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HYBRID BOLIUnder Basel III
Recruiting and RetainingBANK DIRECTORSACCOUNTSWITCHINGA Wake Up Call fromthe Wireless Industry
CYBERSHOWDOWNWashingtonWatch:
2 COMMUNITY BANKER UPDATE | JANUARY 2015
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January 6 HMDA:WhattoKnowNow&What’sontheHorizon?
January 7 ApplePay,theMobilePaymentsGameChanger
January 8 DisasterManagement&ContinuityPlanning, IncludingCriticalVendors
January 13 IRASeries:IRA&HSAUpdate2014-2015TaxYears
January 14 CFPBRulesforMortgageLoanOriginatorCompensation
January 15 AdvancedEndorsements:POAs,Businesses, Trusts&More
January 21 DirectorSeries:FDICTrends&DeficienciesCited inMattersRequiringBoardAttention
January 22 SecurityOfficerReportstotheBoard:Compliance &BestPractices
January 23 CallReports:BaselIII&RC-RChangesLinebyLine
January 27 CustomerComplaint&ResponseManagement
January 28 DealingwithACHTaxRefunds:Exceptions, Posting&BankResponsibilities
January 29 EmergingLeaderSeries:UnderstandingPeer GroupComparisontoImproveBankPerformance
JANUARY 2015 WEBINAR LINE-UP
COMMUNITY BANKER UPDATE | JANUARY 2015 3ICBA_7347_WPS_H_Page Island.indd 1 12/9/14 4:27 PM
Community Bankers of Iowa1603 22nd Street, Suite 102
West Des Moines, Iowa 50266Phone: 515.453.1495
In This IssueJanuary2015WebinarLineup........... 2
FromtheCEO&EVP......................... 3
SavetheDate:LeadershipDevelopmentConference................. 5
BankDirectors......................... 6-9, 13
FromtheTop:ResolvetoGetInvolved..................10
FinePoints:WorkingtheLevers.....11
W2sandPPACA...............................12
AccountSwitching..................... 14-15
WelcomeNewMembers.................15
WashingtonWatch:CyberShowdown........................16-17
HybridBOLI................................ 18-19
RuralMainstreetSurvey........... 20-22
NEW DIRECTIONSWhenIbeganmycareeratCBI(thenIowaIndependentBankers)in1998,ourofficeswerelocatedinsharedsuitesintheTwoRuanBuildingindowntownDesMoines.MyhomewasinClive,justoff128thstreetwhichmeantIwouldtakeInterstate80and235downtowneachmorning.Twolanesoftraffic,eachdirection.Sevenminutestops.IIBmovedtoWestDesMoinesearlyin2000wherewehavebeeneversince.
I-235ontheotherhandhasbeenundervirtuallyconstantconstructioneversincethattime,andtheconstructionhasmovedontoI-35andwidenedbothto3-4lanesineachdirection.Evenso,manymorningsasIcrossunderallsixlanesofI-235gettingtotheCBIoffices,Iseetrafficstoppedorcreepingalongasspaceisapparentlystillinsufficient.Sometimeschangeprecedesneed.Othertimeswe’rejuststrugglingtocatchup.
Ascommunitybankersbeginanewyear,thissentimentiswellunderstood.Wehavebeenbombardedwithchangeinthewakeofthefinancialcrisisandarebracingforwhatmightbecomingintheyearahead.You’restrugglingtoadapttonewrulesandregulations,technologicalinnovationsandchangingdemographicsofyourcustomerbasewhiletryingtomaintainyour“community”connection.
Youcouldsaywe’reallcaughtsomewherebetweenwhatweareandwhatwe’llneedtobecomeforourfuturecustomers.CBI,asanorganization,isrespondingtothissamereality.We’rewalkingtworoadssimultaneously:ononehandrespondingtomemberdemandstodeliverinnovativeproductandserviceresources.Ontheother,we’regroundingourselvesinCBI’sproudhistoryandheritagebasedononesimpleobjective:connectingpeoplewithoneanothertoshareideasandrisetogethertoconfrontallindustrychallenges.
ThisissueofCBI’ssignaturepublication,theCommunity Banker Updateanditssistere-newsletterCommonCENTS,alsoreflectthisdualreality.Youhaveprobablyalreadynoticedafewchangesinthelookandfeelofthesepublicationsandyou’llfindmoreasyouflipthroughtheminthemonthsahead.It’sfamiliarbutdifferent,groundedinthepastbutleaningtowardthefuture.OurgoalistoseeknewdirectionsandwaystocapturetheessenceanduniquenessofIowacommunitybankingandtheindustryasawhole,whilepayinghomagetothehistoryofouroverforty-fiveyearnewsletter.Changeprecedingneed.
AnditisreflectiveofCBI’sleadershipandstaffitself:alwaysattemptingtoanticipatememberneedsbeforeyou,ourmembers,do.
SoIhopeyouenjoythelookandfeelofthemagazinebutmoreimportantly,enjoyitscontents.Weinviteyourfeedbackandsuggestionsforimprovement.Ourconstructionisaworkinprogress,andwelookforwardtothewaysinwhichthispublication,andorganization,willcontinuetoevolvetomeetyourneeds.Wearepleasedtosharethat99%ofourmembershaverenewedtheirmembershipfor2015.
AndnexttimeyouareheadedintoDesMoines,taketheroadlesstraveled.Ifyoucanfindone.
NATIONAL CONVENTION
The Community Banking Event of the Year!
Register before
January 19 and save $300
with early-bird pricing!
March 1-5, 2015
Gaylord Palms Resort & Convention Center
ORLANDO, FLORIDA
Learn more at www.icba.org/convention2015
General Session Speakers (as of November 15)
Join us and be amazed how these four days will impact
your career, your bank and your community.
More than 60 education sessions with CPE credits
Networking and entertainment opportunities
Products and services from more than 240 providers
Access to influential leaders and experts
Cam Fine John Carly Fiorina David Kat Cole Buhrmaster Gregory
BanquetEntertainment
The Midtown Men
COMMUNITY BANKER UPDATE | JANUARY 2015 5
Building theNext Generation of
Community Banking LeadershipTheLeadersofTomorrowDevelopmentGroupwillholdtheir12thAnnualLeadershipDevelopmentConferenceonMarch 26th & 27th,attheMarriottHotelindowntownDesMoines.
OntheConference’sopeningday,attendeeswillmeetwithJim Schipper,SuperintendentofIowaDivisionofBanking,followedbyBreakoutSessionsonAg,Compliance/OperationsandCyberSecuritytopics.Anetworkingdinnerwillalsobeheldthatnighttogiveattendeestheopportunitytonetworkwithotherup-and-comingcommunitybankingleaders.
TheConferencewillcontinueonFridayandwillinvolveaPresidents’PanelincludingSuku RadiafromBankersTrustinDesMoines,Steve LanefromSecuritySavingsBankinGowrieandJosh GuttaufromTSBankinTreynor.ClosingtheConference,keynotespeakerAlan FeirerfromGroupDynamicLeadershipTrainingwillpresentonTeamwork.
Visitourwebsiteatwww.cbiaonline.orginthecomingmonthsformoreinformationandtoregister,orcalltheCBIofficeat515-453-1495ore-mailtocbia@cbiaonline.org.Plantoattend,orsendtheup-and-comingleadersinyourbanktothiseducational,networkingevent!
2015 LOTLeadership Development
Conference
March 26-27, 2015
6 COMMUNITY BANKER UPDATE | JANUARY 2015
by Cynthia L. CourseCPA, Director
Federal Reserve Bank of San Francisco
COMMUNITYBANKD I R E C T O R S
RECRUITING AND RETAINING
Reprinted with permission of Community Banking Connections®Copyright 2014 Federal Reserve System.
COMMUNITY BANKER UPDATE | JANUARY 2015 7
AscommunitybanksmovebeyondtheGreatRecessionandexplorenewopportunitiesforgrowthandprofitability,theiroutsidedirectorswillplayanincreasinglyimportantroleinguidingthebanksthroughbothfamiliarandunchartedterritories.Thoughitmaynotbeaseasytorecruitandretainnewexternalcommunitybankdirectorstodayasithasbeeninthepast,thechallengesarenotinsurmountable.Thisarticleisnotintendedtoestablishordescribesupervisoryexpectationsforboardsofdirectors.Rather,itsuggestssomewaysthatcommunitybankscanthinkaboutrecruitingandretainingqualified,effectivedirectorsandpotentiallyevaluatingtheeffectivenessoftheboardthroughself-assessments.ManyofthesuggestionsforwaystorecruitandretainqualifieddirectorscomefromapanelsurveyofcommunitybankersinthewesternUnitedStates.Is There an “Ideal” Director Profile?Giventhepaceandscopeofchangeinthebankingenvironment,theboardofdirectorscollectivelyandeachmemberindividuallyplayacriticalroleintheoverallsuccessofacommunitybank.Thisdoesnotmeanthateachboardcandidatehastobeanexpertinbankingtobeconsideredforboardmembership.1Tothecontrary,thediversityofexperiences,education,views,andopinionscanmakethestrengthofacommunitybankboardgreaterthanthesumofitsparts.Giventheimportanceofbankdirectorsinoverseeingthesuccessfuloperationofthebank,istherean“ideal”directorprofile?Inaword—no.Asnotedpreviously,acommunitybank’sboardofdirectorscanbestrengthenedbydiversity.TheFederalReserverecentlyissuedsupervisoryguidancethatdiscussescertainpersonalorbusinessexperiencecharacteristicsthathaveprovenproblematicwhenreviewingapplicationsfordirectorsatdenovoandtroubledinstitutions.2Inshort,individualswhosebackgroundsraisequestionsregardingtheirintegrity,financialresponsibility,orcompetence,orotherwiseraisedoubtabouttheirabilitytofulfilltheresponsibilitiesofabankdirector,havebeenviewedunfavorably.However,forthepurposesofthisarticle,itmaybemoreinformativetoconsiderthecombinationofcharacteristicsthatcouldindicatethelikelihoodthatadirectorwillbeagoodfitfor
thebank.Mostlikely,thiscombinationwillbeamixofpersonalattributes,experienceandeducation,andawillingnessandabilitytodedicatethenecessarytimetothisimportantrole.
Theboxbelowillustratessomeofthepersonalattributes,experience,education,andotherqualitiesthataregenerallyfoundincapablecommunitybankdirectors.
Whiletherewilllikelybequiteabitofsimilarityintheattributesofacapabledirectoracrossdifferentcommunitybanks,thefitofeachindividualdirectorshouldbeconsideredwithinthecontextoftheinstitution’sstrategicdirectionandcultureaswellastheattributes,experience,andeducationofthedirectorsalreadyonorbeingconsideredfortheboard.
Recruiting Community Bank DirectorsGivenanunderstandingofthedesiredcharacteristicsofadirector,howcanacommunitybankrecruitcapabledirectors?
(Bank Directors continued on next page)
RECRUITING AND RETAINING
Qualities of an Ideal DirectorPersonal Attributes
Honesty and Integrity
Experience and Education
Engagement
Analytical Skills
Community
Banking
Business
• Puts bank interests ahead of personal interests• Avoids actual and perceived conflicts of interest in life, at work, and while serving on the board• Thinks independently, rather than simply following the pack
• Is inquisitive• Provides constructive guidance and opinions• Asks tough questions and expects satisfactory answers• Voices constructive dissent when appropriate
• Draws analogies between past experiences and current challenges• Is willing to learn and develop new skills• Is strategically engaged but operationally distant
• Possess financial, business, and managerial acumen• Actively engaged in the field of employment• Has connections with other businesses and industries
• Has knowledge of the communities served• Actively engages in and with community groups
• Has a basic understanding of banking, regulatory systems, laws, and regulations• Is willing to fill knowledge gaps
Other Qualities
Has Time To.... Complementary Attributes
• Learn the business• Commit to board activities -- Prepare for and attend meetings -- Review examination and audit reports and ensure responsiveness -- Keep up with the affairs of the bank• Pursue professional development opportunities
• Is independent of bank management• Possesses a skill set that complements those of the other directors• Has skills that support the bank’s long-range vision• Enhances board member diversity (e.g., gender, ethnicity, industry, socioeconomic profile)
LegalDisclaimer:TheanalysesandconclusionssetforthinthispublicationarethoseoftheauthorsanddonotnecessarilyindicateconcurrencebytheBoardofGovernors,theFederalReserveBanks,orthemembersoftheirstaffs.Althoughwestrivetomaketheinformationinthispublicationasaccurateaspossible,itismadeavailableforeducationalandinformationalpurposesonly.Accordingly,forpurposesofdeterminingcompliancewithanylegalrequirement,thestatementsandviewsexpressedinthispublicationdonotconstituteaninterpretationofanylaw,rule,orregulationbytheBoardorbytheofficialsoremployeesoftheFederalReserveSystem.
8 COMMUNITY BANKER UPDATE | JANUARY 2015
(Bank Directors continued from previous page)
Toensurethebestfitbetweenadirectorcandidateandthebank,theboard’snominatingcommitteeorsimilarsubsetoftheboardshouldassesstheskillsanddemographicprofileofitscurrentdirectors,comparetheskillsandprofileswiththebank’sstrategicdirectionandriskprofile,andidentifyanycollectivegaps.Thisexercisewillincreasethelikelihoodthattheboardwillfindanindividualwiththeskills,abilities,talent,andcommitmenttomakeadifference.Importantly,itwillbecomethe“bottomline”inthediscussionwiththecandidateabouthowheorshewillbeabletomakeadirectimpactonthebank’ssuccess.Admittedly,recruitingnewbankdirectorsmayhavebeeneasiertodointhepastthanitistoday.Historically,manybusinessandcommunityleadersconsidereditanhonortobeaskedtoserveontheircommunitybank’sboardofdirectors.Thesecandidatesviewedmembershipontheboardasevidenceoftheirbusinessexpertiseandprominenceinthecommunity,andtheyappreciatedtheshareholders’voteofconfidenceintheirskills.Whileservingonaboardofdirectorsisindeedanhonor,manymaynowalsoweighthebenefitsagainstthepotentialburdenorlegalliability.Today,recruitingnewdirectorsoftenrequiresthemembersofthenominatingcommitteeto“sell”potentialdirectorcandidatesonboardmembership.Thisincludeshavingfrankdiscussionswiththecandidateabouttheinstitution3andhowheorshecancontributetothebank’sfuture.Thisalsoincludesdiscussingthebenefitsofservingasabankdirectorandgivingreasonableassurancestothecandidateabouttheboard’sexpectationsofandcommitmenttoeachmember.Communitybankernominatingcommitteescanconsiderthepointsthataredetailedintheboxbelowwhenpreparingdiscussiontopicstousewhenapproachingdirectorcandidates.Whendoneeffectively,theprocessofrecruitingqualifieddirectorswillbeverysimilartorecruitingqualifiedexecutives,butwiththeshareholdershavingthefinalsayonthenominee.Retaining Strong Bank DirectorsOncethebank’sshareholdershaveelectedadirectortotheboard,theboard’sfocusshouldshiftfromrecruitingtoengagementandretention.Tobemosteffective,effortstoengageandretaincapabledirectorsshouldbeginthemomenttheyareappointedandshouldcontinuethroughouttheirtenure.Orientation.Effectivecommunitybankswilldevelopanorientationprogramthatistailoredtothesizeandcomplexityofthebankandtheexperienceandknowledgeofeachnewdirector.Elementsofacomprehensiveorientationprogramcouldinclude:• Meetingswiththeheadsofeachbusinesslinetogainan
understandingofthechallengesandopportunitiesineacharea;
• Meetingswithotherboardmembers;• Introductionstokeyexternalparties,suchasbankcounsel,
bankauditors,andbankexaminers;• Accesstomaterialsnotmadeavailableduringthe• recruitmentprocess,suchasbankexaminationsandaudit
reports;• Demonstrationsofaccesstovirtualprivatenetworksorother
information-sharingtoolsusedbytheboardofdirectors;
• Accesstodirectortrainingmaterialscommensuratewiththedirector’sexperience,suchastheFederalReserveSystem’sBankDirector’sDesktop.4
Culture and Atmosphere.Aprofessionalandinclusivecultureandatmospherewithintheboardandbetweentheboardmembersandmanagementshouldenhancedirectorretention.Directorsaremorelikelytoremainontheboardwhen:• Managementistransparentaboutallaspectsofthebank’s
operations.• Theboardreceivestimelyandsufficientinformationtomake
sounddecisions.• Theboardisempoweredtomakedecisions.• Theboardmembersaretreatedwithrespect.• Managementisrespectfuloftheboard’stime.
(Bank Directors continued on next page)
Institution Profile
• Publicly available information
• Non-public information, subject to constraints of federal and state law
• How the institution is providing value to its shareholders, employees, and the community
Discussion Points for Director Candidates
Director Profile
• How personal knowledge and talents align with the bank’s needs, today and in the future
• How candidates’ knowledge and talents will add value to the board
Benefits of Service
• Give back to the community
• Meet new people in the industry and the community
• Continually build upon existing skills and knowledge
• Stay abreast of local and national issues
• Receive a competitive compensation package
Assurances
• Transparency in all aspects of the bank’s operations
• Timely and sufficient information
• Opportunities to use their knowledge and skills for the benefit of the bank and the board
• Respect for their opinions, encouraging constructive discussion and dissent
• Appropriate training and educational opportunities
• Respect for their time
• Appropriate compensation and benefits, including liability insurance
COMMUNITY BANKER UPDATE | JANUARY 2015 9
(Bank Directors continued from previous page)
• Managementsincerelyseeksthedirectors’inputandshowsappreciationfortheboard’scontributions.
• Thereisaclearlinkagebetweentheboard’sactivitiesandtheorganization’ssuccess.
Education and Training.Ongoingeducationandtrainingareasimportantforcommunitybankdirectorsastheyareforthebank’sstaffandmanagement.However,thereisadelicatebalancebetweenmaintainingrespectforthedirectors’timecommitmentandensuringthattheyhavetheknowledgenecessarytomakeinformeddecisions.Whiledirectorsareexpectedtobringtotheboardroomtheviewsandperspectivesgainedfromtheirpersonalandprofessionalexperiences,theymustalsobeabletoputthoseviewsinthecontextofthebankandtheenvironmentinwhichitoperates.Eachdirectorshouldpossessknowledgeofthebankandthebankingindustrythatisappropriateforhisorhertenure.Inaddition,eachboardmembershouldbeexpectedtocompletecontinuingeducationandtrainingtobuilduponandmaintaintheskillsnecessarytobeaneffectivecommunitybankdirector.Boardmembersmayfindthatchoosingfromavarietyofeducationalopportunities,suchasthefollowing,helpsthembalancetimeconstraintsagainstinformationneeds:• Targetedtrainingoreducationsessionsasapartofboard
meetings;• Annualdirectorretreatsthatfocusontrainingaswellas
strategicplanningandbankoperations;• Subscriptionstoprintorelectronicperiodicalsand
newslettersthatdiscusscurrentandemergingcommunitybankissues;
• Attendanceatbankerassociation,tradegroup,orregulatoryconferencesandseminars,withformaldebriefingstotheotherdirectorsatboardmeetings.
Recognition.Recognizingdirectorcontributions,whetherthroughwordsandactionsorthroughmonetarycompensation,isalsoasignificantelementindirectorretention.Recognitionandcompensationcanbetailoredtoeachdirector’scontributions;however,theygenerallywillnotbesufficienttoretaincapabledirectorswithoutanatmosphereandculturethatisconducivetoeffectiveboardoperationsandsufficienteducationandtrainingtoensurethateachdirectoriswellinformed.Evaluating Board PerformanceToremainstrongandindependent,communitybankboardsofdirectorsmayfindvalueinperiodicallyevaluatingtheireffectivenessandidentifyingopportunitiesforimprovementandgrowth.Communitybankboardsmayfindthatself-assessmentsareeffectiveathighlightingemerginggovernanceissues.5Forexample,aboardself-assessmentatthehighestlevelcouldaskfocusedquestionsabouttheboard’sprimaryresponsibilities.Subsequentquestionscoulddrilldownintotheboardmembers’perceptionsaroundthebank’smissionandpurpose,theeffectivenessofstrategicplanning,thesufficiencyofsuccessionplanning,theappropriatenessoftheboard’smonitoring(Bank Directors continued on page 13)
10 COMMUNITY BANKER UPDATE | JANUARY 2015
Resolve To Get InvolvedWritten By: John H. Buhrmaster, Chairman of ICBA
AswecommunitybankersacrossthecountryringintheNewYear,weringinwithitourenthusiasmforthisgreatindustry,ourdedicationtothecommunitiesandcustomersweserve,and,I’msure,plentyofNewYear’sresolutions.
Whilemostfolkshavepersonalresolutionsthattheyhopetofocusonfor2015,Iwanttoencourageyouasacommunitybankertoaddaprofessionalresolutiontothemix.Andthisonedoesn’trequireadietorjoiningthegym—Ipromise—itsimplyrequiresthatyougetinvolved,onestepfurtherthanyoualreadyarewithourindustry.
Forexample,resolvetowritethreemoreletterstoyourmemberofCongressthisyearadvocatingoncommunitybankissues,toattendtheICBAWashingtonPolicySummitinAprilandlobbyyourmembersofCongress,togetinvolvedwithyourstateassociation,totakeaneducationcourse,oreventofocusonmentoringandbringingupafutureleaderinthecommunitybankingindustry.Thepointisthatthepossibilitiesareendless—thereisnoshortageofwaystogetinvolvedandmakearealdifference.
Soasyouthinkofbetteringyourselfovertheupcomingyear,thinkaboutwhatyoucanalsodotobettertheindustry.Iknowitwillgoalongwaytowardourfutureasanindustry.
Afterall,thefutureisbrightforcommunitybanks.Ourreputationcouldn’tbebetter,andthat’sbecauseofdecadesofhardwork,experienceandmakingsurewe’redoingourjobsright—alwaysactinginthebestinterestofourcustomersandcommunities.Wetakewhatwedoseriouslyanditshows.
It’sbecauseofthisstellarreputationthatcommunitybankshavebeenabletoaccomplishsomuchoverthepastyear,movingtheballonimportantissuesliketieredregulationandpairingdownregulatoryburden.Infact,overthepastseveralmonths,we’veheardanumber
oftopregulatorscomeoutinsupportoftieredregulationandeasingregulatoryburdensoncommunitybanks.LastmonthU.S.ComptrolleroftheCurrencyThomasCurrycalledonCongresstoexemptcommunitybanksfromtheVolckerrule,sayingthateliminatingunnecessaryrulesforcommunitybankswouldlowerthecostofregulatorycomplianceandmakeiteasierforthemtoservetheircommunities.Atthesameconference,FederalReserveGovernorLaelBrainardadvocatedtailoringregulationstothesize,businessmodelandriskprofileoffinancialinstitutions.Aone-size-fits-allapproachposesadisproportionatelylargecompliancecosttosmallerinstitutions,shesaid.
Whilethesearen’ttheonlyexamplesofregulatorsspeakingout,theyserveasagreatexampleofthetrueinfluencewecommunitybankershaveinWashington.AndwiththenewCongresscomingtotownthismonth,nowisn’tthetimetoloseourspark.It’sgametime,andit’spivotalinalotofways.
ThisiswhyIaskyou—communitybankertocommunitybanker—toresolvetotakeyouradvocacyeffortsonestepfurtherthisyearwithICBA,forthebenefitofnotonlyyou,butthisgreatindustrythatweallareluckyenoughtocallourown.
JohnH.BuhrmasterisChairmanoftheICBAandPresidentof1stNationalBankofScotia,inScotia,NewYork.
“...the possibilities are endless -- there
is no shortage of ways to get involved
and make a real difference.”
TOPFrom the
COMMUNITY BANKER UPDATE | JANUARY 2015 11
InWashington,theleversofpowerarecontinuallypushedandpulled.Sometimesthey’reconspicuouslycontrolledforeveryonetosee.Moreoftenthey’requietlyworked,ornudgedinonedirectionoranother,behindcloseddoors.Andhowthoseleversareoperated,forbetterorworse,isgreatlyinfluencedbytheingrainedmindsetsandbiasesofthosemaneuveringthem.
ForfartoolongWallStreetchieftainsappointedtothehighestunelectedpositionsoffinancialpolicymakinghaveexercised—quietly,subtlyandoutofpublicview—fartoomuchone-sidedthinkingandactioninWashington.Certainly,inWashington,anaivelypermissiveandmisplacedtrustinwheeling-dealingfinancialmega-institutionswasamajorfactoroftheWallStreetfinancialcrisis.AndhavingsomeonewithfirsthandcommunitybankingknowledgeatTreasury’shighestlevelswouldhaveavoidedthecavalierlydismissiveapproachtheagencytooktowardstrugglingcommunitybanksduringitsinitialemergencyresponsetothecrisis.
ForyearsICBAhaswarnedaboutthishazardousWallStreetbiasintheagencyhierarchies.Butthefinancialcrisisandthecostlyregulatoryreactionheapeduponblamelessbutalreadyoverburdenedcommunitybankshaveraisedthestakes.ThenlastfalltheObamaadministrationnamedaWallStreetinvestmentbankertobecometheTreasury’sundersecretaryfordomesticfinance,andICBAloudlysaid—enoughisenough!ThroughoutWashingtonpolicymakersarehearingourmessage—thattoomanypeoplewhoonlysee,knowandserveWallStreetareworkingtheleversofpowerhere.Whetherintentionallyorinadvertently,continuingtodisregardcommunitybanksonMainStreetharmsthepublicinterestandmuzzlesanimportantpolicyvoice.
Afterall,it’scommunitybanksthataretrulytheindispensibleheartofMainStreetandruralAmerica.
Soformorethantwoyears,aspartofourbroadregulatoryburdenreliefeffortsforcommunitybanks,ICBAhasconsistentlysoughtmoreassurancesthatcommunitybanksandMainStreetwillbeservedwhendecisionsarebeingmadebehindcloseddoorsinWashington.Aspartofthiseffort,ICBAhasspecificallypromotedlegislationtoestablishanundersecretarypostforcommunityfinancialinstitutionsatTreasury.And,inrecentyears,webeganpushinglegislationtorequiretheFederalReserveBoardtoalwayshaveagovernortherewithdirectcommunitybankingknowledgeandexperience.TheninawidelybipartisanpushinDecember,markingwhatwouldhavebeenahugevictoryforgenerationstocome,CongresscameveryclosetopassingthatlegislationaspartoftheTerrorismRiskInsuranceAct,whichwasblockedforunrelatedreasonsbyalast-minuteprotestbyasingleretiringsenator.
TheFederalReserveBoardbillhasanexcellencechanceofpassingtheCongressthisyear,signalingaseismicandconcreteshiftinthinkinginWashingtonthatacknowledgescommunitybanking’sessentialfinancialrole.SuchlegislationtobringgreatercommunitybankperspectivetoWashington’severydaydecision-makingislongoverdue.ThatcommunitybanksaredrowninginregulationsprovesthattieredregulationthatICBAhaslongadvocatedthatproperlyconsidersafinancialinstitution’ssize,activitiesandbusinessmodelmustbemorewidelyexpandedandfullyapplied—andsoon.ButCongress’sactionlastmonthshowswecangetallofthisdone.
Justasimportant,thankstoICBAandcommunitybankers,Washingtonisnowfocusingmorefullyontheneedsofthenation’scommunitybanksandMainStreet.WallStreethashaditssayforyears.Now,it’scommunitybanking’sturn.
Working the LeversWrittenBy:CamdenFine,PresidentandCEOofICBA
“...it’s community banks that aretruly the indispensible heart of
Main Street and rural America.”
Following Mr. FineMore than 1,000 people are following Camden Fine’s tweets @Cam_Fine— are you? Visit www.twitter.com/cam_fine.
FINEPOINTS
12 COMMUNITY BANKER UPDATE | JANUARY 2015
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Therequirementtoreporttheaggregatecostofemployer-sponsoredcoveragegenerallyappliestoallemployers;however,employersthatfilefewerthan250FormW-2sinthepreviousyearareexemptfromtherequirementunderatransitionalpolicy.Forexample,anemployerthatfiledfewerthan250FormW-2sforthe2013calendaryear(filedinJanuary2014),willnotberequiredtoreporttheaggregatecostoftheapplicableemployer-sponsoredcoverageonFormW-2sforcalendaryear2014(filedinJanuary2015).Thistransitionalreliefwillremaininplaceuntilfurtherguidanceisissued.
Takingintoaccountthetransitionalpolicy,employersshouldreexaminewhethertheystillqualifyforthetransitionalreliefespeciallyiftheyareonthecuspoffiling250FormW-2s.Employersthatfiledmorethan250FormW-2sin2014,forthe2013calendaryear,musttakestepstocomplywiththePPACAmandatedW-2reportingrequirementsintheFormW-2sfiledinJanuary2015.However,sinceemployerswillneedtotrackinformationthroughout2014,thisworkmustcommenceintheverynearterm.
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COMMUNITY BANKER UPDATE | JANUARY 2015 13
(Bank Directors continued from page 9) andcontrolactivities,andtheinvolvementofthebankinitscommunity.Self-assessmentscanalsoprovidevaluableinsightintothefunctioningoftheboardthroughquestionsthataddressethics,theinterpersonalrelationshipsamongboardmembers,theselectionandtrainingofdirectors,theeffectivenessofdialogue atboardmeetings,theengagementandcontributionofindividualdirectors,andtheorganizationoftheboardanditscommittees.Completingthecircle,theperiodicuseofself-assessmentsmayalsohelpacommunitybank’snominatingcommitteerecruitnewdirectors.Candidateslikelywillbemoreinterestedinjoiningacompanythatseeksoutandactsuponholisticdirectorfeedbackthanacompanyinwhichdirectorfeedbackissoughtonlyonverynarrowandspecificdecisions.Concluding ThoughtsBanksplayanimportantroleintheeconomiclivesoftheircommunities,andcommunitybankdirectorshaveagreatopportunitytoinfluenceandhelpshapetheirlocaleconomies.Foracommunitybank,recruitingandretainingqualifiedandeffectivedirectorsisasimportantasrecruitingandtraininganeffectivemanagementteam.Inthewordsofaformerboardchairmanandmember,“Attheendofthedaythere’snothinglikeastrongboardthatoperatesindependently,asksgoodquestions,anddoesitshomework.”6
Notes1Althoughboardcandidatesarenotrequiredtohaveexpertiseinbankingwhentheyareappointedtotheboard,theyareexpectedtoquicklybecomefamiliarwiththebasicsofbankinginordertoprovideeffectiveoversightofmanagementandtomakeinformeddecisions.Inaddition,abankthatisapubliccompanysubjecttoSecuritiesandExchangeCommissionoversightisrequiredtohaveanauditcommitteefinancialexpertonitsboardofdirectorsandauditcommittee.
2SeeSupervisionandRegulation(SR)letter14-2/ConsumerAffairs(CA)letter14-1,“EnhancingTransparencyintheFederalReserve’sApplicationsProcess,”availableatwww.federalreserve.gov/bankinforeg/srletters/sr1402.htm
3Federaland/orstatelawsmaylimitthenatureofinformationthatcanbesharedwithdirectorcandidates.Forexample,banksareprohibitedbylawfromdisclosingtheirbankandholdingcompanysupervisoryratingsandothernonpublicsupervisoryinformationtononrelatedthirdpartieswithoutwrittenpermissionfromtheappropriatefederalbankingagency.See“ConfidentialSupervisoryInformationDisclosureRules”intheFirstQuarter2013issueofCommunityBankingConnections,availableatwww.cbcfrs.org/articles/2013/Q1/Confidential-Supervisory-Information-Disclosure-Rules
4Seewww.bankdirectorsdesktop.org/
5Recommendingaspecificself-assessmentprocessisbeyondthescopeofthisarticle,andtheFederalReservedoesnotendorseanyspecificself-assessmenttoolsortemplates.However,avarietyofresourcesforcommunitybankboardsofdirectorsinterestedindevelopingself-assessmentsisavailablethroughtradegroupssuchastheBankDirectorwebsiteandmagazineatwww.bankdirector.com/.
6CommentbyLewPlatt,formerchairman,boardmember,andchiefexecutiveofHewlett-Packard,whileservingasaBoeingboardmember,asreferencedinKnowledge@Wharton,“Re-ExaminingtheRoleoftheChairmanoftheBoard,”December18,2002,availableathttp://ow.ly/Cghop.
14 COMMUNITY BANKER UPDATE | JANUARY 2015
AnAmerican’srighttomakedecisionsaboutwhatbusinessesheorshewillgivehisorhermoneytoisafundamentalfacetofhispersonalindependence.Whenanythingimpedesthatfreedomtomakechoices–aboutswitching
cellphonecarriersorbanks,forexample–theAmericanpublictakesaction.
TherecentpassageoftheUnlockingConsumerChoiceandWirelessCompetitionActisaperfectexampleofhowtheAmericanpubliccaneffectchangewhenitfeelsitisbeingtreatedunfairlybyanindustry.ApetitiontotheWhiteHousewithmorethan100,000signaturesonitsurelycontributedtothepassageofthebill,whichwillmakeiteasierformobileuserstoswitchphonecarrierswithouthavingtoincurtheexpenseofbuyinganewphone.
Consumers want portable account numbersThebankingindustryshouldviewtheevolutionofthecellphonelegislationasacautionarytale.Whenconsumersfeelcorneredandcomplainloudlyenough,thegovernmentcanstepin.It’snot
beyondtherealmofpossibilitythatthesamethingcouldhappeninthebankingindustryifenoughconsumersexpressangeroverhowdifficultitcanbetoswitchbanks.
Astudyconductedin2013byBTandYouGovrevealedthat61%ofbankingcustomersintheU.S.favorportablebankingaccountnumbers.Thesurveyofmorethan6,500peopleacrosssixcountriesfoundmostconsumersagreeingthataportableaccountnumber,whichwouldallowthemtoswitchbankswithoutchangingaccountdetailsandcausingmajordisruptions,wouldbeuseful.Infact,ithappenedintheUnitedKingdom,wherestricterruleshavemadebankersmoreaccountablefortheiractionsandeasierforconsumerstoswitchbanks.
Rightnowoneoftheprimaryfactorstyingconsumerstotheirbankisthehassleofswitching(onlinebillpay,automateddeposits,etc.);ifthisisremovedconsumerinertiawilltakeover.Thatsaid,thoughportableaccountnumberswouldsolvealltheissuesconsumerswouldfaceinswitchingaccounts,therewouldstillbethingslikeBillPaywhichwouldneedtobeaddressed.
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An Account Switching Wake-Up Call from the Wireless IndustryWrittenBy:ToddWeiss-Director,ProductManagement-Deluxe
WAKE UP CALL from theWireless Industry
An Account Switching
Written By: Todd Weiss - Director, Product Management - Deluxe
COMMUNITY BANKER UPDATE | JANUARY 2015 15
© Copyright Employers Mutual Casualty Company 2014. All rights reserved.
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Looks like we have a few things in common. Count on EMC® and your independent insurance agent to provide quality products and services to fit the unique needs of your community bank.
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(Account Switching continued from previous page)
Proactive is always bestFeelingtrappedyourselfrightnow?Therearethingsbankscandonowtohelpalleviatethissituation.Inbusiness,it’softenbesttobeproactiveandaddressproblemsbeforetheybecomemajorissuesandyoulosecontroloverthem.Thatcertainlyseemstobethecasewhenitcomestoboththedepartureandonboardingofbankcustomers.
Make their departure painlessYoumightlookatthatheadlineandwonderwhatiswrongwithme,butburningabridgewithcustomersisneveragoodpractice.I’vefoundthatconsumersoftenhaveashortmemorywhenitcomestooldbusinessrelationships,unlessyougivethemareasontorememberit.ThisbringstomindaconversationIhadwithacolleagueofmine.HewasunhappywithhisDSLinternetproviderbuttheonlyoptionwastogobacktothecableinternetproviderthatheusedtohave.Thingsendedsobadlywiththatrelationshipthathe’shesitanttogivethemanothershoteventhoughhewantstochangeproviders.
Customerswholeavewithabadtasteintheirmouthcanimpactyourbottomlinenotonlythroughactualnumericallosses,butbydamagingyourreputationaswell.Thisisonlymagnifiedintheeraofsocialmedia!Icertainlydonotadvocatethatbanksshouldhelpcustomersjumpship.Instead,theyshouldbelookingforwaystoconvinceon-the-fencecustomersthatit’sworthstayingput.Buildingastrongretentionprogramcoupledwith
greatcustomerserviceareatthecoreforbankslookingtokeepvaluablecustomers.
Give them a great experience from day oneAdditionally,youneedtostarttheexperienceoutstronglyfromdayonewithanonboardingprocessthatisassmoothandpain-freeaspossible.
Everyonehastheirownswitchkit,butdoesthisreallymakeitmucheasierforconsumers?It’sreallyjustawaytohelpthemorganizetheirthoughts.Attheendoftheday,theconsumerstilldoesallthework…andinmanycasestheworkloadistoomuchandtheyskipitandstaywiththeiroldbank.
Customersthatstartouthappyaremuchmorelikelytostickaroundandremainhappy.Considerthis:Ifallotherfactorsareequalbetweenyourbankandacompetitor,howyoutreatyouraccountholderscouldbeapositivedifferentiator.
Nooneappreciatesfeelingtrapped,hencethecellphoneindustryregulations.Acustomerwhohasapositiveexperienceleavingyourbankmaybemoreinclinedtoconsiderreturningatalatertimeifyouaddresstheissuesthatpromptedhimorhertolookelsewhereinthefirstplace.
Ultimately,theargumentinfavorofproactivelyaddressingthisissueissimple.Ifbanksdon’tfindawaytomanageitontheirown,theyfacetheveryrealriskthatregulatorswilldoitforthem.
First National BankCreston
Breda Savings Bank
Welcome NewCBI Members!The Community Bankers of Iowa
would like to welcome the following banks to the association, and thank
them for their support:
16 COMMUNITY BANKER UPDATE | JANUARY 2015
TherisingvisibilityofdatabreachesandthepervasivenessofhackingensurethatcybersecurityanddataprotectionwillbetopWashingtonprioritiesin2015.Despitethepublic’sapparentapathytotheseeminglydailyreportsofcyberthreats,CongressandtheregulatorsareunderincreasingpressuretoactintheaftermathofbreachesatHomeDepot,TargetCorp.andothermajorretailers.
ForICBAandcommunitybanks,thisrepresentsanewsetofopportunitiesandchallenges—toimprovethenation’scyber-defensesandrequiregreaterdataprotectionsamongretailerswithoutincurringadditionalandunnecessaryregulatoryburdens.Bysupportingcybersecurityinformation-sharingandconsistentdata-securitystandardsforallpaymentssystemparticipants,ICBAislookingtoreducesecurityrisksforcommunitybanksbybringingothersuptotheirstandard.
Bipartisan opportunityWhile2015willhavenoshortageofWashingtonpartisanship,
RepublicansandDemocratsappeartosharecommongroundinpursuingdata-securityandcybersecurityreforminthe114thCongress.FollowinganexecutiveorderfromPresidentObama,theNationalInstituteofStandardsandTechnologylastyearreleasedacybersecurityframeworkthatisvoluntaryandfocusedonaligningpolicy,businessandtechnologicalapproachestoaddresscyber-risksinallcriticalinfrastructuresectors.Similarly,aRepublicantaskforcerecentlyissuedaninnovationagendaforthenewCongressthatemphasizedpublic-privatepartnership,individualrightsandanon-regulatoryapproach.
Severalcongressionalcommitteeswillhaveahandincraftinglegislationoncybersecurityanddataprotection,sotheprocessmightgetunwieldyattimes.Butifpolicymakerssticktothesecoreprinciplesofvoluntarystandardsandcollaboration,communitybankswillhaveampleopportunitytoachievesuccessfulreformsofbothdata-securityandcybersecuritypolicies.
Data dutiesDatasecurityisfrontandcenterinWashingtonduetotheonslaughtofmassivedatabreachesatmajorretailers.ICBA’sdata-securityobjectivesfocusonensuringallparticipantsinthepaymentssystem—includingmerchants—arerequiredtoplaybythesamekindsofrulesandregulations.ThatmeansapplyingstandardssuchasthoseintheGramm-Leach-BlileyActonallparticipantsandrequiringthecostsofdatabreachestobebornebythebreachedparty.
ICBAalsowillcontinuetosupportanationaldata-securitybreachandnotificationstandardthatwillreplacethecurrentpatchworkofstatelaws.Further,ICBAopposeseffortstomakebanksliableforlossesincurredbybusinesscustomersasaresultoftheirpoorsecuritypractices.Andwhilecommunitybankscontinuetomovetochiptechnologyfordebitandcreditcards,policymakersand
(Cyber Showdown continued on next page)
Security Will Be TopWashington Priority in 2015
CYBERSHOWDOWN
Written By:Lilly Thomas and Aaron Stetter - ICBA
COMMUNITY BANKER UPDATE | JANUARY 2015 17
(Cyber Showdown continued from previous page)
otherstakeholdersshouldunderstandthatthesetechnologiesalonewouldnotpreventfuturedatabreachesanddonotprotectagainstfraudincard-not-presenttransactions,suchasonlinepurchases.
Communitybankshadtoreissuemorethan4millionpaymentscardsfollowingthedatabreachesatTargetandNeimanMarcusatacostofmorethan$40million,accordingtoanICBAstudy.Thisdoesn’tbegintoincludethesubsequentbreachesatHomeDepot,Kmart,P.F.Chang’sandcountlessothermerchants.Together,ICBA’sdata-securityinitiativesaredesignedtoreducethecostofretailerdatabreachesforcommunitybankswhileensuringthebreachedmerchantspaytheirfairshare.WiththepowerthatthelightlyregulatedretailsectorwieldsinWashington,increasingmerchantaccountabilitywillnotbeeasy.ButICBAandcommunitybankswilldoeverythingwecantopromoteafairersystemforourindustry.
Information sharingIntherealmofcybersecurity,ICBAisworkingtoensureWashingtonrecognizesthatcommunitybankstaketheissueseriouslyandalreadycomplywithabevyofmandatesunderexistingfederalandstatelaws,regulationsandguidance.Communitybanksandothersinthefinancialsectorareonthefrontlinesindefendingagainstcyberthreats.Protectingtheconfidentialityandintegrityofconsumerdataandmitigatingtherisksofhackingandcyberfraudarepartofthecommunitybankbusiness.
Toimprovehowweasanationcombatthispersistentthreat,thepublicandprivatesectorsmustbewillingandabletoshareadvancedthreatandattackdatainatimelymannerandamongfinancialinstitutionsofallsizes.Thisprincipleofequitableinformation-sharingisacentralpartofICBA’scybersecurityplatform,andfortunatelyitisatopissueforpolicymakersastheyconsiderlegislationtoencouragetwo-wayinformation-sharingamongthepublicandprivatesectorsincludingliabilityprotections
forprivate-sectorinstitutionsthatwouldencouragethemtosharecyberthreatinformationwiththegovernment.
Further,ICBAopposeseffortstomakebanksliableforlossesincurredbybusinesscustomersasaresultoftheirpoorsecuritypracticesandisworkingwiththeindustrytoenhancecardsecuritybyimplementingchiptechnology,tokenizationandend-to-encryption.Whilecommunitybanksarediligentinmanagingthesevendors,mitigatingcyberthreatstotheseoutsidepartiesisachallenge.Asaresult,we’recallingonregulatorstobeawareofthesignificantinterconnectivityofthesethirdpartiesandtoactivelycollaboratetomitigatetheirrisks.
Tools of the tradeTheimpactoftheupcomingWashingtonactiononcybersecurityanddatasecurityremainstobeseen,butthereareavailableresourcestohelpcommunitybanksprotectthemselvesandtheircustomersfrompersistentthreats.Forinstance,bankingregulatorsareencouragingallfinancialinstitutionstoparticipateintheFinancialServicesInformationSharingandAnalysisCenter.
FS-ISACprovidesalertsandreal-timeinformationonsecuritythreats.Themember-ownedorganization,whichoffersmembershipsstartingatnominalfees,isdesignedtofostercollaboration,gatherandvalidateinformation,anddisseminateinsightsonsecurityissues.Meanwhile,ICBAcontinuestoofferdata-andcybersecurityresourcesonitswebsite,includingatoolkittohelpcommunitybanksrespondtoretaildatabreaches.
ThestubbornthreatofcybercrimethatplaguesthepublicandprivatesectorshasputtheonusonWashingtontoactin2015.ICBAandcommunitybankswillworkdiligentlytomaximizetheeffectivenessofournation’sresponsewhilemitigatingthepotentialfornegativeconsequencesforourindustryandthecommunitiesweserve.
LillyThomas([email protected])isICBA’sVPandSeniorRegulatoryCounsel,andAaronStetter([email protected])isICBA’sSeniorVPofCongressionalRelationsandAdvocacy.
18 COMMUNITY BANKER UPDATE | JANUARY 2015
MostbanksfindtheirguidanceregardingBOLIpurchasesfromtheOCCBulletin2004-56andotherInteragencyStatements.TheOCC
Bulletin2004-56includesrulesrelatedtotheriskweightingofBOLIassets.WiththeadoptionofBaselIIIandthepassageofDoddFrank,banksmaynolongerrelysolelyonthemajorratingagenciestodeterminetheriskweightingoftheirBOLIassets.
Inaddition,newregulationshavebeenissuedregardingtheriskweightingofBOLIassetsheldinGeneralAccount,SeparateAccountandHybridAccountpolicies.Mostconcerning,istheambiguityofhowHybridBOLIwillbetreatedfromariskweightingperspectiveundertheNewBaselIIICapitalRules.ThepurposeofthisdocumentistoexplainthedifferencesintheproductsandexposethepotentialrisksofowningaHybridproductundertheNewBaselIIICapitalRules.
Let’sfirstexaminethedifferenttypesofproductsavailabletobanksinterestedinpurchasingBOLI.TheyincludeGeneralAccount,SeparateAccountandHybridSeparateAccountproducts.
Types of BOLIGeneral Account: GeneralAccountBOLIassumesthegeneralassetsoftheinsurancecompanyissuingtheBOLIpolicywillsupportthepolicy’scashvalues.Inadditionthecreditriskoftheportfolioareguaranteedbythecarrierandtypicallyaminimuminterestcreditingrateisprovided.GeneralAccountBOLIisandwillcontinuetoberecognizedatariskweightingat100%.
GeneralAccountBOLIpoliciesinvestasignificantportioninfixedincomeinvestmentswithasmallerpercentageinvestedinequities.SeparateaccountBOLIproductsalsoinvestinfixedincomeinvestments—basicallybankeligiblesecurities.Therefore,thepotentialdifferenceinyieldofunderlyingassetsbetweenGeneralAccountandSeparateAccountBOLIisusuallyminimal.
Theadvantageofawell-diversifiedtraditionalGeneralAccountproductisthatitincorporatealong-terminvestmentstrategythatisactivelymanaged,well-diversified,andcontainsalong-terminvestmenthorizon.Inaddition,productsissuedbymutuallifeinsurancecompaniescantakealongertermviewontheinvestmentfront,astheyarenotpressuredbyquarterlyperformanceresults.
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Hybrid BOLI: Beware of Treatment Under Basel III
Written By: R. David Fritz, Jr., CLU – Managing Partner and Co-Founder, Executive Benefits Network
COMMUNITY BANKER UPDATE | JANUARY 2015 19
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Separate Account:InaSeparateAccountBOLIpolicy,thepolicycashvaluesaresupportedbyassetssegregatedfromthegeneralassetsoftheinsurancecompanyissuingthepolicy.Multipleinvestmentoptionsmaybeavailable;however,productstypicallyinvestinbankeligiblesecurities,suchasbondfundsandmortgagebackedsecuritiesfunds.Changesinthemarketvalueoftheseparateaccountportfoliofallthroughtothepolicycashvaluesonaproratabasis.
SeparateAccountBOLIundertheNewBaselIIICapitalRulesisconsideredtobeanequityexposuretotheinvestmentfund.Therearethreeapproachesfordeterminingtheriskweightingofseparateaccountassetsunderthenewrule.Inthepast,separateaccountproductshaveenjoyedaminimumriskweightingof20%followingthesethreeapproaches.ThismayormaynotbethecaseundertheNewBaselIIICapitalRules.
Hybrid Separate Account:InaHybridSeparateAccountpolicy,likeSeparateAccounts,thepolicycashvaluesarebackedbyassetssegregatedfromthegeneralassetsoftheinsurancecompany,butnotsubjecttotheclaimsfromothercreditorsoftheinsured.
UndertheHybridSeparateAccountstructure,policyownershavethechoicebetweeninvestingintheSeparateAccountoptionsofferedwithintheproductorintheGeneralAccountoftheunderlyingissuinginsurancecarrier.Theremaybeaminimuminterestratethatiscreditedtoguaranteeagainstinvestmentlosses.Typically,therearerestrictionsonhowassetscanbemovedfromeithertheGeneralAccounttotheSeparateAccount,orSeparateAccounttotheGeneralAccount.TheassetallocationmanagementwithinaHybridpolicycanberestrictive.
Effects of the New Basel III Capital Rules
ItisnotclearundertheNewBaselIIICapitalRuleswhetherhybridseparateaccountwillbetreatedasgeneralaccountorseparateaccountfordeterminingriskweighting.ThebankowningaHybridBOLIpolicywillmakethedeterminationonwhichriskweightingtoselecteitheramoreconservativeapproachormoreaggressiveapproach.
UnderthefinalrulesofBaselIII,thebankmustdetermineiftheproductqualifiesasaseparateaccountorageneralaccount.Toqualifyforaseparateaccount,thefollowingconditionshavetobemet:1. Theaccountmustbelegallyrecognizedunderapplicablelaw.2. Theassetsintheaccountmustbeinsulatedfromthegeneral
liabilitiesoftheinsurancecompanyunderapplicablelawandprotectedfromtheinsurancecompany’sgeneralcreditorsintheeventoftheinsurer’ssolvency.
3. Theinsurancecompanymustinvestthefundwithintheaccountasdirectedbythecontractholderintheinvestment
alternativesdesignatedorinaccordancewithspecificinvestmentobjectivesorpolicies.
4. Allinvestmentperformance,netoffeesandassessments,mustbepassedthroughtothecontractholder,providedthatcontractsmayspecifyconditionsunderwhichtheremaybeminimumguaranteebutnotaceiling.
ItwillbedifficultgoingforwardforHybridSeparateAccountpoliciestomeetthedefinitionofseparateaccountrequirementoutlinedinpointnumberfour.Withthisinmind,itmaybedifficultforbanksafterJanuary1,2015,totakeadvantageofthelowerriskweightingavailablewithsuchaproductduetotheclassificationrules.
How to Determine the Appropriate Risk WeightingToultimatelymakethedecisiononwhattheappropriateriskweightingisforaHybridSeparateAccountBOLIproduct,therearethreemethodologiesthatfinancialinstitutionswillselectfromtodeterminehowtoclassifytheirBOLIproductsfromariskweightingstandpoint.1. FullLook-ThroughApproach:Theaggregaterisk-weighted
assetamountsforallinvestmentsheldbythefundaremultipliedbythebankingorganizations’proportionalinterestinthefund.
2. SimpleModifiedLook-ThroughApproach:Abankingorganizationmultipliesitsexposuretothefundbythehighestriskweightofanyoftheassetsinthefund.
3. AlternativeModifiedLook-ThroughApproach:Calculaterisk-weightedassetamountbasedonpro-ratabasisbasedonpermittedmaximumallocationbysector.Risk-weightingover100%ispossible.
Risks to Banks Regarding Hybrid Separate AccountsInthepast,manyvendorspromotedHybridSeparateAccountproducts,primarilyduetothelowerriskweightingreflectedbymanyoftheseprograms,whiletechnicallyenjoyingtheGeneralAccountbenefits(i.e.,aminimuminterestcreditingrate).ThisaggressiveapproachtodeterminingriskweightingisnowcalledintojeopardyundertheNewBaselIIICapitalRules.
It is Executive Benefits Network’s opinion that relying on justification for a lower risk weighting for a Hybrid Separate Account product based on the fact that there is a Separate Account option within the investment portfolio is not grounds under the New Basel III Capital Rules for continuing this lower risk weighting. The result is that many banks who have structured their overall risk weighting calculations assuming a 20% risk weighting for their BOLI asset may find an unwelcome adjustment going forward.
Intoday’slowerinterestrateenvironments,GeneralAccountproductshavetypicallyoutperformedSeparateAccountproductsandalsocarryaguaranteedminimumcreditingrate.ItmaybeprudentforbankstorelyonGeneralAccountproducts,asthemorepredictable,reliableBOLIinvestmentoptionversusthemoreaggressiveHybridandSeparateAccountproducts.
20 COMMUNITY BANKER UPDATE | JANUARY 2015
December Survey Results at a Glance:• TheRuralMainstreetIndexwasunchangedfromNovember’s
weakgrowthreading.• Farmlandpricessankforthe13thstraightmonth.• Almosttwo-thirdsofbankersareopposedtoFannieMae’s
planstoreducedownpaymentrequirementsonhousingpurchases.
• Farm-equipmentsalesdeclinedforthe16thconsecutivemonth.
• Almostone-thirdofbankCEOsexpectholidayretailsalesintheirareatobeunchangedfrom2013levels.
OMAHA,Neb.–TheRuralMainstreetIndexforDecemberwasunchangedfromNovember’sreadingaccordingtothemonthlysurveyofbankCEOsinruralareasofa10-stateregiondependentonagricultureand/orenergy.
Overall:TheRuralMainstreetIndex(RMI),whichrangesbetween0and100,forDecemberwas50.0,unchangedfromNovember,butupfrom43.4inOctober.
“Lowerenergyandgrainpricescontinuetorestraingrowthintheruraleconomy,”saidErnieGoss,Ph.D.,JackA.MacAllisterChairinRegionalEconomicsatCreightonUniversity’sHeiderCollegeofBusiness.
Farming and Ranching:Thefarmlandandranchland-priceindexforDecemberadvancedtoaweak38.6fromNovember’s30.0.“Muchweakercroppricescontinuetotaketheairoutofthebubbleinagriculturallandprices.Thisisthe13thstraightmonththattheindexhasmovedbelowgrowthneutral,”saidGoss.
TheDecemberfarm-equipmentsalesindexexpandedto23.7from18.6inNovember.Theindexhasbeenbelowgrowthneutralfor17straightmonths.“Thismonth,weaskedbankershowtheyexpectedfarmerstoadjusttheirexpensestothelikelihoodoflowerrevenues,”saidGoss.“Approximately63.6percentexpectfarmerstoputoffequipmentpurchasesevenmoreduetopredictedrevenuedecline.”
Inanticipationoflowerfarmrevenues,almostoneinfivebankers,or18.2percent,anticipatesthatfarmerswillcutcashrents,7.3percentexpectfarmerstowaitforbetterseeddeals,and3.6percentand7.3predictlessfertilizerandchemicalusage.
HowardSchaan,CEOofFirstStateBankofHarvey,N.D.,said,“Wehaveseensometemporarydecreasesinrentsbasedonlowcommoditypricing.”
Banking:TheDecemberloan-volumeindexsoaredto76.7fromNovember’ssolid56.2.Thechecking-depositindexexpandedto62.1fromNovember’s57.9,whiletheindexforcertificatesofdepositandothersavingsinstrumentsgrewtoaweak44.0fromlastmonth’s37.7.
Hiring:Despiteweakercroppricesandpullbacksfrombusinesseswithclosetiestoagricultureandenergy,ruralMainstreetbusinessescontinuetohireatasolidpace.TheDecemberhiringindexslippedtoasolid55.2fromNovember’sveryhealthy61.9.“BusinessesonRuralMainstreetcontinuetoaddjobsatahealthypaceevenwiththeweakeragricultureconditionsandlowerenergyprices.Year-over-yearjobgrowthfortheregionisnowapproximately1.8percent,whichiswellabovethehistoricaverage,”saidGoss.
Confidence:Theconfidenceindex,whichreflectsexpectationsfortheeconomysixmonthsout,sankto42.5from44.7inNovember.“MuchweakercroppricesanddeclinesinenergypriceshavenegativelyaffectedtheoutlookofbankCEOsoverthelastseveralmonths,”reportedGoss.
LarryRogers,executivevice-presidentofFirstBankofUticainUtica,Neb.,said,“(I)didnotexpectcroppricestodropthisfarandwereallyarenotsurewhatthesix-monthtoone-yeareffectwillbe.”
Home and Retail Sales:TheDecemberhome-salesindexgrewtoatepid51.7fromNovember’s51.0.TheDecemberretail-salesindexreboundedto55.3from50.0inNovember.
Thismonth,FannieMaeandFreddieMacannouncedplanstoallowfirst-timehomebuyerstopayadownpaymentaslittleas3percentonahomepurchase.Manybankersexpressedconcernsregardingsuchaprogram,includingJeffBonnett,presidentatHavanaNationalBankinHavana,Ill.,whosaid,“Istillhaveabadtasteinmymouthregarding‘subprimelending’thathelpedcreatethe‘GreatRecession’thatwearejustnowgettingoutof.”
Bankerswereaskedtoassessthe2014holidayretail-buyingseasonintheirarea.“Approximately5.2percentexpectthestrongestbuyingseasonsincetherecession,60.3percentpredictthatthegainfor2014willbethesameasthegainfor2013,and32.8percentexpectlittleornoincreasefrom2013buying.Theremaining1.7percentofbankersanticipatesthe
(Rural Mainstreet continued on next page)
Main Street Economic Survey
C r e i g h t o nU N I V E R S I T Y
Rural Mainstreet Index Remains Weak for December:One-Third of Bank CEOs Expect Flat Holiday Sales
Ernie Goss
COMMUNITY BANKER UPDATE | JANUARY 2015 21
(Rural Mainstreet continued from previous page)
weakestbuyingseasonsincethebeginningoftherecession,”saidGoss.
AccordingtoPeteHaddelandCEOoftheFirstNationalBankinMahnomen,Minn.,“Weareseeingincreasedspendingfortheholidaysbecauseofthereductioningasolineprices.”
Eachmonth,communitybankpresidentsandCEOsinnonurban,agriculturallyandenergy-dependentportionsofa10-stateareaaresurveyedregardingcurrenteconomicconditionsintheircommunitiesandtheirprojectedeconomicoutlookssixmonthsdowntheroad.BankersfromColorado,Illinois,Iowa,Kansas,Minnesota,Missouri,Nebraska,NorthDakota,SouthDakotaandWyomingareincluded.ThesurveyissupportedbyagrantfromSecurityStateBankinAnsley,Neb.
Thissurveyrepresentsanearlysnapshotoftheeconomyofrural,agriculturallyandenergy-dependentportionsofthenation.TheRuralMainstreetIndex(RMI)isauniqueindexcovering10regionalstates,focusingonapproximately200ruralcommunitieswithanaveragepopulationof1,300.Itgivesthemostcurrent
real-timeanalysisoftheruraleconomy.GossandBillMcQuillan,formerchairmanoftheIndependentCommunityBanksofAmerica,createdthemonthlyeconomicsurveyin2005.
Colorado:Colorado’sRuralMainstreetIndex(RMI)remainedabovethe50.0thresholdforthe10thstraightmonth,thoughtheindexdippedto52.5fromNovember’s53.8.Thefarmlandandranchland-priceroseto48.6fromNovember’s46.5.Colorado’shiringindexforDecemberdeclinedtoahealthy62.3from72.5inNovember.ColoradoRuralMainstreetjobgrowthforthepast12monthswas3.9percent.
Illinois:Thestate’sRMIslippedto49.4fromNovember’s49.7.TheIllinoisfarmland-priceindexexpandedto36.9from26.2inNovember.Thenew-hiringindexfellto52.9from56.3inNovember.IllinoisRuralMainstreetjobgrowthforthepast12monthswas0.8percent.
Iowa:TheDecemberRMIforIowadecreasedto48.6fromNovember’s49.8.Thestate’sfarmland-priceindexforDecemberexpandedto35.1from30.2inNovember.Iowa’snew-hiringindex
(Rural Mainstreet continued on next page)
Table 2: The Rural Mainstreet Economy, December 2014Percentage of bankers reporting
Very supportive Supportive Indifferent Opposed Very opposed
Fannie Mae and Freddie Mac announced plans to allow first-time home owners to obtain a mortgage while putting down just 3 percent of the price of the home. Are you:
3.5% 22.8% 8.8% 43.9% 21.1%
Waiting for better seed
deals
Putting off farm equipment purchases
Cutting cash rents
Less fertilizer& chemicals Other
What are the top ways that crop farmers are reducing input costs for the 2015 crop year? 7.3% 63.6% 18.2% 3.6% 7.3%
Strongest since the beginning of recession
Same gain as 2012-13
Weakest since beginning of
recessionLittle or no
Change from 2013
For retailers in your area, how is the holiday buying season stacking up? 5.2% 60.3% 1.7% 32.8%
Tables 1 and 2 summarize survey findingsNext month’s survey results will be released on the third Thursday of the month, Jan. 15.
Table 1: Rural Mainstreet Economy Last Two Months and One Year Ago: (index > 50 indicates expansion)
December 2013
November 2014
December 2014
Area economic index 56.1 50.0 50.0Loan volume 66.7 56.2 76.7Checking deposits 66.0 57.9 62.1
Certificates of deposit and savings instruments 37.2 37.5 44.0Farmland prices 47.0 30.0 38.6Farm equipment sales 44.3 18.6 23.7Home sales 53.1 51.0 51.7Hiring 56.9 61.9 55.2Retail business 54.7 50.0 55.3Confidence index (area economy six months out) 47.0 44.7 42.5
22 COMMUNITY BANKER UPDATE | JANUARY 2015
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(Rural Mainstreet continued from previous page)
forDecemberslumpedto51.5fromNovember’s59.5.IowaRuralMainstreetjobgrowthforthepast12monthswas1.0percent.
Kansas:TheKansasRMIforDecemberclimbedto50.6fromNovember’s50.2.Thestate’sfarmland-priceindexincreasedto40.6fromNovember’s34.6.Thenew-hiringindexforKansassankto55.9from63.0inNovember.KansasRuralMainstreetjobgrowthforthepast12monthswas2.0percent.
Minnesota:TheDecemberRMIforMinnesotaadvancedto51.0fromNovember’s49.7.Minnesota’sfarmland-priceindexgrewto41.6from36.8inNovember.Thenew-hiringindexforthestatefelltoasolid56.7fromNovember’s75.7.MinnesotaRuralMainstreetjobgrowthforthepast12monthswas2.4percent.
Missouri:TheDecemberRMIforMissourideclinedto54.3fromNovember’s56.2.Thefarmland-priceindexexpandedto63.3fromNovember’s50.5.Missouri’snew-hiringindexdecreased74.1from75.7inNovember.MissouriRuralMainstreetjobgrowthforthepast12monthswas5.7percent.
Nebraska:TheNebraskaRMIforDecemberadvancedto48.8from48.3inNovember.Thestate’sfarmland-priceindex
expandedto32.9from21.5inNovember.Nebraska’snew-hiringindexsankto49.7fromNovember’s52.5.AccordingtoJonSchmaderer,CEOofTricountyBankinStuart,“Higherlivestockpricesarestrengtheningtheeconomyinnorth-centralNebraska.”NebraskaRuralMainstreetjobgrowthforthepast12monthswas0.2percent.
North Dakota:TheNorthDakotaRMIforDecemberslippedto56.7fromNovember’s57.0.Thefarmland-priceindexclimbedto71.7from61.5inNovember.NorthDakota’snew-hiringindexdippedto80.8fromNovember’s84.5.NorthDakotaRuralMainstreetjobgrowthforthepast12monthswas8.1percent.
South Dakota:TheDecemberRMIforSouthDakotaroseto49.6fromNovember’s49.0.Thefarmland-priceindexforDecemberincreasedto37.6fromlastmonth’s31.4.SouthDakota’snew-hiringindexslumpedto53.5from60.4inNovember.SouthDakotaRuralMainstreetjobgrowthforthepast12monthswas1.0percent.
Wyoming:TheDecemberRMIforWyomingslippedto50.5fromNovember’s51.0.TheDecemberfarmlandandranchland-priceindexgrewto42.8fromNovember’s36.2.Wyoming’snew-hiringindexsankto57.7fromNovember’s64.3.WyomingRuralMainstreetjobgrowthforthepast12monthswas1.9percent.
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