viable 

is they have been able to leverage off larger companies that have the scale and the sustainability 

that none of the individual community banks have. In this way, Member Scully explained, the 

idea of co-opting one of them is intriguing because the industry would not be trying to, in her

words “reinvent the wheel.” Member Tolomer mentioned that it might be too challenging for 

individual community banks to undergo the conversion necessary to achieve a co-opt of services. 

Member Lundy pointed out several other issues with servicer providers including adhesion 

contracts and smaller technology service companies that might have a niche product but not the 

balance sheet to stand behind vendor representations and warranties. In this regard, Member 

Lundy thought developing a database of the types of issues would be useful to the community 

banking industry.

Member Busse appreciated the segmentation of the findings regarding board versus 

management. With regard to cyber risk, the idea of due diligence, associated with mergers and 

acquisitions in the cyber risk area is very important and should be paramount in due diligence 

activity going forward. Member Busse also brought up the issue of liability with large 

providers. Member Busse explained that if liability is being shifted to community banks, then 

the regulator could assist by helping the banks ask better questions or maybe gathering the 

information from community banks about how that liability shift is taking place. This way, the 

regulator should be able to translate that into potential capital earnings risk which creates risk for 

the bank environment. 

Ms. Ryan then introduced the next speaker, RMS Deputy Director Mark Moylan who 

moderated the managing technology challenges panel. Mr. Moylan began by pointing out that 

community banking has generally benefited from advances in technology. Mr. Moylan 
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addressed how, because of strong technology, innovation has increased over time and as such

must be incorporated into the bank’s strategic planning and due diligence involved in strategic 

planning. He also summarized the discussion concerning issues related to managing risk.

Mr. Moylan then opened the discussion up to comments and questions from the 

Committee members. 

Member Castillo observed one positive aspect of technology has been the ability to 

utilize, through licensing, intellectual property. Member Castillo then asked whether examiners 

have been able to draw any conclusions relating to cloud services. Mr. Moylan responded by 

pointing out one of the challenges is the term “cloud” itself, which is broad and has different risk 

characteristics depending on what definition is being used. So, with utilization of the “cloud” it 

is important to understand the characteristics of the product and how it fits into the bank’s risk 

profile. Member Williams mentioned the challenge faced by debit card fraud. In this regard, 

Mr. Moylan responded that customer awareness is an important facet of debit card and mobile 

banking services. 

Ms. Ryan then introduced the next session led by DIR Director Diane Ellis, who 

moderated the panel on ownership structure and succession planning. 

Ms. Ellis started the session by presenting an overview of an FDIC survey on the number 

of closely-held banks, in which significant or substantial overlap exists between ownership and 

management. Ms. Ellis pointed out that while there are some challenges to the closely-held 

form of ownership, in terms of access to capital, economies of scale, and ability to recruit, there

are also some distinct advantages, namely, efficiency and performance. Ms. Ellis then discussed 

several of the themes covered by the panel. The first was the need by the closely-held bank to 

have liquid share ownership to aid in ownership and management succession; the idea being that 

ownership drives business decisions when shareholders need to trade shares. She next discussed 

the management of board succession and officer and management succession. Next, Ms. Ellis 

discussed commercial banking programs in universities and some of the innovative ways

undergraduates are being brought into these programs to develop the next generation of bankers. 

In particular, Ms. Ellis summarized the points made by one of her panelists, who is a professor at 

Texas A&M University on the banking program offered by his institution. 

Ms. Ellis then opened the panel up for comments and questions from the Committee 

members. Before doing so, Ms. Ellis posed two questions for discussion. The first was whether 

the need to liquefy shares is more or less urgent now than it has been in the past. Her second 

question was to ask whether or not community banks are doing an adequate job telling their story 

about what career paths they offer; and she invited comments and questions on the training 

program discussed by the panel, and in particular how a bank might utilize such a program.

Member Seleski began the discussion by pointing out that the answer to the first question 

depends on the bank’s investor base and how impatient (or patient) they are. Member Lundy 

pointed out that the post-crisis period saw institutional type investors coming in thinking that 

they could capitalize the bank, roll up some failed or nearly failed banks, and then exit quickly. 

These institutional type investors then learned that the regulators were not amenable, perhaps, to 
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that kind of a strategy. Member Tolomer pointed out that the issue of share liquidity is always 

an issue for a privately held bank at some level. Member Scully reminded the group that it is 

important for regulators to focus on why certain community banks need capital, for instance,

rural banks verses metropolitan banks. The point being that capital may become an issue more 

quickly for banks operating in metropolitan areas. 

Member Bryant raised the issue of community banks that are either CDFIs or MDIs, 

when corporate organizations or nonprofit foundations made investments, and that the new 

leadership does not view each investment in the same manner. 

Member Lundy commented on employee training and added that he endorses hiring of 

young people. In his institution, many new employees are hired as credit analysts. This

provides the bank with a robust centralized underwriting function and becomes a resource for 

future development at the institution.

Chairman Gruenberg then shared some thoughts on the conference and going forward. 

Chairman Gruenberg mentioned there are issues that may go beyond the traditional role of 

supervision and it would be helpful to think about them. He observed that five years post-crisis 

the industry is at an inflection point; during the crisis, the industry witnessed 500 banks fail, 450 

of which had assets under one billion dollars. Further, Chairman Gruenberg pointed out that of 

the approximately 6,200 institutions considered community banks, 93% are supervised by the 

FDIC. Chairman Gruenberg commented that community banks are important to the financial 

system and the economy, and the business model of the community bank remains highly relevant 

and viable. He recognized a new set of challenges to the long-term success of community 

banking, and mentioned the importance of building a narrative, or continuing to build a narrative, 

of the role of community banking in the United States, its importance to the financial system and 

the economy. He also discussed that, as to outreach to the market, to employees and recruitment 

and retention, community banks have a very positive story to tell, in terms of their service to the 

community, their role in the financial system in the economy, and their being an attractive and 

appealing place to work as well as a service to local communities. Chairman Gruenberg 

commented that developing this narrative in a positive way is very important. He next 

mentioned that it might be useful for the next meeting to have a panel of millennials to 

discussion how they utilize financial services. 

Chairman Gruenberg noted that the educational program at Texas A&M, as discussed in 

the panel, might be a model that could be replicable in some additional states with other 

community banks. Chairman Gruenberg next mentioned that in many ways the strength of the 

community bank was the customer relationships, whether they are small businesses or 

consumers. The Chairman explained that in this way everything might be thought of in terms of 

building around that central issue, whether it is the communication, the recruitment, or the 

utilization of technology, building on utilizing technology to enhance the relationship with the

customer is really fundamental. Chairman Gruenberg pointed out many bankers on the panel 

were reporting successful use of technology; these bankers saw the pluses of technology working 

in their interest. Chairman Gruenberg raised another point not mentioned in the morning panel 

discussion concerning the issue of new community banks and de novo banks going forward. 

Chairman Gruenberg suggested that it might be useful to put together a small number of 
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executives from successful de novo banks to talk about the experience, and what they had to do 

to get set up, to keep going, and their relationships with their regulator(s). 

Chairman Gruenberg mentioned that it might be beneficial to have a series of work 

streams coming out of the conference to build on going forward. He then welcomed thoughts 

from the Committee members on specific items. 

Ms. Ryan introduced the next session on Assessments and the Small Business Lending 

Survey. The presenters were DIR Director Diane Ellis, providing an update on the Deposit 

Insurance Fund and some rulemakings related to assessments and Smith Williams, who is Acting 

Chief of Special Studies Section in DIR, providing an update on a survey the FDIC is conducting

on small business lending.

Ms. Ellis began with a summary update on assessments. She reported that in March, the

FDIC Board approved a final rule, known as the final surcharge rule, to implement three 

provisions of the Dodd-Frank Act. She explained that this rule will raise the minimal reserve 

ratio for the DIF from 1.15 percent to 1.35 percent; this will require the agency to hit the target 

of 1.35 percent by September 30, 2020. She reported that the rule also requires that in setting 

assessments, the FDIC offset the effect of that increase on insured depository institutions with 

assets less than 10 billion. Ms. Ellis next stated that the final rule provides that large banks, 

those greater than $10 billion in assets, will pay quarterly surcharges at an annual rate of four and 

a half basis points in addition to their regular risk-based assessment rates which will start as soon 

as the reserve ratio reaches 1.15 percent; the view is that this surcharge will be enough to reach 

1.35 percent in approximately eight quarters, by mid-to-late 2018. She stated that if 1.35 

percent is not reached by the end of 2018, a shortfall assessment will be imposed on large banks 

to close the gap; the bottom line being that the DIF will reach 1.35 percent by the end of 2018.

Ms. Ellis then focused on the part of the rule providing small banks credits while the 

reserve ratio is being built up, which will offset the portion of their assessments that helped to 

actually raise the reserve ratio during this time period. She explained that one of the key ways 

the final rule differs from the proposed rule is after the reserve ratio hits 1.15 percent, the FDIC 

will automatically apply a small bank's credits to reduce its regular assessment rates. Ms. Ellis 

indicated that the prior proposal stated that the FDIC would not begin to apply the small bank’s 

credits until the reserve ratio hit 1.4 percent (the thinking being that it would not be advisable to 

get above that 1.35 percent target and then fall down below it). She said that the effective date of 

the rule is when the reserve ratio reaches 1.15 percent which will then continue through the 

quarter the reserve that the ratio reaches or exceeds 1.35 percent. Ms. Ellis explained that the 

estimate is that surcharges will total about $10 billion. 

Ms. Ellis reported that, as of December 31, 2015, the reserve ratio was about 1.11 percent

and the DIF balance was $65.7 billion. She explained that that best estimates are that the 

reserve ratio should be at 1.15 percent by the first half of this year. She further explained that 

deposit growth was strong in the fourth quarter and this remains the variable going forward. 

Ms. Ellis next spoke about small bank pricing. She mentioned that the first notice of 

proposed rulemaking (“NPR”) was in June of 2015 (discussed at the previous Community 
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Banking Committee meeting) and since that time the FDIC has issued another proposed 

rulemaking. She explained that the new proposal was based upon a probability of failure 

model, which will project failures over a three year period and would update the financial ratios 

based upon that model. She stated that the FDIC received approximately 484 comments on this

proposal. Before going to a final rule, certain of these comments needed to be addressed. Ms. 

Ellis explained that in February of this year, the Board approved a revised NPR that made 

changes to the original proposal, including using a brokered deposit ratio in place of the 

previously proposed core deposit ratio and treating reciprocal deposits as they are treated under 

the current rules. This, Ms. Ellis pointed out, was the subject of the majority of the 484 comment 

letters received. She reported that the second area of change was to revise the asset growth 

measure. Ms. Ellis explained that in the revised proposal, there is an asset growth measure that 

will only kick in when annual growth exceeds ten percent.

Ms. Ellis mentioned that the FDIC received 19 comment letters in response to the revised 

NPR; now that the comment period has closed, FDIC staff is in the process of considering the 

comments and developing a final recommendation, hoping to bring the final rule to the Board in 

the near future.

At this point Ms. Ellis then opened the discussion up to the Committee for comments and 

questions. Member Hartings began by asking about the accounting treatment of the credit and 

whether this has been addressed. Pat Mitchell, Deputy Director for Risk Analysis and Pricing

in DIR, answered by opining that they would not be treated as assets. Member Menon then 

asked for elaboration on the issue relating to C&I loans. Ms. Ellis responded by discussing the 

loan mix index. Ms. Ellis explained that the loan mix index looks at categories of loans reported

on the Call Reports, and charges more for loans where there was a very high charge off rate 

during periods of high bank failures. She went on to state that the loan mix index charges more 

for construction and development loans than it would for C&I loans, then it would for C&I 

secured by real estate, consumer, agricultural lending, and so on. Ms. Ellis explained that the 

intent was for it to be a risk-based system. 

Member Scully voiced concern regarding the proportion of safety and soundness 

examination percentages versus the risk-based formula. Her point being that there might be 

dilution of whatever was done in a safety and soundness exam. Ms. Ellis responded by 

reminding that CAMELS ratings are only one of the eight factors utilized and it is a weighted 

average CAMELS rating and then seven financial ratios. Ms. Ellis clarified that the current 

system buckets banks first by their CAMELS ratings so that in this way, one and two-rated banks 

are in a separate category than three, four, and five-rated banks. Ms. Ellis pointed out that the 

FDIC is eliminating the buckets so going forward, the formula is going to apply to all banks.

Ms. Ellis then introduced the next presenter, Acting Chief of Special Studies Smith 

Williams. Ms. Smith began by stating that she and her colleagues have been working on 

developing a unique survey of banks on their small business lending activities. She stated that 

the survey is designed to answer some fundamental questions concerning small business lending, 

which is vital to the community banking sector. Ms. Smith explained that the raw Call Report 

data does not contain the information or granularity to answer some fundamental questions about 

how small business lending needs are being met. The main purpose of the survey, she said, is to 
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help fill data gaps. Ms. Williams reported that the survey will be launched this summer and 

will be conducted through the U.S. Census Bureau. Ms. Williams indicated that the process 

began back in 2014 and involved developing a list of questions for the banks. In 2015, her group 

received input and feedback from the banking community. She explained that the feedback was 

incorporated into the survey which made it shorter and also that multiple versions were 

developed, the intent being to make it more answerable. She further explained that the version of 

the survey a bank receives depends on the bank’s size and core data systems. Ms. Williams 

reported that some survey topics include the characteristics of small business borrowers, the size 

of small business lending originations, and the size of outstanding loans by collateral (provided 

the bank’s core data systems are able to report this data). Ms. Williams stated that the survey 

also seeks information on loan products and underwriting, and how underwriting of small 

business loans is done at banks. Finally, she indicated there is a small section in the survey that 

inquires about consumer transaction accounts, which is due to a congressionally-mandated 

obligation. 

Ms. Williams next indicated that the survey intends to answer questions such as how 

banks meet the needs of the small business community, how important small business lending is 

to a bank’s portfolios and how banks of various sizes differ in characteristics of small businesses 

that they serve, the products that they offer to small businesses, and the obstacles they face in 

serving the small business community. She reported that the survey is set to go out this summer 

and only to a nationally representative random sample of banks. Ms. Williams concluded by 

saying that hopefully the survey will provide new insight into bank small business lending and 

also further demonstrate the important role that small business lending plays in the U.S. 

economy.

Member Hartings asked for clarification on the length of the survey and how many data 

points or questions. Ms. Williams responded by stating that answer is difficult to quantify 

because depending on how the questions are answered, there may be follow up questions. This 

being said, Ms. Williams stated that the response time should not exceed 2-3 hours for small 

banks and up to 6 hours for large banks. Member Hartings then asked who at the bank should 

fill out the survey. Ms. Williams responded by stating that the survey provides a list of 

suggested personnel to help fill out the survey which mainly are senior commercial loan officers 

and loan operations staff.

At this point, the meeting broke for lunch at 12:06 p.m. 

The meeting reconvened at 1:18 p.m. at which time Associate DCP Director Keith Ernst 

began the next session regarding mobile financial services (“MFS”) which centered on 

qualitative research that DCP has performed regarding MFS for underbanked customers. Mr. 

Ernst began by pointing out that the FDIC has focused on opportunities to expand economic 

inclusion in the banking system. He indicated that past survey work has shown that almost 1 in 

12 households or 16.6 million adults, have no access to the banking system whatsoever. Mr. 

Ernst stated that research has shown the potential for mobile banking to reach the under-served 

and expand economic inclusion. Further, he said, survey results demonstrate that mobile and 

smartphones are accessible to under-served populations and that many under-banked households 

are already using mobile banking. He brought up statistics from the 2013 survey that 
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demonstrate these points: (1) 91 percent of under-banked households had a mobile phone. This 

rate is higher than the rate among fully-banked households, but the fully-banked were more 

likely to have smartphones; and (2) 29 percent of under-banked households reported using 

mobile banking, versus 23 percent of fully-banked households. He added that a majority of 

under-banked households using mobile banking identified it as their primary banking channel. 

Based on these results Mr. Ernst indicated that a white paper was developed in 2014 to 

explore how technology could assist with the establishment of banking relationships and make 

those relationships more sustainable. Mr. Ernst stated that while the work producing the white 

paper was suggestive, the goal was to test the ideas by engaging consumers directly. 

Mr. Ernst then introduced two primary researchers, Susan Burhouse, Senior Financial 

Economist, DCP, and Yazmin E. Osaki, Financial Analyst, DCP. Mr. Ernst stated that one of the 

key takeaways from the research is the finding that under-served consumers see MFS as 

positioned to address areas where they've struggled in banking relationships by, for example,

enhancing their sense of control for their account. 

Ms. Osaki presented highlights from the qualitative research study. Ms. Osaki made 

mention that the qualitative research study validates many of the takeaways from the 2014 white 

paper and provides a more in-depth and nuanced understanding of what the under-served 

consumer values when selecting financial services and how they perceive MFS in relation to 

these values. 

Ms. Osaki then explained the methodology centered on focus groups, which were 

extremely informative because they gave a chance to hear directly from consumers in their own 

words. She indicated that there were 18 focus groups last summer with a total of 172 

participants in three cities, Memphis, Los Angeles, and Kansas City. Ms. Osaki further stated 

that four focus groups were conducted in Spanish, and the rest in English and the focus groups 

targeted both unbanked and under-banked individuals. Finally, she reported that all of the 

participants in the survey owned smartphones.

Ms. Osaki explained that the first step in thinking about how MFS might meet underserved consumers' needs and help financial institutions appeal to these consumers was 

identifying and understanding their core financial service needs. She reported that across the 18 

focus groups, certain core financial needs emerged. She said that the core needs include the need 

for control, security, and long-term partnership. Ms. Osaki stated that the focus groups revealed 

that consumers have a need to feel that they are in control of their finances. She further defined 

“control” as knowing exactly when and how money is being deposited and withdrawn from the

consumer’s account and having the ability to change cash flows as desired. She also added that 

the ability of the consumer to keep a record of transactions that can be later accessed whenever 

disputes arise helps bolster that sense of control. Most importantly, Ms. Osaki stated that to feel 

in control, consumers need to be confident that transactions are processed timely and that 

unpredictable fees do not undermine their ability to keep an accurate record of their available 

funds. Ms. Osaki summed up by stating that predictability and transparency are highly valued by 

these consumers to achieve a sense of control. 
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Ms. Osaki next discussed the core need of security. She identified “security” as a broad 

term that consumers use to describe the protection of not only their funds, but also their private 

information. She also reported other core needs such as quick access to money, convenience, 

affordability, and customer service. She stated that consumers were clear about requiring quick 

access to their money to successfully manage the timing of incoming and outgoing payments. 

Ms. Osaki explained that convenience could refer to the location of the financial providers, the 

hours of operation, the ease or the speed of the service, or for others the ability to just access 

their information quickly. She mentioned that good customer service or support involves the 

ability to access live support when consumers need assistance through a preferred channel that is 

convenient to them at the time. Ms. Osaki mentioned that in thinking about economic inclusion 

it is also important to understand what type of financial instruments like cash, money orders, 

prepaid cards, the under-served consumers are using and how do these different methods meet 

their core financial needs. 

Ms. Osaki pointed out that even with the digital financial instruments available, cash 

remains a key method many under-served consumers use for the day-to-day financial 

transactions since cash transactions are instantly settled at the time of payment although 

consumers did note that cash is often not accepted for rent payments and it is impossible to use in 

the online marketplace.

Ms. Osaki then discussed checks. Under-served consumers indicated that personal payroll 

checks are increasingly less common now that debit cards and direct deposits are more 

widespread. However, she stated that many under-served consumers are still using checks to pay 

bills and make payments. 

Ms. Osaki next discussed the use of peer-to-peer payment tools, or P to P tools offered 

by banks, wire services, or other companies. She reported that some consumers in the research 

used these payment methods, but not the majority by any means. She stated that those who did 

use it were generally satisfied with these services and stressed the quick access of funds that they 

get. 

Ms. Osaki concluded the presentation by stating the study results show that under-served 

consumers use a variety of financial products, they get these products from a number of different 

sources, and they use providers based on how well they perceive these providers helping meet 

the core financial needs of the moment. 

Ms. Osaki then introduced Ms. Burhouse to discuss how MFS might align with the core 

financial needs just discussed. 

Ms. Burhouse began by making the observation that awareness about MFS was generally 

high with consumers in the focus groups. The focus groups identified different ways consumers 

were learning about MFS such as directly from their financial providers or word of mouth. Ms. 

Burhouse then discussed how some of the specific MFS features and functions meet the needs of 

the consumer. Ms. Burhouse stated that consumers found it valuable to be able to access 

information on demand when they need it. Ms. Burhouse mentioned that consumers generally 

expect to see their accounts updated immediately, in real time, exactly when their transactions 
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occur. Ms. Burhouse also indicated that the focus groups reported positive feedback from 

utilizing mobile alerts; these alerts help the consumer feel more aware of his or her account 

status and monitor for unauthorized transactions such as fraud alerts whenever the provider 

noticed suspicious activity. She also indicated that these types of alerts help address the 

consumer’s perceived need for security. Ms. Burhouse reported that consumers were receiving

alerts through texts and from emails; many of the consumers indicated that they were fond of text 

notices, feeling that they were more immediate and attention grabbing but also saw the 

advantage of email which can provide more detailed information and a better way to document 

account history. 

Ms. Burhouse mentioned certain consumers reported concerns about the alerts; some 

found the alerts to be at times annoying or overwhelming. She said these consumers mentioned 

that text alerts may not always be useful such as when they are not in a position to take action on 

the alert. She also mentioned that while consumers saw value in getting these types of alerts, 

they did not want these channels used for other purposes and they were not interested in 

receiving marketing or other types of unsolicited communications from the provider in these 

types of alerts. Ms. Burhouse pointed out that the consumer’s distaste for receiving other types of 

alerts from the provider might be something to consider from the standpoint that if consumers 

are relying heavily on alerts as a primary way of getting communications from their banks they 

might not have opportunities to learn about other bank products and from the bank's perspective,

it may be more difficult to cross-sell and grow the banking relationship. 

Ms. Burhouse pointed out that some of the consumers were using MFS to pay bills with 

their phones. She said that the use of mobile bill pay was not as widespread as the use of the 

account monitoring tools but the focus group participants who were doing it were really satisfied. 

She reported that the consumers enjoyed the convenience of being able to take care of their bills 

whenever and wherever they needed to. Further Ms. Burhouse stated that certain of the 

consumers not using mobile bill pay found it difficult to see the value in it; some had a system 

that was working for them so they did not really see a reason to switch over to the mobile; others 

were wary of the automated nature of bill pay just in general. She said these consumers wanted 

to have the control to be able to stop or prioritize payments if they did not have enough money to 

cover everything. She added that other consumers were concerned about timing when it came to 

using the bank's mobile payment tools. 

Ms. Burhouse next discussed the use of mobile remote deposit capture (“mRDC”) which 

allows consumers to deposit checks by taking a picture on their phone and sending it to their 

institution. Ms. Burhouse reported that there were a number of vendors or consumers aware of 

this feature but relatively few had experience using it; although they saw convenience, they had 

questions and reservations about how it would work, they were concerned about the time it 

would take for the transaction to process and for the funds to be made available to them. She 

added that the users who had experience using mRDC provided mixed reports. Further, she 

pointed out, to some extent mRDC was being held to an even higher bar than other deposit 

channels. Ms. Burhouse reported that because of the electronic and digital nature of mRDC, 

consumers expected the transaction to happen instantly even if they would not necessarily expect 

an ATM deposit or other type of deposit to be available that quickly. Ms. Burhouse stated that 

consumers also had questions about the security of mRDC; they did not necessarily trust the 
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technology and that it was prone to fraud. She added that these types of concerns were an 

obstacle for some consumers. Finally, Ms. Burhouse indicated that other consumers mentioned 

that mRDC really did not carry value for them because they rarely received paper checks; if they 

were already receiving the direct deposit to their bank account or even a prepaid card then they 

really did not feel like they had a need to use the remote deposit capture. 

Ms. Burhouse then mentioned the final MFS function, namely, mobile account opening. 

She explained that the hypothesis being that the ability to open an account on a mobile phone,

while potentially challenging for financial institutions, could be an effective tool for improving 

access to accounts, especially among consumers whose only access to the Internet is through 

their phone. She reported that the focus group research did not reveal the lack of a computer to 

be a huge hurdle to account opening; simply put, the focus group participants did not 

demonstrate a large demand for mobile account opening. In this way, she explained that it was 

perceived to be a convenient way to open an account but consumers had reservations; the 

concerns involving account security. Finally, Ms. Burhouse stated that the focus group 

participants voiced a strong and clear desire for personal interaction at account opening. 

Ms. Burhouse then concluded by stating that the data collected is being used to learn 

whether and how MFS can improve a bank's ability to meet under-served consumers' core needs. 

She reported that one area where banks are already perceived to be doing very well is in personal 

financial management, long-term planning; under-served consumers felt that banks are good 

partners, better than nonbank providers for long-term financial relationships. She also indicated 

that banks are perceived to be strong over MFS in the areas of security and customer service. 

Ms. Burhouse reported that in terms of customer service, consumers did have positive 

perceptions of banks, especially relative to prepaid card providers and consumers felt that banks' 

staffs were generally more interested in helping them resolve issues than nonbanks and they 

really valued the ability to reach a live person when they needed, either at the branch or on the 

phone. MFS, however, was not seen as a good means to meet this type of need. Ms. Burhouse 

summarized by stating that, according to the focus group study, banks are highly regarded for 

their security and customer service and consumers perceive MFS to be inferior in these areas. 

Ms. Burhouse also pointed out that under-served consumers perceived banks to be 

weakest in terms of access to money and consumers expressed frustration about delays in check 

clearing and incoming payments; these issues are somewhat dependent on individual banks but 

they are also dependent on a merchant's policies and even more broadly on the payment systems 

and their technologies and limitations. She explained that while MFS might give fast access to 

information the mobile channel itself does not directly impact how quickly these transactions are 

clearing or when consumers will actually have access to the funds themselves. Ms. Burhouse 

stated that control, convenience and affordability are perhaps the most interesting; these are areas 

where consumers do not view traditional banking doing well but felt that MFS is strong. 

Ms. Burhouse stressed that under-served consumers tend to feel out of control when they 

lack a say in their bank account about when transactions will hit. She indicated that they are 

adverse to the uncertainty about knowing when payments will be posted. In this regard, the 

under-served consumers find it inconvenient to be tied to the specific bank branch locations and 
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hours and many of them have had a bad experience with bank fees. So, Ms. Burhouse reasoned, 

areas such as control, convenience and affordability, are areas where MFS can help. For 

instance, she reasoned that alerts can help consumers feel in control, MFS can help them keep 

records, keep track of expenses and balances allowing for more informed decisions about 

spending, MFS can help avoid overdraft and other fees and as banking becomes more available it 

will lead to more sustainable and better banking relationships. Finally, Ms. Burhouse said banks, 

financial educators and other stakeholders can help consumers understand what features are 

available and how MFS can help meet their needs.

In conclusion, Ms. Burhouse stated that the research has provided valuable insight into 

the under-served consumers' financial needs and how these drive their decision-making. 

Consumers felt that their essential needs were control, convenience and affordability. These 

needs were not being well addressed by traditional banks but could be served by mobile banking. 

Ms. Burhouse indicated that mobile banking is not a stand-alone solution for economic inclusion. 

She also added that MFS does not appeal to everyone. Now that the qualitative research has 

been completed, Ms. Burhouse stated that they are working on releasing a final report which will 

come out next month and staff will be presenting and discussing that report at the Chairman's 

Advisory Committee on Economic Inclusion in May. 

Mr. Moylan then rounded out the discussion with a summary of FFIEC activities relating 

to IT. He reported that some of the specific risks associated with four types of mobile financial 

service technologies are: short message services or texting, mobile enabled websites, mobile 

applications and wireless payment technologies. Then, he stated, wireless payment technologies 

break down into additional categories including; near-field communications, image-based, areabased and also mobile payment person-to-person. The FFIEC guidance will address strategic 

operational, compliance and reputational risk, provide guidance on risk identification, risk 

measurement, risk mitigation, monitoring and reporting for each type. For instance, Mr. Moylan 

said, texting has a different risk profile than P to P, and web-based has a different profile than 

mobile. In summary, Mr. Moylan stated that the FFIEC guidance will help define these 

characteristics and hopefully it will be approved soon. 

Following these presentations, there was a general discussion among the Committee 

members concerning the issues raised by the panel. 

Chairman Gruenberg then observed that the issues presented in the case study have been 

prominent in terms of trying to find vehicles to give consumers access to the banking system 

versus alternative providers that may be more expensive; even though the product may be more 

convenient, provide a broader range of services and be less expensive, it still may have trouble 

competing with the alternative in part because the alternative has an established trust 

relationship. Chairman Gruenberg mentioned this as an important insight because the 

importance of the relationship can be equal to the convenience and savings of the technology; if 

the relationship cannot be established then it really becomes an issue. Chairman Gruenberg then 

pointed out that local community organizations that have a trust relationship may have an interest 

in having their members find lower cost and better services in the financial arena. 
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Next Ms. Ryan introduced the final session concerning recent developments at the FASB 

including new work on the CECL model. Making the presentation was FDIC Chief Accountant, 

Bob Storch from the Division of Risk Management Supervision. 

Mr. Storch began by explaining that FASB has been on a multi-year process working 

with the international accounting standards board to move from the incurred loss model to the 

CECL model. Mr. Storch stated that CECL is meant to be a workable standard for all types and 

sizes of institutions and banks should be able to build on existing systems and processes that are 

in place. 

 

Mr. Storch next discussed the timetable. For companies that are designated as SEC filers, 

the standard would take effect in the first quarter of 2019. For other organizations that are 

deemed to be public from an accounting definition standpoint, the standard would take effect in 

the beginning of 2020. Private institutions would implement the standard as of year-end 2020, 

although the transition adjustment would have to be measured as of the beginning of 2020 but 

would not have to be booked until year-end. 

Mr. Storch next discussed the current status of the standard. Mr. Storch reported that the 

FASB recently had a meeting of their Transition Resource Group. The purpose of this meeting 

was to review the current draft and assess whether it is clear, whether there are other areas that 

need to be clarified and whether the draft seemed workable. The general sense of the comments 

made during the meeting was that the draft was much improved. 

Mr. Storch then mentioned advice the FDIC has been trying to provide, both to examiners 

and banks, which is to start planning now for the transition as opposed to waiting until 2019 or 

2020. Mr. Storch opined that, while this will be a pervasive change for the industry, planning for 

the process over the next few years should ease the burden of implementing it and ultimately 

improve the bank’s financial reporting. 

Mr. Stroch stated that one significant question is how large of an impact the new standard 

will have has on a bank's financial statements. Mr. Storch pointed out that there is really no 

good answer at this point because every bank has its own portfolio with its own underwriting 

standards. Further, it is unclear what the economic conditions will be in 2019 or 2020. There is

no benchmark percentage of increase that the banking agencies expect all banks to have their 

allowance go up "X" percent. Rather, it will be institution specific. It will depend on the bank’s 

loan portfolio. Next, Mr. Storch addressed questions and comments from the Committee. 

Member Haskins asked about the time frame for the historical look back. Mr. Storch responded 

by stating that there is no clear-cut answer. Mr. Storch further stated that it may depend on the 

life of the loan so if, for example, there are loans that have an average life of 10 years, then the 

bank could probably look at data covering 10 years. Mr. Storch cautioned that some loan data 

processing systems purge data after a couple of years. So, he said, it may be challenging to get 

10 years' worth of data in an automated fashion. 

Member Haskin then asked about loan pools based on Call Report information and 

whether or not that would be a reliable source of information for the 10-year look back. Mr. 

Storch responded by stating that yes, there would be 10 years' worth of data available. The 
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April 7, 2016

challenge would be that while there would be losses for each of the 10 years, the lifetime loss 

rate for a loan with a 10-year life is not 10 times the annual loss rate. Since portfolios are

constantly changing and the level of the loans in that type of loan category is increasing, it will 

be a challenge to determine how the bank might be able to look at the last 10 years and translate 

the losses each of the years into a lifetime loss rate. 

Mr. Storch commented that the data issue is a key area of interest and he would like to 

see continued discussion with trade groups to try to work on viable methods that will be 

available to the community institutions to come up with estimates. Member Haskin then 

commented that she would appreciate FDIC consideration of that because it's something that 

could be fairly easy obtained by looking back at the Call Report information. 

Member Williams then asked about how much the reserve requirement is going to 

change. Member Williams commented that there appears to be a consensus that reserves are 

going up which makes the process appear to be a means to an end. Mr. Storch responded by 

stating that it is very much extending the model that is being used today. The input will be the 

historical lifetime experience rather than annualized experience – yielding a loss rate and adding 

on the forward looking or reasonable supportable forecast feature to go beyond the current 

conditions. But the rest of the basic framework still would be able to be applied. Member 

Williams then indicated that he was concerned about what is going to be acceptable as the 

forward look. Mr. Storch responded that a reference point might be the Federal Reserve website 

and the forecasting done at the district level and sometimes down to the state level. Mr. Storch 

then went on to state that certain types of assumptions about forward-looking conditions used for 

other business purposes already in the bank should be analogous to loan portfolio impact as well. 

Member Blankenship then asked whether there will be acceptable benchmarks, standards 

that the agencies would be willing to accept such as those from the Federal Reserve. Mr. Storch 

responded by stating that there has been discussion across the agencies that when the standard 

comes out there would be some information to share with the industry about at least initial types 

of expectations for the standard, in part to eliminate any confusion, misunderstanding or 

misinformation there may be about the standard. Further, Mr. Storch reminded that the FDIC 

has existing policy statements and under the old accounting model, there is a 2006 interagency 

policy statement on the allowance and there is one from 2001 on methodologies and 

documentation. These would be updated. Further, the FDIC is going to provide education and 

training to examination staff. Chairman Gruenberg then asked about the likely timeframe for the 

final action by FASB. Mr. Storch responded by stating that the timeline for final action by the 

FASB is mid-2016. 

Member Blankenship commented that the unknown may create issues for banks and have 

an effect on mergers, curtail expansion activity, cause leveraging activities, prevent banks from 

taking advantage of opportunities, result in their erring on the side of caution. 

Ms. Ryan then turned the discussion back over to Chairman Gruenberg. 
382

Chairman Gruenberg then commented that he felt that the comments and discussion were

very helpful and that there will be more discussion on these topics going forward. Chairman

Gruenberg then thanked the presenters and the Committee.

There being no further business, the meeting was adjourned at 3:04 p.m.

Ro~ail ~

Executive Secretary

Federal Deposit Insurance Corporation

And Committee Management Officer

FDIC Advisory Committee on Community Banking

April 7, 2016
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

Apri17, 2016 — 9:00 A.M.

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

complete.

h

Martin J. Gruenber

Chairman

Board of Directors

Federal Deposit Insurance Corporation