virginia banker march/april 2011
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In ThIs Issue BOLI RIsk ManageMent | OptIMIzIng effIcIency | spRIng eteRnaL
BankingirginiaV March/April 2011
Virginia Bankers association — serVing Virginia’s Financial community since 1893
Green ShootsGreen Shootsof economIc
Growththe
MARKET TO 23,300 CPAS and all of the CPA firms in Virginia and New Jersey.
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2010-2011 OFFICERS AND DIRECTORS OF THEVIRGINIA BANKERS ASSOCIATION
Charles H. Majors, Chairman, Danville
William Couper, Chairman-Elect, Washington, D.C.
H. Watts Steger, III, Immediate Past Chairman, Buchanan
O.R. Barham, Jr., StellarOne Corporation
Katherine E. Busser, Capital One Financial Corporation
Charles K. Collum, Jr., Burke & Herbert Bank & Trust Co.
Larry G. Dillon, C&F BankRandy K. Ferrell,
The Fauquier BankPete Jones,
Wachovia/Wells FargoMonte L. Layman,
The Page Valley BankGail Letts, SunTrust BankSamuel L. Neese,
Highlands Union BankSusan Ralston, Bank @LantecDavid P. Summers,
Virginia Heritage BankJeffrey M. Szyperski,
Chesapeake BankDaniel G. Waetjen, BB&TRichard T. Wheeler, Jr., Franklin
Federal Savings Bank
statements of fact and opinion are made on the responsibility of the authors alone and do not implyan opinion or endorsement on the part of the officers or members of VBa.
AT-LARGE MEMBERSBenefits Corporation Chair
Richard M. Liles, McKenneyManagement Services Inc. Chair
Frank Bell, III, MidlothianGovernment Relations
Committee ChairChristopher W. Bergstrom, McLean
VBA Education Foundation ChairJ. Peter Clements, Carson
EDITORIAL & EXECUTIVE OFFICES4490 Cox Road Glen Allen, VA 23060804-643-7469 Fax 804-643-6308www.vabankers.org
Bruce T. WhitehurstPresident and CEOVirginia Bankers Association
Chandler DeweyCommunications & Marketing ManagerVirginia Bankers Association
SUBSCRIPTIONSIf you would like to subscribe to Virginia Banking, contact Chandler Dewey at cdewey@vabankers.org. Virginia Banking is published bi-monthly. subscription price is $25 per year and $45 for two years for nonmembers. copyright 2011.
featuresOptimizing the Efficiency Ratio: factors you can control toIncrease profitabilitythe key to growing profitability lies in strategic planning. the efficiency ratio can help a community bank develop and refine its growth strategies.
More Than 350 Bankers Visit General Assembly for Banker Day 2011On Jan. 13, members of the VBa met with state representatives.
4 calendar of events 5 Insights 7 Worth noting16 Washington Update17 Legal Line
18 Legislative Update19 Welcome new associate Members20 compliance corner 22 Bankers on the Move
send us your thoughts or ideas on Virginia Banking!
please e-mail chandler Dewey at cdewey@vabankers.org. Has your information changed?
please e-mail kellee edelin at kedelin@vabankers.org with your new contact information.
8
12
BankingirginiaVVirginia Bankers association — serVing Virginia’s Financial community since 1893
10
photo
in every issue
Demystifying the Purchase and Risk Management of BOLInine steps to analyze and manage bank-owned life insurance policies.
DIRECTORSTimothy M. Warren Chairman Timothy M. Warren Jr. CEO & Publisher David B. Lovins President Vincent M. Valvo Group Publisher & Editor in Chief
FINANCE & ADMINISTRATIONJeffrey E. Lewis Controller / Director of Operations
EDITORIAL Christina P. O’Neill Custom Publications Editor Cassidy Norton Murphy Associate Editor
ADVERTISINGGeorge Chateauneuf Publishing Division Sales Manager Richard Ofsthun Advertising Sales ManagerCara Inocencio Advertising Sales ManagerEmily Torres Advertising, Marketing & Events Coordinator
DESIGN & PRODUCTIONJohn Bottini Creative Director Scott Ellison Senior Graphic DesignerEllie Aliabadi Graphic Designer
©2011 the Warren group Inc. all rights reserved. the Warren group is a trademark of the Warren group Inc. no part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. advertising, editorial and production inquiries should be directed to: the Warren group, 280 summer street, Boston, Ma 02210. call 800-356-8805.
PUBLISHED BY
280 Summer Street, Boston, MA 02210Phone: 617-428-5100 Fax: 617-428-5118 www.thewarrengroup.com
March/April 2011 | Virginia Banking 3
march/April 2011
instructor-leD seminars
Security Workshop, CharlottesvilleApril 12-13
Advanced Commercial Lending 2011, Glen Allen (Richmond)April 18-19
Problem Loan Workout and Business Development During Challenging Times, Glen Allen (Richmond)April 26
HR and Benefits Symposium, Charlottesville May 1-3
Bank Call Officer Training, Glen Allen (Richmond)May 10
Introduction to Lending Compliance Seminar, SandstonMay 10
Mortgage Update – B to Z Seminar, SandstonMay 11
Mastering HMDA Seminar, SandstonMay 12
Operations and Technology Workshop Stonewall Jackson, StauntonMay 17-18
BSA 2 Day School, Glen Allen (Richmond)May 18-19
instructor-leD courses
PRInCIPLeS Of BAnkInGAPRIL 18
COnSUMeR LenDInGAPRIL 18
GeneRAL ACCOUnTInGAPRIL 18
GeneRAL ACCOUnTInGMAy 9
PRInCIPLeS Of BAnkInGMAy 16
COnSUMeR LenDInGMAy 16
eCOnOMICS fOR BAnkeRSMAy 16
WeBinars
CURRenT TRenDS In AGRICULTURAL LenDInGApril 12
THe BASICS On HSASApril 13
OPTIMIZInG PRICInG DeCISIOnS In ALCOApril 14
PROACTIve ReLATIOnSHIP DeveLOPMenTApril 18
A PRACTICAL GUIDe TO COnSUMeR LenDInGApril 26
GLOBAL CASH fLOWApril 26
Live event Online Seminar Webinar
Information and online registration is available at the vBA website. Please either go to www.vabankers.org or use this form to check the box next to the program you want information about, then fax the form to the vBA office at 804-643-6308. The vBA will send you information about the program as soon as it is available, usually eight weeks before the program.
name_________________________________________________ Bank/firm___________________________________________
Address_____________________________________________________________________________________________________
City________________________________________________________________ State/Zip______________________________
Phone___________________________ fax_________________________ e-mail___________________________________
For more information go to www.vabankers.org.
4 Virginia Banking | March/April 2011 www.vabankers.org
Calendar of Events
Those who know me well know that I
am not a fan of cold weather. Those
cold days and early dark evenings just
don’t appeal to me, so much so that I actually take
note of the extra few minutes of daylight every
day as we move through January and February.
When we have warmer days – currently the case
as I write this column – it feels like I have stolen a
day or two from Old Man Winter. Give me spring,
summer and fall, but you can have winter, snow
and all.
In many respects, our industry and our entire
nation have been through a long and rough winter
since the fall of 2008. The housing market down-
turn has had a chilling effect on our economy as
it drove us from financial crisis to recession. The
unemployment rate and the high level of foreclo-
sures have added to our challenges. The banking
industry has been vilified, with broad generaliza-
tions from the media and some political leaders
that completely confused traditional banking
from Wall Street and from the shadow banking
system. We have witnessed a huge overreaction
to this financial winter in the form of costly new
compliance burdens that will work against con-
sumer benefit; we will have to work even harder
to reach a more appropriate balance. We have seen
regulators plow through our industry even when
there is no snow to be moved. We have had plenty
of darkness and not much daylight.
Fortunately, winters do not last forever, nor
do economic downturns in the United States, no
matter how severe. We are beginning to see signs
of spring and we are becoming more optimistic
about what lies ahead. Recent economic indicators
are encouraging and economists are talking more
and more about the “green shoots” that indicate
economic growth. As we see signs of spring, our
moods lift and we begin to see potential in ways
that were hard to imagine during those winter
months.
As often happens in early spring, we will have
warm days and cold days. Sometimes we may feel
like we are taking two steps forward and one step
back. But overall, we will be making progress as
we head to more sustainable good times.
To be sure, we have many challenges and no
small amount of change in store for our industry.
The recent financial winter will be throwing new
compliance burdens our way for some time to
come. It will be more expensive to operate a bank,
and that will chal-
lenge us as we
adapt and move
forward. The
VBA will be very
focused on help-
ing our member
banks stay on top
of emerging regu-
latory and legislative issues, and we will be ask-
ing bankers to continue your excellent grassroots
communications that have become so important to
our industry’s future. We also want to hear from
you whenever you see ways that the VBA can be
supportive of your bank.
Good riddance winter and welcome spring!
Bruce Whitehurst
President and CeO,
virginia Bankers Association
Bruce Whitehurst can be reached by e-mail at bwhitehurst@vabankers.org.
signs of spring
March/April 2011 | Virginia Banking 5 www.vabankers.org
”“ fortunately, winters do not last forever, nor do economic downturns in the United States, no matter how severe. We are beginning to see signs of spring and we are becoming more optimistic about what lies ahead.
Insights
VBA Benefits Corporation
Through this program, you can:
Improve your employees’ health, Increase productivity, Reduce future healthcare costs, Reduce absenteeism and turnover, Increase employee morale, And enhance the bank’s image
More Than Just a Medical PlanMore than just medical benefits, the VBA Benefits Corporation brings you programs that address the TOTAL HEALTH of your employees.
We understand that, as a bank operating in your community, you want to be seen as the employer of choice. Through the health promotion and wellness programs offered by VBA Benefits, you can achieve this status by participating in Banking on Wellness.
Banking on Wellness also benefits your bank by offering financial incentives from the Benefits Corporation for providing programs promoting healthier lifestyles.
Qualifying programs include:
Future Moms Health Risk Assessments Weight Management Bank Healthy Challenges Walking Competitions Health Screenings
In 2011, banks who complete a Banking on Wellness scorecard will be refunded one month’s medical administration fee.
Bringing You All the BestFor several years, all preventive care screenings have been covered in the VBA medical plans according to Anthem’s Preventive Health Guidelines, long before the Healthcare Reform Mandate. Several years ago, preventative vision screening exams were added to all the medical plans to encourage employees to keep their eyes healthy too. More recently, the Benefits Corporation added the Employee Assistance Program to the benefits that all banks receive if they have medical coverage through the VBA. This program provides your employees with resources for dealing with life’s day-to-day issues.
At VBA Benefits, we’re attuned to your objectives and committed to bringing you ALL THE BEST!
Roy Allison (right), VBA Benefits Corporation, delivers the 2010 grand prize Banking on Wellness check to Farmers & Merchants Bank. Accepting the check (pictured from left) are Sharrie Harrison, Human Resources, Ellen Branner, Sr. Vice President-Human Resources, and Dean Withers, CEO, of Farmers & Merchants Bank. The VBA Benefits Corporation again distributed over $20,000 to banks participating in the Banking on Wellness program in 2010.
March/April 2011 | Virginia Banking 7 www.vabankers.org
BankPac achieVes annual FunDraising recorD
The ABA National BankPAC Committee has reported another
impressive year for BankPac, which reached a year-end total of
$1.8 million! A huge majority of the state associations put forth
a tremendous effort to achieve or exceed their fundraising goals.
Thirty state associations raised 100 percent or more of their goal
in 2010, with Virginia reaching 205 percent of its goal for the
second year in a row. Virginia was listed as reaching the highest
percentage of its goal, and it was also a “Top Dollar State” after
it reached over $100,000.
community Bankers’ Bank anD cBB Financial corP. name neW Directors
The board of directors of CBB Financial Corp. has elected Ellis
L. Gutshall and Christopher J. Honenberger as members. Guts-
hall is president and CEO of Valley Bank in Roanoke, a position
he has held since in 1996. Honenberger is president and CEO of
ClearPoint Financial Solutions, Inc., a national nonprofit credit
counseling organization headquartered in Richmond. He is a
member of the Virginia Bar Association and has practiced law
in Orange and Charlottesville and was president and CEO of
Second Bank & Trust in Culpeper from 2000 to 2007. Both have
previously served on the board of Community Bankers’ Bank
and as chairman of the board of the bank.
Gutshall will also serve as a director of Community Bankers’
Bank, while Honenberger will serve as an advisory director.
icBa announces nominees For 2011-2012 executiVe committee
Salvatore Marranca, ICBA chairman-elect and president and
CEO of Cattaraugus County Bank, Little Valley, New York, be-
came chairman at the 2011 ICBA National Convention and Tech-
world, held March 20-24 in San Diego. Jeffrey L. Gerhart, chair-
man of Bank of Newman Grove, Newman Grove, Nebraska, was
nominated as ICBA chairman-elect, while William A. Loving
Jr., president and CEO of Pendleton Community Bank, Frank-
lin, West Virginia, was nominated to become ICBA vice chair-
man. James D. MacPhee, CEO of Kalamazoo County State Bank,
Schoolcraft, Michigan, became ICBA immediate past chairman.
A special congratulations to Bill Loving of Pendleton Commu-
nity Bank, a VBA member bank, on his nomination as ICBA vice
chairman.
three generations oF Whitehursts come together at the general assemBly
During the 2011 General Assembly Session, VBA President
and CEO Bruce Whitehurst’s son, Carson, served as a page for
the Virginia House of Delegates. Joining Carson on the floor on
February 3 were Bruce and his father, Rev. Walter Whitehurst,
who delivered the morning prayer to the House of Delegates.
carDinal Bank names neW Director oF human resources
The board of directors of Cardinal Bank recently announced
the election of Cheryl L. Steinbacher as senior vice president
and director of human resources. In this position, Steinbacher
will lead initiatives in human resource management within the
Cardinal network.
Prior to joining Cardinal, Steinbacher spent six years at Inte-
gra Bank in Indiana, where she held roles in human resources
and leadership development. She has a bachelor’s degree from
the University of Tennessee, as well as a master’s degree from
Vanderbilt University, both with concentrations in Human Re-
source Development and Educational Leadership. Over the past
five years, Steinbacher has actively participated in numerous
industry-wide leadership initiatives, advisory councils and non-
profit community boards.
NotingWorth
Higher performing commu-
nity banks know that the key
to growing profitably and
building franchise value is to control
what they can and strategically man-
age against market factors they can-
not. The efficiency ratio has become a
prime focus as banks strive to offset
the additional expense of loan loss pro-
visions to cover asset quality issues.
The efficiency ratio is comprised of non-
interest expense, noninterest income and
net interest margin. However, let’s focus
on expense management and fee income.
Community banks have the greatest con-
trol over these variables, which are criti-
cal to maintaining or optimizing overall
earnings performance.
To begin, let’s focus on three of the fol-
lowing categories – personnel, occupancy
and other non-interest expenses.
Personnel expenses – The average
personnel expense runs about 54 percent
of non-interest expense for banks and
thrifts in the United States. Personnel
decisions are amongst the most difficult
to make and many banks put off these
decisions although they can have the
greatest impact on the bottom line.
Examine hiring and salary increases
(freezes may be necessary for cutting
costs and even saving jobs) and items
such as 401(k) discretionary/matching,
health benefits and training/recruiting
and flex hours. Adjustments in these
areas can immediately improve your
bank’s efficiency.
Higher-performing banks also pay
close attention to how they staff their
branches in both thriving and turbulent
markets. When is the last time you took
a hard look at your bank’s staffing per
branch? High performers typically hire
fewer employees who take on multiple
responsibilities, and compensate them
well. High performers also do an excel-
lent job of setting forth achievable incen-
tives that are aligned with shareholder
objectives, especially those actions that
generate revenue to drive better individ-
ual and overall bank performance.
Occupancy expenses – Branch profit-
ability plays a huge role in overall fran-
chise performance, yet banks don’t often
focus on this factor. Occupancy expenses
represent about 14 percent of noninter-
est expense, so evaluate them as with
personnel expenses on an annual basis –
small adjustments here can make a big
impact. One simple metric to analyze is
revenues generated per branch office.
U.S. average is about $2.1 million, but
success will be determined based upon
your specific operating strategy. Often,
banks do not generate enough revenue to
support even the fixed costs of a branch.
With continued pressure on deposit ser-
vices charge fee income, it will become
increasingly difficult to justify underper-
forming branches.
For new locations, consider the aver-
age square feet per branch (ask yourself,
how much do you really need?); for exist-
ing leased locations, can and should you
renegotiate leases (after all, it is a buyer’s
market right now); and if sale/leaseback
is an option that could provide your bank
with short-term benefits. Also examine
where technology could reduce occupan-
cy costs. For example, Voice over Internet
Protocol technology or remote branch
capture could potentially save thousands
of dollars in communications costs.
Other non-interest expenses – It’s vi-
tal to review every vendor contract care-
fully and categorize each by need. Can
you rationalize each on an annual basis?
Consider economies of scale and vendor
consolidation.
FDIC premiums, an expense you can’t
control, are likely to go up. Develop a
strategy to make up those costs through
fee adjustments or by lowering your
bank’s cost of funds. Another way to
keep expenses in check is to employ tech-
nologies to lower payment costs. Lastly,
take full advantage of your association
memberships and their benefits; you may
be able to leverage association programs
8 Virginia Banking | March/April 2011 www.vabankers.org
optimizing the efficiency Ratio: factors You can control to Increase Profitability
By kevin tweddle
that reduce the costs of things like sup-
plies, subscriptions and insurance.
INCREASE NONINTEREST INCOME
Most banks have already cut expenses
significantly; they have no more to gain
right now and expense reduction is not
sustainable for the long term. The other
important side of the equation is fee
income, which offers banks of all sizes the
greatest opportunity to improve efficiency,
but the current climate necessitates that
you think of new and creative ways to
generate it. Following are things that the
high performing banks are doing:
Deposit service charge fees. Now that
many banks have completed the Reg E
opt-in process, they will find that that
even in the most optimistic cases they will
have lost about 20 perecent of their over-
draft/NSF fee income. Banks mus come
up with alternatives. We recommend a
full review of all customer charges, fo-
cusing on those that incent the proper
customer behavior and don’t penalize
your better customers. Examples include
charging higher foreign ATM fees, charg-
ing for incoming wires, raising limits on
reward programs (i.e. debit card usage)
and annual card fees.
Remote capture/cash management.
For commercial-oriented institutions in
metro areas, remote deposit capture is a
“must-have” product. It reduces courier
expenses and is a great way to bring in
non-interest bearing demand deposit ac-
counts. High performers grow small busi-
ness/commercial deposits by packaging
commercial and retail accounts, and by
tying loans and other products to deposits
(and vice versa), to offer preferential rates.
It’s critical to know the competition and
their small business offerings so that your
bank can clearly differentiate itself.
Wealth management. It’s important to
consider whether there is sufficient de-
mand for wealth management products
(primarily comprised of trust, brokerage
and insurance) in your bank’s particular
market to make this effort worthwhile. Trans-
action activity volume must be solid and
customers’ current price sensitivities must
be considered. Establishing clear bench-
marks, understanding the demographics of
your market and price analysis through peer
analysis are factors critical to the success of a
wealth management program.
Every community bank’s efficiency ra-
tio can be optimized by gaining greater
control of expenses and by taking steps to
increase or add revenue streams. How-
ever, no all-encompassing target ratio ap-
plies to all banks. Each bank’s efficiency
ratio reflects the specific kind of business
it’s in, so the strength of your bank’s ratio
will be dependent upon its specific oper-
ating strategy.
Kevin Tweddle is executive vice president
of sales and operations for Bank Intelligence
Solutions from Fiserv. Reach him at kevin.
tweddle@fiserv.com.
March/April 2011 | Virginia Banking 9 www.vabankers.org
Demystifying the Purchase and Risk Management of BOLI
Attendees at bank regulatory and
professional association meetings often
ask how to take the mystery out of the
purchase and risk management of BOLI.
The following simple “Nine-Step Due
Diligence Process” is often the answer.
It was first presented at the OCC’s Na-
tional Capital Markets Conference in De-
cember 2009.
The nine steps should be viewed from
the perspective that the purchase and risk
management of BOLI is nothing more
than making a long-term, variable inter-
est rate loan to an insurance company.
(The Interagency Guidelines governing
the purchase and risk management of
BOLI are found in OCC Bulletin 2004-56
and FDIC FIL-127-2004; hereinafter, the
guidelines.)
First, a little background about BOLI
is warranted. Out of a universe of 1,000-
plus life insurance companies in the U.S.,
only about 40 carriers have ever had a
true, single premium BOLI product. Of
these, probably about half are still active
in the BOLI market.
There are two basic types of BOLI
products: whole life and universal life.
This article, however, should not be per-
ceived as promoting any particular in-
surance carrier or type of BOLI product.
A whole life product is the more tradi-
tional form of life insurance. It is a bun-
dled product and is actuarially designed
such that based upon a set premium
payment the product is guaranteed to
provide permanent life insurance protec-
tion. This form of guarantee is not found
in a universal life product.
The great preponderance of BOLI is
universal life. Universal life is an “unbundled
product.” Simply put, it should be thought
of as a life insurance product made up of
two buckets. One bucket, the “cash bucket,”
represents the cash value and the other
bucket, the “death benefit bucket,” the death
benefit. As long as there is sufficient cash in
the cash bucket through premium payments
and investment earnings to cover the cost
of the death benefit in the death benefit
bucket, the policy owner has life insurance
protection.
A great majority of the banks in the U.s. have either
bought or are considering the purchase of bank-
owned life insurance (BOLI) to address employee benefit
costs and/or offset the costs of executive or director benefit
plans. It’s likely that the use of BOLI will continue to grow
with the anticipated rise in healthcare costs under the new
healthcare laws.
By John h. milne, JD, llm and gerald l. martin, cPammB consulting, llc, richmond
10 Virginia Banking | March/April 2011 www.vabankers.org
Universal life can be further broken
down into three subcategories: general
account, separate account, and hybrid.
The reference to “general account”
simply means the cash in the cash bucket
is held and managed in the carrier’s
general portfolio and the crediting rate
is dependent on the carrier’s declared
crediting rate.
A separate account product is a
universal life product in which the assets
are placed in a fund that is separate from
the carrier’s general account and are
separately managed.
The hybrid product has features of both
separate account and general account and
is promoted as having potentially lower
risk weighting features; a claim that
banks should independently validate by
conducting their own analysis.
Due to space limitations, this article
will necessarily concentrate only on
whole life and general account univer-
sal life BOLI products, which constitute
most of the BOLI products found in the
market today.
The nine-step due diligence process
is designed to help minimize the risk
that a bank will make some missteps
in building and/or managing its BOLI
portfolio:
1. THE BANK SHOULD REVIEw THE INSURANCE CARRIER’S RATINGS FROM BEST, S&P, FITCH, AND MOODY’S.
The guidelines state that “carrier selec-
tion is one of the most critical decisions
in a BOLI purchase [and] credit quality
is a key variable.” The ratings reflect the
carrier’s claims paying ability, which is
the bank’s ultimate investment risk. The
bank should also review the carrier’s
past financial ratings for trends.
2. IS THE CARRIER A STOCK OR A MUTUAL COMPANY?
According to Moody’s 2005 Report
on Life Insurers, “mutual companies
are relatively more concerned with
solvency and financial strength
compared to the growth and
profitability objectives that are typically
the focus of stockholder-owned
insurers.” Moody’s 2009 Report said
that “the U.S. mutual life insurance
companies have more successfully
protected and maintained their credit
worthiness than their stockholder-
owned rivals.” All things being equal, a
mutual company may be preferred.
3. HOw EFFICIENTLY DOES THE CARRIER OPERATE ITS BUSINESS?
The bank should review the carrier’s
operating fundamentals; i.e., mortality
and expenses, lapse ratios, and invest-
ment returns. A comparison should be
made to other BOLI carriers. The com-
parison will show how efficiently the
carrier operates, which may indicate
how one BOLI product might perform
long-term against another.
March/April 2011 | Virginia Banking 11 www.vabankers.org
Continued on page 14
It’s only a sampling, but look what’s in the compliance services package TCA provides VBA member banks:
• Hands-on help, with scheduled on-site audits.• Timely, accurate information about compliance issues and trends.• Advice about how to meet federal compliance requirements.• An e-newsletter heads-up when the rules change.• Access to the TCA compliance professionals, the people who make TCA the
most respected source of compliance information and assistance in banking.
Whether your need is BSA/AML, IT vulnerability scans and web site security reviews, or training that keeps your staff — and directors — up-to-date, TCA is your Compliance Advantage.
Call us . . . today . . . to learn more. 1-800-934 -7347.
Thomas Compliance Associates, Inc.2846 N. Mildred Avenue, Suite 150Chicago, Illinois 606571-800-934-7347
www.tcaregs.com
12 Virginia Banking | March/April 2011 www.vabankers.org
1 Over 350 bankers came out to the Capitol this year for
Banker Day.
2 VBA Chairman Charley Majors introduces keynote speaker
Governor Bob McDonnell at the Banker Day luncheon.
3 Senator Edd Houck (D) with VBA President and CEO Bruce
Whitehurst.
4 Speaker of the House Bill Howell (R) with Billy Beale.
5 Delegate Ward Armstrong (D), second from left, outside the
General Assembly Building with bankers.
6 Senator Richard Saslaw (D), fourth from left, participated in
Banker Day.
7 Delegate Glenn Oder (R), middle, on Banker Day.
8 Delegate Bill Janis (fourth from left) meets with bankers from
Capital One.
9 Governor Bob McDonnell addresses the bankers at lunch at
the SunTrust Building.
10 Delegate Todd Gilbert (R), third from right, meets with some
of the participants.
11 Senator Mark Obenshain (R), third from left, with a group of
attendees.
12 30 members of the newly created VBA Leadership Division
participated in Banker Day this year.
13 Senator Richard Saslaw (D), second from right, with bankers
from his district.
14 Bruce Whitehurst, Brandon Atkins, Bill Via, Delegate Danny
Marshall (R), Jeff Haley and Charley Majors.
On Jan. 13, speaker Bill Howell welcomed the over 350 bankers who attended VBa Banker Day 2011, all of whom were proudly sporting buttons reading “proud to be a Virginia Banker.” this was the largest crowd that has ever participated in this event. the meetings on Banker Day provide the bankers with an opportunity to discuss upcoming legislation that may impact the banking industry and an opportunity for the legislators to ask questions of the bankers. a large crowd on Banker Day makes a real difference. thank you to those bankers who contributed to a successful general assembly session – which started out with their participation on Banker Day 2011.
1
2
3
4 8
7
6
5
More Than 350 Bankers Visit General Assembly for
2011BankerDay
14 Virginia Banking | March/April 2011 www.vabankers.org
4. EXAMINE THE BOLI ILLUSTRATION FOR CASH VALUES AND DEATH BENEFITS AT GUARANTEED CHARGES AND CREDITING RATES.
Most BOLI products have a minimum
guaranteed crediting rate. These same
products also have guaranteed charges
and expenses. It is important to review
the illustration at the guarantees be-
cause it may indicate the policy has the
potential of actually losing cash value
and lapsing at its guarantees. Most
universal life products will lapse at the
guarantees. Whole life products gener-
ally do not.
5. REVIEw THE ILLUSTRATION FOR CASH VALUES AND DEATH BENEFITS OUT TO AGE 100.
BOLI is frequently sold from a rate
sheet showing returns on the BOLI for
the first year or the first five years or so.
Carriers know this and the temptation is
to make their product more marketable
by illustrating “teaser” returns in the
early years. This can be accomplished
either by providing a higher initial gross
crediting rate or by back end loading the
mortality and expense charges.
The sales illustration should indi-
cate what the crediting rates are in the
product. If the sales illustration shows
a higher initial gross crediting rate than
its ultimate gross crediting rate then the
carrier is enhancing the product’s early
return.
It can, however, be more difficult to
determine whether the carrier is back-
end loading the insurance costs. Short
of hiring an actuary, the bank may be
able to determine whether this is being
done by simply comparing the cash
value returns in the early years to the
returns in the later years. Returns should
decline as the insured gets older but a
precipitous decline especially after the
first several years might indicate costs
are back end loaded. Again, this review
is best done in comparison with other
carriers’ products.
6. REqUEST ILLUSTRATIONS SHOwING wHAT THE RETURN wOULD BE TODAY HAD THE BOLI BEEN PURCHASED FROM THE SAME CARRIER SEVERAL YEARS EARLIER.
If the bank is looking at a BOLI product
for a new purchase or for replacement of
an existing product, it should ask what
the net rate of return on the cash value
would be today had it bought that prod-
uct several years earlier. If the new rate is
superior to what is being earned on the
carrier’s earlier block of BOLI, it could
be attributable to policy enhancements
or the carrier could be subsidizing new
sales off of its old policy owners? Once
the bank purchases the BOLI, it is an old
policy owner, so knowing how it will be
treated going forward is important.
Continued from page 11
March/April 2011 | Virginia Banking 15 www.vabankers.org
7. ASK HOw THE BANK IS PROTECTED IF THE CARRIER wITHDRAwS FROM THE MARKET.
A number of BOLI carriers have either
withdrawn from the market or have
suspended BOLI sales. The question
is whether the carrier will continue
to support its BOLI product if it is no
longer active in the market. It’s best if
the carrier has a consistent track record
in the market. Most BOLI products
today have restrictions and penalties
that make it difficult to exchange out
of the product. The opportunities to
change carriers in the future can be
severely limited.
8. DOES THE BOLI HAVE BREAKPOINTS?
Most BOLI products have commis-
sion breakpoints. Typically, these break-
points occur at premium purchases of $5
and $10 million. The lower commissions
paid at these breakpoints can result in
a direct improvement in the net credit-
ing rate on the BOLI. If the bank is close
to obtaining a breakpoint, it should look
to structure its purchase to obtain that
breakpoint. Diversification is important,
but be mindful of breakpoints, too.
9. wHAT ARE THE BANK’S OPTIONS IF THE CARRIER HAS PROBLEMS?
The bank’s options are generally lim-
ited if the carrier has a problem. One
option might be to exchange out of the
product tax-free under Section 1035 of
the Internal Revenue Code. This option,
however, is not always available. The
bank must have an insurable interest in
the person insured by the policy. If the
insured person is no longer employed at
the bank, then the bank no longer has an
insurable interest and an exchange may
not be made. If the policy is medically
underwritten and the insured has expe-
rienced health problems, an exchange
may no longer be possible. Finally, there
could be exchange charges and restric-
tions, which would make it expensive or
time consuming to make the exchange.
A second option is simply to surren-
der the policy. A surrender, however,
would trigger income tax on the invest-
ment gain in the policy plus a 10 percent
tax (MEC) penalty on that gain.
The bottom line is the bank should be
aware of its limited ability to exchange
out of a carrier’s BOLI product. Getting
it right from the start is, therefore,
extremely important.
CONCLUSION
BOLI can be an excellent way for a
bank to address rising benefit costs. It
can also be used very effectively to
cover the cost of a plan designed to at-
tract, retain, and reward the bank’s key
talent. That being the case, the bank’s
BOLI should be as good as it can pos-
sibly be. The nine-step due diligence
process should help the bank achieve
that goal.
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Frank keating President and CeO,
ABA
Bankers are Leading by example
Several things have impressed me in the
weeks leading up to my becoming the
American Bankers Association’s new
president and CEO on Jan. 1:
One is the work that all of you do as bankers.
You can and do improve the quality of people’s
lives, through the loans that you make and the
savings that you keep safe, and all the other
extras, such as supporting charitable activities.
A great example is Union First Market Bank,
based in Richmond. This year, the bank’s employ-
ees surpassed their fundraising goal and gave
more than $172,000 to the Rappahannock and
Greater Richmond/Petersburg United Ways.
We’ve been highlighting banks’ efforts like
these, big and small, on our website at www.
aba.com. We want you to continue to share your
stories with us by sending them to ProudtoBea-
Banker@aba.com. We want every part and parcel
of our nation represented in these examples of
how you lead in your communities and support
your local economies.
You should be proud of what you do. Your
accomplishments should also be recognized
by others, including our lawmakers and
policymakers in Washington. Each day, two
million bankers perform the basic blocking
and tackling that keeps our nation’s economy
moving.
I’m preaching to the choir when I say that you
and your banks are essential to your customers
and communities, and that you are essential to
our economy. We all get this. But, too often, this
message gets lost in the halls of Congress. We
have to reinforce it, again and again.
This is our job. Working together with your
state bankers association, we are your voice
and your advocate. We are your champion in
promoting your bank’s – and your customers’ –
Main Street values.
When we advocate for you, ensuring that
your bank has the ability to compete, we’re also
advocating what is best for your community.
That’s a powerful and compelling combination.
I’m looking forward to meeting, listening and
learning from you in the year ahead.
A fellow Oklahoman, Will Rogers, once said,
“A man only learns in two ways: one by reading,
and the other by association with smarter people.”
I like to do plenty of both, so don’t hesitate share
your thoughts with me as we move forward,
together.
Gov. Frank Keating can be reached by e-mail at fkeating@aba.com.
Update
“ We’ve been highlighting banks’ efforts like these, big and small, on our website at www.aba.com. We want you to continue to share your stor ies with us by send-ing them to ProudtoBeaBanker@aba.com. We want ever y part and parcel of our nation represented in these examples of how you lead in your communities and support your local economies . ”
16 Virginia Banking | March/April 2011 www.vabankers.org
Washington
court Rules for Bank in counterfeit check case Involving Law firm
Law firms have become attractive targets for
criminals involved in international check
fraud schemes. In a recent court case, a law
firm that was victimized in such a scheme for nearly
$250,000 sought to shift the loss to its depositary bank.
The case, Fischer & Mandell v. Citibank (2d. Cir. 2/3/11),
contains some important lessons for banks (and law
firms).
Under the facts of the case, the law firm received
what appeared to be an “official check” in the amount
of $225,351 drawn on Wachovia from a new client. (The
client, as it turns out, was a crook out to defraud the law
firm.) The law firm deposited the check in its attorney
trust account at Citibank. A few days later the law firm
accessed this account through Citibank’s online bank-
ing website and saw that funds in excess of the amount
of the deposited check were “available.” In reliance on
this information, and per its client’s instructions, the
law firm requested a wire transfer of $182,780 from its
attorney trust account to an account in South Korea. A
day later, the law firm requested a second wire trans-
fer on behalf of its client to an account in Canada. That
same day the Federal Reserve returned the $225,351
Wachovia check to Citibank as a counterfeit item.
Citibank charged back the amount of the returned
check against the law firm’s attorney trust account,
which created an overdraft. Citibank then set apart the
amount necessary to cover the overdraft from the law
firm’s money market account at the bank under author-
ity set forth in the deposit agreement. The law firm then
requested Citibank to cancel and recall the two wire
transfers. Citibank attempted to do so, but was unsuc-
cessful because the funds had already been withdrawn
from the accounts in South Korea and Canada.
The law firm sued Citibank for breach of contract
and negligence. The law firm argued that by indicating
that the funds were “available” before they had been
collected from Wachovia, Citibank implicitly represent-
ed that the check had cleared. The law firm contended
that this misled it to believe that funds were available
as of right, and that it relied on this in initiating the two
wire transfers. The law firm argument was essentially
that “available” meant “collected.” The bank argued
that “available” merely meant that there were funds in
the account available to be withdrawn, not that the bal-
ance represented collected funds.
In ruling for Citibank, the court focused on the terms
of the bank’s deposit agreement. The deposit agree-
ment gave customers the ability to make use of funds
provisionally, subject to charge-back if checks were re-
turned unpaid. The court pointed out that the deposit
agreement provided: “Please note that a check you de-
posit may be returned unpaid after we have made the
funds available to you. If this happens, the amount of
the returned check will be deducted from your account
balance.”
In addition, the UCC expressly gives a depositary
bank the right of charge-back to unwind withdrawals
of available funds. By allowing access to the funds on a
provisional basis subject to a right of charge-back, the
bank was merely following common industry practic-
es, according to the court.
The court also ruled for the bank on the law firm’s
claim that the bank had been negligent in failing to un-
wind the wire transfers before the money was lost to
the fraudsters. The court found that the bank had com-
plied with the applicable provisions of Article 4A of the
UCC (Wire Transfers) and was not negligent.
The case shows how solid deposit agreement lan-
guage can help in court. It also points to the need for
better controls by law firms to avoid check scams like
this from succeeding. A law firm should exercise cau-
tion when it receives a cashier’s check from a new cli-
ent who then immediately requests that the funds be
withdrawn by wire: this is a common practice em-
ployed by fraudsters.
Joseph e. spruill
General Counsel,virginia Bankers
Association
Joseph E. Spruill can be reached by e-mail at jspruill@vabankers.org.
Line
March/April 2011 | Virginia Banking 17 www.vabankers.org
Legal
springing to action
Appropriately enough, March has come
roaring in like a lion on the VBA gov-
ernment relations front. The Virginia
General Assembly adjourned on the last weekend
of February, concluding its “short” session. The
VBA was able to beat back sustained, zealous ef-
forts to modify Virginia’s foreclosure process to
slow down, disrupt and inject judicial roadblocks
into our banks’ ability to move on those borrowers
who fall into default. Despite heightened rhetoric
and aggressive proposals, all measures dealing
with foreclosures were either defeated or sent to
Gov. Bob McDonnell’s Foreclosure Task Force for
further study. Thanks to outstanding feedback
from many of the members of our various boards
and work groups, the VBA was able to offer a
positive, proactive alternative to these harmful
bills. While that effort was swept up with the less
friendly proposals, the good faith effort displayed
by our industry did not go unnoticed by reason-
able members of the legislature.
Just as the state legislature was concluding, the
new Congress was quickly ramping up its action.
Several VBA member banks and VBA staff visited
the Washington offices of all our newly-elected
members of the Virginia delegation, as well as the
office of Sen. Mark Warner in late January, and
were effective in bringing our united message
directly to our federal officials. Several members
in central Virginia also had the chance to discuss
our industry’s top concerns with House Major-
ity Leader Eric Cantor at the VBA office in early
February. Lastly, we again visited with our repre-
sentatives as part of the VBA/ABA Government
Relations Summit in March.
Delivering the message that the consequences
of recent federal action – from the financial conse-
quences of the Durbin Amendment on interchange
fees, to the troubling, expanded scope of the Feder-
al Reserve Bank, to the disquieting uncertainty of
the new Consumer Financial Protection Bureau –
will have real and negative effects on our institu-
tions’ ability to carry out our business remains an
ongoing priority of the VBA. As we did during the
Dodd-Frank debate, the VBA will be vigilant in
keeping our members apprised of opportunities
to voice their concerns directly to federal decision-
makers. Please be on the lookout for requests to
make contacts to help shape the course of federal
policy.
One of the critical ways you can help ensure a
strong banking environment nationally, and here
in Virginia, is through your participation in the
VBA’s BankPAC. We have kicked off our annual
campaign that will run through the summer. We
have set an aggressive campaign goal and will
need your commitment to keep our outreach
through BankPAC strong. We are proud that VBA
staff got us off on a great start with 100 percent
participation in the campaign. Also, be on the
lookout for upcoming information on some spe-
cial events to benefit BankPAC, including the re-
turn of our golf tournament and a new silent auc-
tion at our annual convention. If you have any
questions about how you or your institution can
participate in the campaign, and help in this key
component of our overall government relations
strategy, please do not hesitate to contact me. With
your help, this year’s campaign will be a roaring
success.
matt Bruning Director of
Government Relations,
virginia BankersAssociation
Matt Bruning can be reached by e-mail at mbruning@vabankers.org.
Update
18 Virginia Banking | March/April 2011 www.vabankers.org
“ Be on the lookout for upcoming information on some special events to benefit BankPAC , includ-ing the return of our golf tournament and a new silent auction at our annual convention. ”
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New Associate Members
Compliance reporting is surprisingly even
across the country. Because of that, what fed-
eral regulators told a compliance meeting in
Chicago is pertinent in Virginia. At that meeting, repre-
sentatives from the FDIC, OCC and OTS had quite a lot
to say about violations that result in citations and what
bankers can expect as 2011 progresses.
FAIR LENDING
OCC is citing more of its national banks for •
redlining.
OTS wants examiners to focus on pricing dis-•
parities, which have been occurring more often
with brokered transactions.
The FDIC has increased its focus on banks re-•
quiring spousal signatures on loan contracts
even though only one of the two applies and
qualifies for the loan.
All of the banking agencies have increased re-•
ferrals to the Department of Justice for fair lend-
ing violations.
The regulators told bankers in Chicago that they •
would not consider a loan with preferential
terms and conditions granted to an individual
who is purchasing a bank-owned, one- to four-
family or commercial property to be a violation
of fair lending regulations – apparently because
safety and soundness regulators have been very
aggressive in encouraging institutions to dis-
pose of real estate owned or to provide financ-
ing to remove the real estate from their balance
sheets.
The representatives indicated their compliance divi-
sions want to see the real estate disposed of as well.
Hardship programs/workouts usually will not be ex-
amined for fair lending purposes.
HMDA
Home Mortgage Disclosure Act (HMDA) data collec-
tion is a concern: Financial institutions still are not get-
ting HMDA data collection right.
The OCC stated that data from a bank’s loan ap-•
plication register are used to scope a fair lending
review. That makes it especially important for
Loan Application Register data to be accurate.
OTS indicated some of its institutions are using •
the preapproval code on the loan application reg-
ister even though the institution does not have a
formal preapproval program. OTS has assessed
civil money penalties when the number of mis-
takes caused by the improper use of the preap-
proval code was beyond the error threshold.
COMPLIANCE MANAGEMENT
OTS does not want the president of an institution •
to also serve as compliance officer. The agency’s
reasoning: A financial institution president has
many other responsibilities and cannot possibly
dedicate the time needed to be an effective com-
pliance officer.
Once an institution reaches $200 to $250 million •
in assets, OTS believes it should have a full-time
compliance officer with no other duties.
The FDIC threshold is even lower. Once a bank •
reaches $100 million in assets, the FDIC represen-
tative believes it should have a full-time compli-
ance officer. The OCC did not offer an opinion.
Each agency spokesperson stressed the impor-•
tance of training. Many violations have been a
result of a lack of training or of poor training.
Some have resulted in civil money penalties and
enforcement actions.
FLOOD
Flood insurance violations continue.
Examiners have been citing the notice to bor-•
Regulators share compliance Insights
By Donna rakes and Jim Dray Thomas
Compliance Associates, Inc.
Corner
20 Virginia Banking | March/April 2011 www.vabankers.org
Compliance
rower in a special flood hazard area
as not being acknowledged by the
borrower or not being provided to
the borrower in a timely manner.
The agencies have also been citing fi-•
nancial institutions for not obtaining
new notices for flood loans that are
renewed.
The agencies stated that if a loan •
is secured by multiple properties,
the bank should have a separate
flood determination form for each
property.
HIGH-PRICED MORTGAGE LOANS
Regulators have been citing banks for not
meeting the requirements for high-priced
mortgage loans (HPML).
Although none of the agency rep-•
resentatives stated specifically why
banks are being cited, they did indi-
cate that smaller financial institutions
which historically have not escrowed
for real estate taxes and insurance are
the ones having the most difficulty
complying with the HPML require-
ments. These institutions do not es-
tablish an escrow account when the
annual percentage rate exceeds the
HPML threshold.
The agencies indicated the only rem-•
edy to HPML violations is to either
lower the interest rate or establish an
escrow account.
BANK SECRECY ACT
Federal regulators are seeing an in-•
crease in the number of suspicious
activity reports (SARs) – and dis-
covering during examinations that
directors are not being made aware
of the filings at their regularly sched-
uled meetings.
The agency representatives indicated •
that Office of Foreign Assets Con-
trol screenings are not meeting BSA
requirements, although none of the
spokespersons elaborated on which
requirements were not being met.
All of the agencies indicated that •
compliance with Regulation GG –
Prohibition on Funding of Unlawful
Internet Gambling – will be exam-
ined during BSA examinations.
The federal representatives indicated •
that when a long-time customer indi-
cates a new tax identification number
because the original tax identifica-
tion number was not assigned to him
or her, the customer should be con-
sidered a high risk and a SAR should
be filed. The bank should also verify
that the tax identification number is
valid and assigned to the customer.
OTHER COMPLIANCE ISSUES
Agencies do not currently examine •
for compliance with the Americans
with Disabilities Act.
The agencies do not yet examine so-•
cial media sites during reviews, part-
ly because the agencies’ own Internet
filtering parameters do not allow ex-
amination staff to visit social media
websites.
Although financial institutions with •
more than $10 billion in assets will be
regulated by the CFPB, national banks
still will be visited by OCC examiners
because the OCC will continue to have
examination authority for compliance
with BSA, CRA and flood rules.
If, during an examination, a bank can-•
not find a loan file that has been re-
quested, then examiners most likely
will select another file for review.
They also indicated that a bank will
be cited for record retention violations
if the failure to locate files is a recur-
ring event.
VBA members seeking information or more
direct assistance with federal regulations
should call TCA’s Donna Rakes or Jim
Dray. The toll-free number is 800-934-7347.
Rakes is manager of TCA’s East Coast re-
gional office in Rustburg. Dray is president
of TCA. TCA is the VBA’s endorsed provid-
er of compliance services.
March/April 2011 | Virginia Banking 21 www.vabankers.org
Housing Equity Funds of Virginia
Over 20 years of profitable investing
For more information contact Arild Trent at 804.343.1200 x116 or atrent@vacdc.org
Virginia Community Development Corporation | vacdc.org
Bank of clarke county, Berryville
robert c. Boyd, Senior Vice Presidentand Senior Credit OfficerJon elliott, Assistant Vice President andBranch ManagerJ. andrew Hershey, Vice President andLoan Officergregory l. Jay, Senior Vice Presidentand Loan Officer
cardinal Bank, tyson’s cornerBun nhe-navamal, Bank Officersteve nelson, Commercial ServicesExecutiveBrennan rader, Bank Officer
Jonathan reimer, Bank OfficerVonnie symathong, Bank Officer
carter Bank & trust, rocky mount
rhonda t. James, Vice President andManaging Officer
First national Bank, covingtonchris lemons, Assistant Vice Presidentand Branch Manager
Boyd elliott Hershey JamesJay nhe-navamal nelson rader reimer symathong
Move
22 Virginia Banking | March/April 2011 www.vabankers.org
©20
11 P
ULS
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are your bankers on the move? e-mail submissions to cdewey@vabankers.org.
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