Independent Banker (December 2008)

Plus:• New Bank Hardware

• Fighting Payments Fraud• Investing in SBA Pools

Can they make your

computer network

more effi cient?

TM

www.icba.org | December 2008 IndependentBanker IndependentBanker

Contents | Zoom in | Zoom out Search Issue | Next PageFor navigation instructions please click here

Contents | Zoom in | Zoom out Search Issue | Next PageFor navigation instructions please click here

ICBA IndependentBankerD

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Decem

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12|2008 ICBA IndependentBanker 1

FEATURES

Hot Hardware StuffThe newest bank equipment comes to Main Street. By Bridget McCrea

Techno ExpoClassifi ed listing of community bank technology product and service providers.

Fighting Payments FraudBasic principles and steps to reduce check, card and ACH risks. By Cary Whaley

Ready for the Rule?How to prepare for NACHA’s new International ACH Transaction rule.By Priscilla Holland

To Catch a ThiefThe ICBA National Convention will present the latest in fraud prevention. By Carol Patton

COVER STORY

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December 2008 | www.icba.orgContents

Virtual ServersThe next operational advancement for community banks? By Dean Lemons


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68Photograph by Rebecca D’Angelo

60

COLUMNS

9

11

52

56

60

From the TopJob Well DoneBy Cynthia L. Blankenship

Fine PointsDownsize Them—It’s Overdue!By Camden R. Fine

Portfolio ManagementThe safe harbor of SBA pools.By Jim Reber and Craig Dismuke

Capital MarketsDealing with nonperformingassets to preserve capitallong term.By Bill Sammon and Ken Segal

Vantage PointReal-time computing to speedtransactions and boost effi ciency.By Brian King

DEPARTMENTS

16

64

Tech TalkCheck-image data testingencounters new scrutiny.By Lauri Giesen

Lender LifeCommunity banks fi ll the big-bank gap in small businesslending.By Ray Pelosi

ALSO

12

6768

NewslinesBrief updates on ICBA andcommunity banking news.

Advertiser Index

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12

Periodicals postage paid at Sauk Centre, MN, and additional mailing offi ces. ICBAIndependent Banker (ISSN-0019-3674) is published monthly by the IndependentCommunity Bankers of America, 518 Lincoln Road, Sauk Centre, MN 56378-1653.Member subscriptions are $40 per year. Additional member subscriptions, $20.All other subscriptions $75. POSTMASTER: Address changes to ICBA IndependentBanker, P.O. Box 267, Sauk Centre, MN 56378. © 2008 ICBA All rights reserved.

16

December 2008 | www.icba.orgContents

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THE NATION’S VOICEFOR COMMUNITY BANKS

Volume 61, Number 12www.icba.org

EDITORIAL OFFICE

1615 L St. NW Suite 900 Washington, DC 20036-5623

(202) 659-8111E-mail: [email protected]

SUBSCRIPTION INQUIRIES

(320) 352-6546

ICBA EXECUTIVE COMMITTEE

CHAIRMANCynthia L. Blankenship

CHAIRMAN-ELECTR. Michael Menzies

VICE CHAIRMANJames D. MacPhee

SECRETARYWilliam C. Rosacker

TREASURERLarry Winum

PRESIDENT AND CEOCamden R. Fine

AT-LARGE DIRECTORWilliam T. Bain

AT-LARGE DIRECTORJack E. Hopkins

IMMEDIATE PAST CHAIRMANTerry J. Jorde

PAST CHAIRMANDavid E. Hayes

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VICE PRESIDENT/DIRECTOR OF PUBLICATIONSTimothy Cook

ASSOCIATE DIRECTOR OF COMMUNICATIONS/PUBLICATIONS

Suzanne Sundburg

ASSOCIATE DIRECTOR OF MARKETING Nicole Swann

ASSISTANT DIRECTOR OF PUBLICATIONSThomas Warren

COMMUNICATIONS COORDINATORMichele A. Matthews

ACCOUNTING COORDINATORKim Schneider

DATA COORDINATORCindy Meyer

SUBSCRIPTIONS COORDINATOR Diane Meyer

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By Cynthia L. Blankenship

Job Well Done

Congratulations to each and everycommunity bank member whoresponded to ICBA’s political action

calls as Congress and other federal policy-makers grappled with how to respond to thenation’s growing financial troubles. Morethan 4,100 community bankers joined insending more than 15,200 e-mails, letters andphone calls to Capitol Hill. When all wassaid and done, you and ICBA helped achievespecifi c economic safeguards—including atemporary increase in federal deposit insur-ance to $250,000—for community banks andMain Street America in the fi nal EmergencyEconomic Stabilization Act of 2008 signedinto law by President Bush in October.

The law’s ICBA-backed provisions are avery meaningful victory not only for commu-nity banks, but also for Main Street America.My work on ICBA’s executive committeeafforded me an up-close look at how it allcame together, and I can assure you thatthe obstacles were many, but ICBA neverwavered in protecting your interests.

ICBA was fi rst to take a stand on the Trea-sury proposal as originally presented, whichcontained little, if any, benefit for com-munity banks. We watched as the nation’smutual funds were, overnight, given a fullfederal guarantee. It was an outrageous andunfair dealing of the cards. With one swipe ofa pen, our competitive advantage of insuredfunds was not only obliterated, but our com-petitors also were given an advantageousposition of having all funds insured on theday in question.

No longer was “too big to fail” a debate. Itwas a defi ning moment.

Immediately, ICBA called for equal andfair treatment. We lobbied hard to ensureour members had equal access to the fundand spent many hours outlining why banksshould be able to treat losses associated withpreferred stock held for investment purposes

as ordinary rather than capital losses. ICBAstaff met with Treasury Secretary Paulsonand FDIC Chairman Sheila Bair to expressour concerns about consumer confi dence,consumers’ confusion of money marketmutual funds with a money market accountat a bank, and examiner overreaction to thecurrent market.

While the financial markets crisis is farfrom over, we can all breathe much easiertoday because most of the concerns of ourcommunity bank members have beenaddressed. With legislation now in place,we must turn our attention to reassuring ourcustomers to continue to place their full faithand trust in our institutions.

Bank of the West is reaching out to ourcustomers to tell them that we remain in sta-ble and sound condition. We reassured themthat our bank did not participate in subprimemortgage lending and remains committedto supporting Main Street America. ICBA isalso helping get the word out and has devel-oped a number of customizable materials,including ads, press releases and a statementstuffer for your use available on our Web site,www.icba.org. Please continue to use thesematerials, and adapt them to your bank’s par-ticular needs, whenever you can.

While no one can predict when the turmoilof the nation’s economy will be resolved, restassured that ICBA will remain your faithfulally to protect and preserve the franchisevalue of community banks. And know thatwhen community bankers speak out togetherthrough ICBA, your representatives in Wash-ington will listen.

Cynthia L. Blankenship is ICBA’s chairmanand vice chairman and chief operating offi cerfor Bank of the West in Grapevine, Texas.

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A s fi nancial regulatory agencies con-tinue to respond to the currentfi nancial crisis, Congress is address-

ing the underlying causes—largely the resultof inadequate supervision of the nation’stoo-big-to-fail, too-big-to-regulate finan-cial conglomerates. For many reasons, thisfi nancial crisis should never have happened.If all lenders had followed the common-senseunderwriting and fi duciary practices of com-munity banks, America simply would not bein a crisis.

So necessarily and unavoidably, the debateon financial regulatory system reform hasbegun on Capitol Hill. ICBA has alreadyoffered policy guidelines and fundamen-tal principles for legislators to apply whenchanging the fi nancial regulatory system.

In testimony presented to Congress inOctober, ICBA first warned policymak-ers against taking precipitous action in theweeks and months ahead. We said our cur-rent regulatory system’s many checks andbalances must be preserved. And the diversi-fi ed community banking model—in whichlocal decision-making ensures responsiblebanking practices that benefi t both lendersand borrowers—must continue.

Second, ICBA outlined for Congress sev-eral essential components of our currentregulatory system that must be maintained,including the dual banking system; the sep-aration of banking and commerce; a strictdeposit concentration cap; and the crucialliquidity role of government-sponsoredenterprises.

And third, ICBA recommended adoptingseveral specifi c reform actions. Among themwere strengthen the supervision of non-bankfi nancial institutions; suspend mark-to-mar-ket and fair value accounting; expand tieredregulation that differentiates between large,complex institutions and everyday commu-nity banks; and reduce the size of systemicallydangerous institutions.

That last recommendation—breaking uptoday’s super-size fi nancial institutions—is abig but necessary step that ICBA does nottake lightly. It offers the only certain solu-

tion to a serious underlying threat to ournation’s fi nancial stability—the dangerousand unwise overconcentration of our nation’sfi nancial assets and resources in the hands ofa few institutions.

Today, the four largest banking companiesin the United States control more than 40percent of our nation’s deposits and morethan 50 percent of its fi nancial assets. Thosefacts alone, never mind the daily headlines,tell us why the too-big-to-fail fi nancial insti-tutions impose too great a systemic threat onour nation’s economy and financial secu-rity. (Consider how much infl uence just thedirectors of Bank of America now have.)

Since its founding, ICBA has continuallyand consistently warned about and foughtagainst the excessive concentration offi nancial assets and resources. Our unprec-edented successes in blocking Wal-Martand other commercial firms from owningFDIC-insured institutions are just part ofICBA’s long legacy of activism on this issue.For decades, ICBA has worked virtuallyalone to hold back powerful forces promot-ing self-serving interests to permit, step byincremental step, extreme fi nancial consoli-dation and concentration. Despite our nowall-too-prophetic warnings, three generationsof unbridled fi nancial takeovers, mergers andboardroom raids were allowed.

History and current events show those daysare ending. No longer can anyone deny thatthe systemic risk of excessive concentration isreal or argue that fi xing the problem can bedelayed. The fi nancial conglomerates shouldbe broken up or required to divest themselvesof enough assets to ensure that they no lon-ger pose a systemic risk. Congress must actresponsibly and judiciously, but withoutquestion it must act. It’s long overdue.

Camden R. Fine is president and CEO ofICBA. Reach him at cam.fi [email protected].

Read ICBA’s Oct. 21,2008, principles offi nancial regulatoryreform on the asso-ciation’s Web site.Click on “Advocacy”and then “ICBATestimony.”

Statutory Recap

f ine points

By Camden R. Fine

Downsize Them–It’s Overdue!


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newslines

12 ICBA IndependentBanker 12|2008

ICBA Leaders Meet with President Bush,Treasury Secretary Paulson

In October, ICBA leaders met with President George W. Bush fol-lowing his remarks before the U.S. Chamber of Commerce. The

president requested the meeting with ICBA leaders to discuss theTreasury Department’s latest fi nancial stabilization initiatives. Laterthat day, ICBA leaders met privately with Treasury Secretary HenryPaulson to discuss the role of community banks in those efforts andto express support for Treasury’s voluntary program to purchasefi nancial institutions’ preferred stock.

ICBA Chairman Cynthia Blankenship, Chairman-elect R. MichaelMenzies, Vice Chairman James MacPhee, President and CEO CamdenFine and Executive Vice President for Government Relations KarenThomas participated in the meetings. During the meeting with Paul-son, ICBA offi cials discussed potential community bank participationin the Emergency Economic Stabilization Act program to inject capitalinto fi nancial institutions. They also highlighted community bankconcerns with federal efforts.

Link to special ICBA NewsWatch Today alert:www.icba.org/publications/NewsletterDetailNWT.cfm?ItemNumber=50571

Meeting the Treasury SecretaryTreasury Secretary Paulson (center) discussed community banksand the government’s actions to improve fi nancial stability withICBA executive committee members in October. From left: ICBA

Vice Chairman James MacPhee, ICBA President and CEO CamdenFine, Secretary Paulson, ICBA Chairman Cynthia Blankenship and

ICBA Chairman-elect R. Michael Menzies.

NWT alert:

F inancial regula-tory re form and

too-big-to-fail will befront-and-center issueswhen the 111th Con-

g r e s s c o n v e n e s n e x tmonth. Federal Reserve

Board Chairman Ben Ber-nanke has weighed in to saythat excessive concentration offi nancial assets within too fewfinancial institutions’ controlremains a concern. Each of thethree largest financial institu-tions to survive the financialcrisis—Bank of America, WellsFargo and JPMorgan Chase—is approaching the statutory10 percent limit in control-ling U.S. domestic depositsthrough acquisition, a lawICBA successfully advocated asa brake on dangerous fi nancialoverconcentration.

In recent remarks before theEconomic Club of New York,Bernanke emphasized the vitalimportance of maintaining adiversified financial systemthat includes thousands of com-munity banks. “I don’t want tosee this country go to the pointwhere we have six large banksand that’s basically the creditmarket,” the chairman saidduring a question-and-answersession. “We need to have theinformation capital, the localknowledge that is incorporatedin local lending, local com-munity banking and a diversityof different types of creditinstitutions.”

Bernanke: ExcessiveFinancial ConcentrationRemains a Concern

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newslinesnewslines

On Ending Financial

Concentration Testifying

before Congress for ICBA,

Michael Washburn (center),

president and CEO of Red

Mountain Bank of Hoover,

Ala., and vice chairman

of ICBA’s Policy Develop-

ment Committee, outlines

for lawmakers key ICBA

principles and recommenda-

tions for proposed fi nancial

regulatory reform. Washburn

also presented ICBA’s call

to downsize the country’s

too-big-to-fail fi nancial

institutions and more closely

supervise those fi nancial

institutions.

ICBA Independent Banker AddingNew Content, Revamping Design

The only award-winning national publication exclu-sively serving the needs of community bankers,

ICBA Independent Banker will soon unveil somechanges. Beginning with the January 2009 issue,you’ll see useful new content plus a more dynamicand reader-friendly design.

New Content—ICBA is introducing new monthlydepartments to provide even more relevant, valuableinformation to help your community bank maintain itscompetitive edge. New departments will include:• Opportunity Knocks features case studies of com-

munity banks that fi nd creative solutions to specifi cchallenges.

• Vantage Point offers insights from industry expertswithin community banking.

• Indie Banker profi les different ways specifi ccommunity banks support their customers andcommunities.

• The Vault highlights a roundup of newsworthy slice-of-life briefs for community bankers.

ICBA will also keep publishing many ICBA Inde-pendent Banker favorites like Tech Talk, featuring

current technology trends and developments; ToolShop, covering new products and services; PaymentsExchange, addressing the latest in payments; andWashington Watch, highlighting legislative andregulatory news.

A Whole New Look—You’ll also see ICBA Indepen-dent Banker’s dynamic new design for the fi rst timein January. Check out the engaging new graphicsand table summaries. Community bankers are busy,forward-thinking people, and the new design will helpICBA members get new ideas and expert insightsquickly and easily.

With all of these changes, however, ICBA Indepen-dent Banker will continue its tradition as a publicationdevoted to you, the nation’s community bankers.

And, as always, ICBA welcomes your feedback andsuggestions. Tell us about your community bank,what topics you want to read about from the com-munity banking perspective, or comment on coverageyou’ve read in the magazine.

E-mail us at [email protected].

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mismatch between checkimages and data filesrarely happens. But when

it occurs, the consequences couldpotentially be quite serious forbanks and their customers. That’swhy many fi nancial institutionsare giving greater considerationto the issue of image integrity,o f ten inser t ing inspect ionsthroughout the imaging processto make sure the images and thedata match up every time.

Mismatches most often occurat the check sorter when thecheck’s image and metadata fi leare separated during the checkcapture processing. This processcreates the potential for the data

to become incorrectly matchedwith a different image. If thathappens, bank customers mayview the wrong image when theyconduct an online banking ses-sion or when they check theirstatements.

“Any paying bank could beaffected by this,” explains BobMeara, analyst for technologyconsulting firm Celent LLC inBoston. “And while such errorsmay not be the paying banks’fault, their customers are theones affected.”

“This is very serious when ithappens,” says Fred Herr, seniorvice president of the FederalReserve Bank of Atlanta and

tech talk

By Lauri Giesen

Searching for MismatchesCheck image-data testing encounters new scrutiny

“Privacy breaches can be expensive to remediate, can erodebrand reputation and customer relationships, and can diminishtrust between image exchange partners.” —Kerry Atha, imaging expert


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retail payments officer. “You have the potential for some-one to get someone else’s bank account number and payment information. That is a serious privacy violation, and it presents an opportunity for fraud.”

There are also customer ser-vice issues to consider. “Privacy breaches can be expensive to remediate, can erode brand repu-tation and customer relationships, and can diminish trust between image exchange partners,” offers Kerry Atha, director of strategy for ViewPointe Archive Services LLC in New York, a provider of image archive and exchange services.

Given the privacy loss, cus-tomer service problems and fraud potential, some image technol-ogy firms, such as Viewpointe, Fiserv Inc. in Brookfield, Wis., and the Federal Reserve Banks have developed check image-data checking systems. Those systems make sure that the images and metadata fi les match up at vari-ous points.

One problem in addressing the issue of image integrity, however, is that no one is quite sure how prevalent the problem is. One large bank that studied the prob-lem reported that only one image out of 100,000 items is reported as mismatched.

Most community banks also do not see a large number of errors related to matching data and images. “This does not happen very often if at all,” says Ray Car-roll, chief technology offi cer for West Alabama Bank & Trust in Reform, Ala.

However, some imaging experts believe most estimates by banks underrepresent the problem. Herr explains that most estimates

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are based on known cases where customers report they received the wrong image. But many cus-tomers don’t look at every check image. They often only look at the image if they have a question about the transaction.

“If the data is correct on their statement, most customers do not look at the image,” he says. “And banks then only know about the problem if they are told by their customers.”

Indeed, in a Financial Services Technology Consortium study, in which processor Fiserv partici-pated four years ago, a check of images stored in archives showed

that between 3 percent and 5 per-cent of the stored images were not properly indexed, according to Ron Jacobs, vice president of production and strategy for Fiserv’s fraud and compliance division.

Whi le tha t percentage i s thought to have declined in the past several years with increased use of technology that catches and corrects mismatches, other factors could increase the poten-

tial for problems. The rising volume of check imaging is likely to increase the likelihood of mis-matches for any bank, Meara says. In addition, he asserts, the growth of remote deposit capture could make image integrity a big-ger issue as commercial clients, not banks, capture more check images.

Meara says community banks should carefully review, or have a technology company review, the check information from remote deposit capture clients.

While many of the mismatches occur at the checker sorter, Herr adds that “the mis-sort could

happen anywhere in the process where the two pieces are sepa-rated.” Additionally, he notes, often one error can cause others by allow a sequencing of checks to get out of step during the sort-ing process.

The Federa l Reserve has been using software programs, which Herr describes as “system traps,” to identify and correct mismatches before they get to the check writer’s bank. Several

large check archive companies, including Viewpointe, now use Fiserv’s image integrity technol-ogy as part of their processing and archive services.

Viewpointe also offers a product that employs Optical Charac-ter Interrogation to validate the MICR line match and identify mismatches, Atha explains. The company’s product is the result of an 18-month period of discus-sion with its image exchange customers.

Community bankers concerned about image integrity have several options to improve their opera-tions. Those that handle image processing in-house can review the precautions embedded in their software and archive provid-ers’ services to address the issue. Banks that use outside service providers should ask their pro-cessors what technology they are using and make sure the proper checks are in place.

Indeed, one of the reasons Car-roll believes West Alabama Bank

has not had a problem with check image errors is that since adopt-ing check imaging, the bank has used software that checks for data mismatches. “We do our own processing and we have always had safeguards in our software,” he says. “There have to be checks and balances built into your system.” ib

Lauri Giesen is a freelance writer in Libertyville, Ill.

The growth of remote deposit capture could make image integrity a bigger issue as commercial clients, not banks, capture more check images. —Bob Meara, vendor representative

tech talk

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ICBA Member Benefits are Tailored forYour Community Bank!

AdvocacyEducationNational ConventionPayment ServicesInvestmentsFee IncomeInsuranceLendingDiscountsFundingCompliancePublicationsBank Director ProgramInformation Center

When you join ICBA, you make a business connectionthat will prove its value every day. As the premier resource for community bankers, ICBA addresseseverything you need. Political advocacy. Professionaldevelopment. Business solutions. Many members earn more through ICBA sponsored products and services than they pay in membership dues. Join today!

Phone: 866-THE-ICBA(843-4222) Email: [email protected] Web site: www.ICBA.org

For more information:

The Nation’s Voice for Community Banks®

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Th e next operational

advancement for community

banks?

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Virtual servers—the computing term sounds like pow-erful computers fl oating on a cushion of white clouds. But the concept’s potential operational benefits to community banks are very real. So what are virtual servers (or, more precisely, what is server virtualization), and how can virtualization help your community bank?


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.

. Increase return

on assets by lowering cost per hardware

processing cycle.

Reduce time to market for technology-

dependent products and services.

Improve IT server effi ciency,

eff ectiveness, fl exibility and adaptability.

The term server vir-tualization refers to software that allows a

single physical server (actual hardware) to run multiple operating systems in isola-tion of one another. In the simplest sense, virtualiza-tion allows a single physical server to run multiple appli-cations concurrently, without confl icts. This enables one server to do what tradition-ally would have required 10 or more servers.

Without virtualization, certain complex applications may require their own server. Virtualization software sepa-rates the operating system along with its applications from the physical hardware. The virtualization software also performs an intermedi-ary process, distributing tasks and efficiently allocating server processing, memory and storage among various virtual servers. A virtual server is indistinguishable from a traditional server by a network end-user, even when that virtual server is one of many running on a single physical server.

By more effi ciently using computer hardware, the s o f t w a r e a d v a n c e m e n t of virtualization, in turn, can generate tangible cost savings, enhance the abil-ity to recover systems and da ta more quick ly and with greater ease, and offer greater fl exibility in system maintenance. According to a Metavante Corp. case s tudy, server vir tualiza-tion allowed companies to reduce their server hardware by 25 percent.

The IT research fi rm Gart-ner Inc. predicts that server virtualization will have a great impact on computing infrastructure and operations within the next four years. An Enterprise Strategy Group survey found that about 40 percent of smaller compa-nies have already adopted virtual server technology.

A s o n e o f t h e l a t e s t information technology advancements, server vir-tualization has been touted as the next leap in comput-ing efficiency. It promises to improve operating effi-ciency and cut costs, speed data transmission and lessen disaster recovery time, and reduce the complexity and increase the flexibility of computer networks.

Top 3 Benefi ts

of Virtual Computer

Servers


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FLEXIBILITYEFFICIENCY AND COST

Server virtualization signi-fi cantly boosts the effective computing capacity of serv-ers, reducing hardware and operating expenses by requir-ing fewer servers. Having fewer physical servers should translate into reduced hard-ware costs, lower energy bills, less maintenance and lower personnel costs.

For example, the typical server today, in a “nonvirtual” environment, uses about 20 percent of its capacity to run applications, according to the report “Server Virtual-ization Evolves Rapidly” by Thomas Bittman of Gartner. However, server virtualiza-tion can boost computing capacity to 65 to 80 percent, the report said. On average, a single server running new virtual server technologies can replace between seven and 10 physical servers that a community bank might run.

SERVER MIGRATION

Serve r v i r tua l i z a t i on allows applications to be moved more quickly and easily to a new computing platform—without taking the virtual server offline. Virtual servers allow infor-mation technology staf f to back up daily with ease and to replace lost systems and data quickly. One rea-son information technology departments may look to “virtualize” their servers may be to speed disaster recovery.(See page 26.)LESS COMPLEXITY, MORE

FLEXIBILITY

By reducing the number of physical computer servers in play, server virtualization reduces the time needed for network setup, confi guration, deployment and testing. And because the virtual server is simply software, an operat-ing system and applications, it can be copied for testing purposes, such as for updates and patches, without affect-ing the current production environment.

WORDS OF CAUTION

Despite their benefits, however, there are some potential pitfalls to avoid. Even with the extra comput-ing capacity virtual servers should provide, overload-ing a single server with too many memory- or resource-

intensive applications can still cause problems. Virtual servers typically work well for applications, but they do not replace the need for an adequate amount of storage space. Community banks also must be sure to provide their staff with sufficient training, and outsourced technicians should be certi-fi ed in server virtualization technologies. Proper secu-rity measures must be used and maintained.

Last, it is important to realize that despite how sig-nificant an industry trend might be, it does not mean that specific technology is right for all community banks. An objective and real-istic assessment of whether your bank would benefit from the technology is nec-essary due diligence. ib

Dean Lemons is managing director of information technology consulting with RSM McGladrey Inc., a fi rm headquartered in Minneapolis that provides business consulting, accounting and tax services for community banks. His offi ce is in Daven-port, Iowa. Reach him at [email protected]. Suzanne Sundburg, ICBA’s former associate director of communica-tions and publications, contributed to this article.

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Using Computer Server Virtualization for

Disaster Recovery

Disaster recovery and business continuity issues are increas-

ingly making their way to the forefront for every financial institution. The fl oods in the Midwest and hurricanes that Louisiana and Texas faced this year were key reminders that banks serve a vital role in the community. For a com-munity to rebound from a natural disaster and resume operating with any sense of normalcy, the local banks must have the ability to operate in all conditions.

As a result, this year the Federal Financial Institu-tions Examination Council (FFIEC) revised its busi-

ness continuity planning to reduce negative effects on financial institutions’ b u s i n e s s o p e r a t i o n s , reduce monetary loss, and

enable fi nancial markets and customers to maintain service levels with minimal disruption.

Suppor t ing day - t o -day bus ine s s decisions often requires pulling data from multiple sources, and determin-ing what data needs to be prioritized for disaster recovery can be an ardu-ous task. Historically, the acceptable disaster recovery practice for a mission-critical computer was to perform a full backup of a bank’s system(s) and send a tape to a remote location. The complete backup tape was usually created weekly, and an incremental backup of only the changed data was performed on a daily basis.

This was a reasonable approach to accomplishing the backup of all the voluminous data. But with today’s zero-tolerance expectations and application complexity, this backup model is com-pletely outdated.

Virtualization can play a key role in making real-time disaster recovery a reality that is affordable for the overall enterprise. Using virtual technology, a server has an identical or redundant image created on a completely independent computer at a remote location in case of a disaster. The computer does not need to be iden-tical to the one whose image has been replicated.

In fact, it can be anywhere in the corpo-rate enterprise and on any available piece of hardware that can safely store this virtual image. This environment allows for delib-erate separation of physical hardware from

Virtualization makes real-time replication, a component of real-time

disaster recovery, more aff ordable because the hardware components are

used more cost-eff ectively.


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the software applications and operational functions. Each desktop at the fi nan-cial institution points to a virtual server instead of a physical server.

Virtual izat ion makes real-time replication, a component of real-time disaster recovery, more affordable because the hardware components are used more cost-effectively. The faul t to lerance of these platforms ensures 100 percent uptime. The single point of failure is distributed throughout the virtual platform, eliminat-ing downtime and service interruption.

The communications infrastructure is paramount in this type of disaster recovery solution when vir-tualization is coupled with real-time replication. The

hardware used for storing data and databases is not necessarily at the same location. That’s because the servers being refer-enced are virtual images of a server, not physical hard-ware locations.

The hardware locations would be very secure and free from disruption of environmental s torms, energy outages and even nuclear attack. Adequate bandwidth to transfer data is key so that replication can be achieved without delay between servers.

Service Oriented Archi-tecture (SOA) framework, new technology techniques built into the computing infrastructure facilitating rapid movement of data, is best suited for taking full advantage of the power and capabilities of virtual

machine technology. Very few banking platforms are available in true SOA. Also, vendors continue to expand their develop-ment of composite applications combining legacy applications with newer technology platforms to co-exist in clients’ computer systems, making disaster recovery increas-ingly diffi cult.

More important, few applications can take advantage of virtually replicated confi gurations because the applications need to be written with the intention of redirecting from one server to the other. The ability to automatically roll over to the new server with minimal disruption of service must be part of the application design. Legacy systems still remain at the core of today’s banking systems, and until that changes, achieving 100 percent uptime for most community banks is still a distant reality. ib

Mike Golebiowski is the president of Integrated Bank Technology, a provider of innovative software and support services for community fi nancial institutions. He can be reached at [email protected]._____________________


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With technology moving at the speed of light, and with community banks demanding the best of the best hardware and equipment to serve their customers and run their operations, manufacturers are unveiling new

products across various categories. Not only are these latest products easier to install and use, but many of them also are more aff ordable than their predecessors. Here’s a look at what’s new and what’s com-ing around the next corner in scanning equipment, ATM enclosures and kiosks, drive-up equipment, and vaults and deposit boxes.

HotHardware

Stuff Th e newest bank equipment coming to Main Street

— B y B r i d g e t M c C r e a —

Scanning Equipment The biggest news in scanners right now

is that their prices have come down below $1,000, according to Barry Landry, execu-tive vice president at check scanner reseller C&A Associates in Denham Springs, La. Cheaper equipment is available both for banks and merchants, and features include full-image and endorsement capabilities.

“Look back 10 years and a bank would

have paid $50,000 for the same piece of equipment,” says Landry, who points out that exact prices still depend on the scanning volume that the branch or merchant supports.

T h e e q u i p m e n t itself also is get-t i n g e a s i e r t o i n s t a l l a n d use , Landry

ays Landry, who points outces still depend on the me that the branch

pports.m e n t et-t o


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notes. Small Computer System Inter-face (SCSI) ports have gone the wayof the 8-track tape, with most devicesnow compatible with the easier-to-useUniversal Serial Bus (USB) ports. “It’sa matter of plugging it in and seeingthe ‘new hardware found’ prompt on adesktop,” he says. “It’s that easy.”

Other advances in scanning equip-ment include improved detectioncapabilities that can quickly determineif a check has been inserted twice,piggy-backed on another check or isupside down (for the latter, the equip-ment can automatically reorient theactual check). Up next, adds Landry, iscustomer capture via fl atbed scannersand—a bit further down the line—viacell phones.

Digital imaging devices that canscan both fronts and backs of checksor other source documents (such as abill-pay or remittance stubs) are alsogaining popularity among communitybanks right now.

Karin McNabb, assistant vice presi-dent of management and hardware forelectronic payment processing softwareand hardware provider RDM Corp. inWaterloo, Ontario, explains the devicesare able to read the MICR line or opti-cal character recognition font off of thecheck and then can send that informa-tion to the appropriate recipients forverifi cation.

The equipment, whichproduces highly credibleread rates and featurescompac t de s igns tha tare easy to use, is beingproduced in response toindustry requirements and

increased regulations, says McNabb.“Everyone is looking for a better,faster, smarter way to deal with checkfraud.”

ATM Enclosures and KiosksAs manufacturers cont inue to

develop multifunction ATMs, thecompanies that make the enclosuresand kiosks surrounding them are work-ing closely with those manufacturersto design products that will accommo-date the new pieces of equipment, withregard to both size and function.

Ray Nelson, general manager atATM kiosk and canopy manufacturerHeritage Industries in Wayne, Neb.,

reports there’s also a trend for commu-nity banks to use full-size kiosks at theirremote locations to improve securityand expand marketing options.

“We’re seeing a lot of differentATMs being deployed right now,” saysNelson, “and accommodating thisequipment requires a bit of ingenuity

on our part.” Enclosure man-ufacturers are coming up

with products of differentshapes and sizes to meet

those needs. Heritage,for example, offers a

SlimLine style thatallows banks torotate the prod-

uct 90 degrees to service it within thebuilding’s perimeters, thus enhancingsecurity.

Drive-Up EquipmentTo better serve their drive-up custom-

ers, community banks are demandinglarger transaction drawers to accom-modate commercial clients and moreconfigurable equipment, such asoverhead and extra-long pneumatictubes that allow for the best possiblepositioning when working between theteller and the automobile.

Making particularly big waves indrive-up equipment right now are new,adjustable audio and video systems thatare 16 inches by 9 inches in size, saysDan Grabowski, vice president of salesand marketing for Cincinnati-baseddrive-up equipment and vault manu-facturer Security Systems EquipmentCorp.

“Years ago we saw a lot of fraud tak-ing place in bank lobbies, so we putcameras in there,” explains Grabowski.“Now the bad guys have moved to thedrive-through, where new video andaudio systems allow the teller to adjustthe camera not only to see who is inthe vehicle, but to also take pictures.”

Institutions can run advertisingand marketing messages on the videoscreens, he says, making the newequipment an even more compellingbuy for banks.

Deposit Boxes and VaultsIn the vault space, community

bankers are talking about the newattendant-less safe deposit box opera-tions. Also known as a “touch-vault”system, the product eliminates theneed for keys and instead relies on bio-metric controls (or, alternatively, ATMor another type of card access).

“It’s great for the bank that wants toeliminate the vault attendant,” saysGrabowski.

Other advantages of the touch-vault

p

d

pufacturers a

with produshapes an

those nfor ex

Slimalro

A mix of technology vendors are producing state-of-the-art products thatare helping community banks work smarter, better and faster.


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ATM KIOSKS AND EQUIPMENT

Companion SystemsNorth Salt Lake, Utah (877) 736-3446www.companionsystems.com

Heritage IndustriesWayne, Neb. (402) 375-4770www.heritageind.com

Kiosks@WDCAugusta, N.J. (973) 383-6285www.kioskswdc.com

Kiosk Information Systems Inc.Louisville, Colo.(303) 466-5471www.kis-kiosk.com

Triton Long Beach, Miss. (228) 575-3100www.triton.com

SCANNING EQUIPMENT

Canon USA Inc. New Hyde Park, N.Y. (800) 652-2666www.usa.canon.com

Digital Check Corp.Northfi eld, Ill.(847) 446-2285www.digitalcheck.com

Panini North America Dayton, Ohio (937) 291-2195www.panini.com

RDM Corp.Waterloo, Ontario, Canada(519) 746-8483www.rdmcorp.com

Rosetta Technologies Corp.Tampa, Fla.(800) 937-4224www.rosettatechnologies.com

DEPOSIT BOXES AND VAULTS

Hamilton Safe Co. Inc.Fairfi eld, Ohio(513) 874-3733www.hamiltonsafe.com

National Safe Corp. St. Petersburg, Fla.(800) 634-8174www.nationalsafe.net

Security Systems Equipment Corp.Cincinnati, Ohio(513) 758-1070www.sse-corp.com

Williamson Safe Co. Hillsboro, Ohio(937) 393-9919www.wsco.net

Bank Hardware Equipment Companies

system include the ability to track exactly who has had access to which box (or boxes). If, for example, a cus-tomer attempted to open a box that wasn’t his or hers, then the bank would be able to track that information from a main offi ce, or on the box itself.

Vault panels also are getting lighter, says Grabowski. In the past, a Class One panel weighed about 70 pounds per square foot, while a Class Two weighed about 118 pounds per square foot. Today, more lightweight solutions (made of ceramic composite concrete material) are available at 35 and 50 pounds, respectively.

“That’s made installation much eas-ier and more feasible,” says Grabowski, “while still retaining the security level of a Class One or Class Two vault.”

Core ProcessingData storage is the name of the game

in core processing hardware, says Ed Wammack, manager of sales support and hardware and vendor relations for Jack Henry & Associates Inc. in Mon-ett, Mo. The need for greater archiving capabilities for check and document imaging, for example, is on the rise, as is the demand for “open architecture” systems that can accommodate a vari-ety of operating systems.

Also coming to the forefront—thanks to increased regulatory standards—is the use of biometrics, particularly in the areas of security and compliance. Finally, there is also a “green” push to consolidate servers as a way to reduce a bank’s carbon footprint through less power consumption.

As you can see, the community banking arena benefi ts from a mix of advancing technologies as vendors

scramble to produce state-of-the-art products that help community banks work smarter, better and faster. Expect to see even more innovations around the next corner, say hardware company

executives. They see “no end in sight” for future hardware innovations. ib

Bridget McCrea is a freelance writer in Dunedin, Fla.


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Techno Expo 2008

The Techno Expo classifi edlistings in the Decemberhardware-software issue ofICBA Independent Bankerfeatures companies offeringtechnology products andservices for the communitybank marketplace. Each listingin this classifi ed section isprovided by the identifi edcompany. A listing does notimply any endorsement by ICBAor ICBA Independent Banker.

Elan Financial Services is a leading and experienced EFT processor that provides reliable,fl exible and profi table ATM and debit programs. Elan also owns and operates the nationalsurcharge free MoneyPass(r) ATM network. Through our unique brand of service, supportand ongoing consultation, Elan delivers what other providers only promise.

Booth #200

ICBA Services Network represents the profi tability solutions from the ICBA, the Nation’sVoice for Community Banks®. When considering a new product line from a communitybank focused provider, the ICBA Services Network has solutions for your bank. ICBABancard/TCM Bank, ICBA Reinsurance, ICBA Mortgage, ICBA Financial Services and ICBASecurities.

Booth #300

ICBA Services Network1615 L St, NW, Suite 900Washington, DC 20036800-828-7183www.icba.org

Leading core technology & personal relationships for a more rewarding experience. Owned& trusted by bankers nationwide for 46 years. Advanced iCore processing & managementsoftware, in-house/outsourced. Relational data & integration. Advanced capabilities, con-trol & options for online, mobile & paperless banking; remote capture; ATM/card services;data security, more. Useful innovation focused on your success.

Booth #100

DCI (Data Center Inc)20 W. 2nd AveHutchinson, KS 67501620-694-6800www.datacenterinc.com

12|2008ndependentBanker 1A Indep

Elan Financial Services4 Station Square, Suite 300Pittsburgh, PA 15219800-343-7064www.elanfi nancialservices.com

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MoneyPass(r) is one of the nation’s fastest growing, cost-effi cient surcharge free ATM net-works. With access to more than 14,000 surcharge-free ATMs located from coast-to-coast,MoneyPass is convenient and accessible. Offer the ultimate in convenience and value byjoining MoneyPass and reward your fi nancial institution and your cardholders with the mul-tiple benefi ts of MoneyPass.

Booth #500

MoneyPass4 Station Square, Suite 300Pittsburgh, PA 15219866-322-7844www.moneypass.com

Booth #700

For the past 12 years, we have been helping community banks across the US in building asolid commercial lending program while maintaining compliance with asset quality, regula-tory examinations and earnings goals. By delivering affordable integrated lending softwaretechnology, community banks are able to deploy strong loan and portfolio controls in com-pliance with their loan policy and risk management objectives. Please visit with us aboutour Loan Management System (LMS) and integrated document imaging solutions (SDI).

Suntell1100 SW Wanamaker Road,Suite 101Topeka, KS 66604888-848-7349www.suntell.com

Mortgage Builder is an all inclusive loan origination software system for processing andclosing residential mortgage loans from pre-qualifi cation through interim servicing and de-livery with seamless integration to core banking systems. The system includes embeddedclosing document production, product and pricing eligibility, ability to create custom docu-ments and reports, over 60 interfaces available, paperless functionality and much more.

Booth #600

Mortgage Builder24370 Northwestern Highway,Suite 200Southfi eld, MI 48075800-460-5040www.mortgagebuilder.com

Booth #400

Metavante (NYSE:MV) delivers banking and payment technologies to over 8,600 fi nancialservices fi rms and business worldwide. Metavante products and services drive accountprocessing for deposit, loan and trust systems, image-based and conventional check pro-cessing, electronic funds transfer, consumer healthcare payments, electronic present-ment and payment, and business transformation services. Metavante is headquartered inMilwaukee.

Metavante4900 W Brown Deer RdMilwaukee, WI 53223-2422800-822-6758www.metavante.com___________


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D0

FIGHTING

PAYMENTS BASIC PRINCIPLES AND STEPS TO REDUCE CHECK, CARD AND ACH RISKS

EVER SINCE THE INTRODUCTION OF THE PAPER CHECK, COMMUNITY BANKS HAVE BEENCHALLENGED BY FRAUD AND HAVE SOUGHT TO DECREASE THE LOSSES DUE TO PAYMENTSFRAUD. HOWEVER, AS NEWER ELECTRONIC PAYMENT PRODUCTS SUCH AS DEBIT CARDSAND THE AUTOMATED CLEARING HOUSE (ACH) HAVE GROWN IN POPULARITY, COMMU-NITY BANKS CONTINUE TO SEE REDUCING PAYMENTS FRAUD AS A PRIMARY CHALLENGE.

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RGHIDE F

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CANCEL

BY CARY WHALEY


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12|2008 ICBA IndependentBanker 3512|2008 ICBA IndependentBanker 35


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ccording to ICBA’s 2007Community Bank Payments

Survey, continuing to managefraud remains a priority for mostcommunity banks, especially forpayments involving checks, debitcards, ACH and credit cards.While the liability models varydepending on the form of thepayment, in many cases the con-sumer ’ s bank mus t ab so rbtransaction losses, and such lossescontinue to mount for fi nancialinstitutions of all sizes.

According to a 2008 survey of

corporate fi nancial professionalsconducted by the Association forFinancial Professionals (AFP),71 percent of corporations expe-rienced attempted or actualpayments fraud in 2007. In a2007 AFP survey, 58 percent ofbusinesses with annual revenuesunder $1 billion were victims ofpayments fraud, compared with80 percent of businesses withannual revenues greater than$1 billion. AFP reported that 63percent of organizations subjectto payments fraud suffered no

fi nancial loss resulting from thefraud because their financialinstitution absorbed the cost.

Understanding the basics ofpayments fraud in paymentssystems can help your commu-nity bank develop the means tomonitor fraud and educate yourcustomers about what they cando to avoid it. Three types of pay-ments fraud involving checks,credit and debit cards, and ACHtransactions generate most ofthe transaction fraud affectingcommunity banks.

While check use continuesto decline, check fraud is

still prevalent. Of the companiesthat experienced attempted oractual payments fraud in 2007,94 percent were victims of checkfraud.

Check fraud continues tothrive, largely because desktoppublishing and copying makeit relatively easy to create orduplicate a check. However,many criminals use chemicals toremove or manipulate the infor-mation on checks. In most cases,these crimes begin with the theftof a check placed in the mail orone discarded in the trash.

Community banks can limittheir losses through holds on thedepositor’s account. Under Regu-lation CC (the Expedited FundsAvailability Act), banks mustgenerally make funds depositedby check available on the sec-ond business day after depositfor local checks and on the fi fthbusiness day for nonlocal checks.Banks may also use Regulation

CC exception holds for depositsof more than $5,000 or checks ofdoubtful collection for a maxi-mum of seven business days forlocal checks and 11 business daysfor nonlocal checks.

One of the most effective waysto reduce your corporate custom-ers’ exposure to check fraud is tooffer positive pay, which protectscompanies against altered checksand counterfeit check fraud.Positive pay allows businesses toprotect themselves against unau-thorized checks being paid. Acustomer sends the bank a dailylist of checks it has issued, sothe bank can match the checksas they are presented. Items notfound on that list are reported asexceptions that require a pay orreturn decision.

Other ways to reduce checkfraud are to offer your businesscustomers daily account reconcil-iation services and to encourageinternal controls such as theseparation of duties and dualcontrol.

Check FraudABC

Check fraud continues to

thrive, largely because desktop

publishing and copying make it

relatively easy to create or duplicate

a check.


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s the use of credit and debitcards grows, so does card

fraud. This fraud usually beginswith either the theft of the physi-cal card or the theft of card-relateddata through skimming, dump-ster-diving or a data networkbreach.

Merchants can avoid databreaches and protec t thei rcustomers’ identities by imple-menting the Payments CardIndustry Data Security Standard

(PCI-DSS). This data protec-tion standard was developed bythe major card networks to helpfacilitate the adoption of consis-tent data security measures andis intended to help organizationsprotect customer account data. Itis a multifaceted security standardthat includes requirements forsecurity management, policies,procedures, network architecture,software design and other criticalprotective measures.

Card Payments

Six Best Practices

Six basic principles are involved in eff ectively mitigating payments fraud risks:

1 Skills and ExpertiseHave skilled

employees who areknowledgeable aboutpreventing paymentsfraud. Banks withemployees who are skilledat mitigating paymentsrisk encourage ongoinglearning based on clearlydefi ned responsibilities andorganizational goals.

2 Awareness andCommunication

Encourage staff andcustomers to understandpayments risks and what’srequired to reduce those

risks. Again, keep staffcurrent about changes andtrends in payments fraud.

3 Policies andProcedures

Defi ne and documentpayments risk mitigationprocesses, policies andprocedures. Review thepolicies periodically.

4 Risk Measurementand Analysis

Assign formal responsibilityfor measuring and reportingpayments risk. Formalmetrics should be used tomanage tolerable risk.

5 AuditingPeriodically use

internal auditors (andexternal auditors forriskier processes, such asprocessing on behalf ofthird-party processors) toensure risk managementpolicies are sound and arefollowed.

6 Tools and AutomationTechnology can be

effective in monitoringpayments activity. Riskmitigation tools can be usedto automate managementand to monitor transactionsacross payments channels.

Merchants can avoid data breaches and protect their customers’ identities by implementing the Payments Card Industry Data Security Standard.

ABC


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The AFP survey indicates that ACH fraud is not prevalent,

with 15 percent of corporations experiencing financial losses from ACH fraud in 2007. Failure to adopt effective internal pro-cedures and bank fraud control services was the most frequently cited reason for the losses.

Best practices to control ACH fraud include using ACH debit blocks, daily reconciliation, ACH debit filters and timely ACH return. The most effective way for

banks to control fraud is to know their customers. This includes a thorough review of custom-ers during the sign-up process and continued monitoring for suspicious transaction activity. Knowledge of customers’ habits and the nature of their transac-tions is important. ib

Cary Whaley is ICBA associate director of payments and technol-ogy policy. Reach him at [email protected].

ACH Fraud

Failure to adopt eff ective internal

procedures and bank fraud control

services were the most frequently

cited reasons for the losses.

ABC

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Not only are Triton ATMs effective, they are reliable. When my customers use an ATM, they aren’tusing a Triton ATM, they are using a Security First Bank ATM. Each of those machines has our nameon it, which means our bank’s image is on the line with every transaction. So you’d better believe I take their dependability seriously. Fortunately, Triton does too.

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Ready for the Rule?


AAs thhee buuzzz abooutt thhe newww Internaattionaal AACCH Trannsssactionn (IIATTT) ruleccontiinnueess,, a reccuurrinng queeesstion resssounddss: “If we ddooon’t orrigiinaatteinnternnaatioonnal ACCHH traansaccctiions, doooes thhee nnew rulee aapply to uss??” Theeaanswweer iss an emmpphattic “YYeess!” Hereee’s wwhaatt you neeeed to ddo tto pppreparee.

BByyy Prriisscillaa HHHoollaaandd E f fect ive Sept . 18, 2009, an amendment to the NACHA Operating Rules will require all financial inst i tut ions to ident i fy internat ional payments made via the ACH Network as international ACH

transactions using a new Standard Entry Class (SEC) Code—IAT.The new rule also will require that all IAT payments include specifi c data elements defi ned by the Bank Secrecy Act’s Travel Rule. Office of Foreign Assets Control (OFAC) penalties for noncompliance are steep. They include hefty fines, forfeiture of property and criminal penalties, including imprisonment.


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“Even if you are not originating international ACH transactions, if you receive an IAT, you must comply with international rules and regulations,” says Janet O. Estep, president and CEO of NACHA—The Electronic Payments Association. “The deadline is fast approaching, and community banks should be taking steps to pre-pare. Community banks that do not originate international ACH transac-tions cannot refuse [to accept] the IATs or opt out of OFAC obligations.”

The NACHA rule identifies, for the first time, international ACH transactions by focusing on where the fi nancial agency that handles the payment is located. Thus, certain trans-actions currently channeled through a U.S.-based correspondent relationship and formatted as domestic transactions will, under the new rule, be identifi ed as IATs and subject to all specifi c rules and regulations.

The new rule requires all fi nancial

institutions to make signifi cant changes to their ACH systems so that they can scan IAT transactions and comply with OFAC requirements. While commu-nity banks can rely on outside vendors for ACH software, processing and screening, banks cannot contract away their OFAC liability.

To check your community bank’s readiness and to identify those areas that still need work, use this IAT Readi-ness Checklist:

Familiarize yourself with the new ACH rule related to IAT.

A thorough understanding of the new rule and your bank’s obligations regarding IAT transactions is critical. To order a copy

of the 2008 NACHA Operating Rules, visit http://pubs.nacha.org.

Develop and implement an ACH OFAC compliance policy for origination and receipt of IAT transactions.

All financial institutions must create a written OFAC policy for the identifi cation, review and investigation of IAT transac-tions. The policy should include such items as follows:• The name of the bank employee respon-

sible for OFAC compliance;• How the bank maintains an up-to-date

listing of prohibited countries, organiza-tions and individuals;

• How specifi c transactions (such as debits and credits) are handled;

• The information the bank checks against the Specially Designated Nationals (SDN) list;

• A copy of the bank’s OFAC review of on-us transactions;

• All OFAC reporting procedures;

• A list of record retention processes and procedures; and

• A copy of the bank’s OFAC compliance audit.NACHA recommends that each bank

sign up for the automated notifi cation of changes to the SDN list at www.ustreas.gov/offices/enforcement/ofac/sdn. Once registered, your bank will receive an e-mail notifying it of updates to the SDN list. When notifi cation is received, the new list should be downloaded, and the interdiction software or procedures should be updated.

Review all originators for possible IAT scenarios, and determine if any of the scenarios cause your bank to become a gateway operator.

Gateway operators are responsible for educat ing corporate or iginators on the specifics of the IAT. Some sce-narios are available at www.nacha.org/IAT_Industry_Information.

Educate and train appropriate staff (for example, originators; third-party providers; cash manage-ment sales offi cers; operations, compliance, audit and customer service employees).

Education, training and technical assistance are available from a number of resources, including your Regional Payments Associations, NACHA and the Federal Reserve. • Regional Payments Associations: www.

electronicpayments .org/ f inancial /fi .about.associations.php

• NACHA—The Electronic Payments Association: www.nacha.org/IAT_Industry_Information

• Federal Reserve Financial Services: www.frbservices.org

Contact your vendors and inter-nal ACH software managers.

This includes ACH software providers, service bureaus and processors, and indi-viduals or organizations that handle your cash management and reporting, OFAC screening, transaction processing and state-ment processing. Ask them the following questions:• When will you be ready?• When can we test?• What other downstream applications are

affected?

Contact corporate customers.• Review exist ing ACH agreements;• Determine which parties will be originat-

ing and receiving IAT payments;

“EEveenn iff you are not ooriginaattingg innternaatiional ACCHHHtrannssaccttionss, if yyou rreeceivee an IAATT, you mmmustt coommmply wwitthinnternaational rrulles aannd reguulatioonns.” —JJaanet O. EEsteep, NNACHA CCEO

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http://www.frbservices.org

http://www.ustreas.gov/offices/enforcement/ofac/sdn

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• Determine if any scenario causes you to be designated as a gateway opera-tor; and

• Provide education and training.

Review all downstream appli-cations for the ability to accept the new format and processing requirements.

Identify and resolve all issues and potential problems. Test and retest for readiness. Applications such as those for demand deposit account (DDA) processing, reporting systems, state-ments and online banking platforms should be reviewed.

Update applicable procedures and provide training on those procedures.

Educational tools and resources are available through your Regional Pay-ments Association and NACHA—The Electronic Payments Association.

Test readiness with vendors, ACH operators, correspondent banks, customers, etc.

NACHA advises community banks to test extensively, both internally and with outside vendors.

Although a huge step for the indus-try, IAT offers banks of all sizes a low-cost alternative to wire transfers for international transfers and the potential for new business opportunities in the international marketplace. The new rule also will enhance network process-ing effi ciencies and make ACH formats consistent with other formats like the Society for the Worldwide Inter-bank Financial Telecommunication (SWIFT) format, ensuring efficient mapping of data across platforms.

While such widespread changes present significant challenges, they also mark the maturation of the ACH payments system. Once these changes are in place, the industry will be better positioned for growth.

“These changes are very positive,” says Estep. “While change is never easy, the new IAT rule will create the neces-sary conditions for cross-border ACH to mature in the U.S. arena, which is good for the industry as a whole.” ib

Priscilla Holland is an Accredited ACH Professional, senior director inter-national programs for NACHA—The Electronic Payments Association. Reach her at [email protected].

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12|2008 ICBA IndependentBanker 4512|12|12|200200200888 ICBICBICBA IA IA IndendendepenpenpendendendentttBanBanBankerkerker 45 45 45

Change is the only constant in the world of fi nancial fraud. According to the Associa-tion of Certifi ed Fraud Examiners (ACFE), thieves are joining forces and workingtogether as partners or in loosely knit groups. Computer hackers, for example, have

recently begun selling fi nancial data and other personal information to “carders”—those whosteal credit cards.

B Y C A R O L P A T T O N

The upcoming ICBA convention willfeature the latest in fraud prevention



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Keeping up with the imagina-tive ways of criminals who arefi ne-tuning their skills and scam-ming community banks is a lotlike predicting the exact time andpath of tornadoes—you neverknow when or where they’regoing to hit until after the dam-age is done.

“The idea is to stay one stepahead of those perpetrating thefraud,” says Allan Bachman,certifi ed fraud examiner and edu-cation manager at the ACFE inAustin, Texas. “Any fraud preven-tion that’s created by a humancan be breached by [another]human.”

Still, community bankers neednot raise the white fl ag. Attendingthe ICBA National Conventionand Techworld, which will beheld in Phoenix from March 18to 22, is among the most cost-effective solutions. By talkingwith exhibitors, workshop speak-ers and other attendees, bankerscan learn about the latest bankscams, new products and servicetrends.

The largest educational venuefor community bankers, theconvention will offer a uniqueopportunity to explore betterways to protect banks and theircustomers. It will increase com-munity bankers’ awareness of

next-generation technology andservices, which Bachman believesis a critical fi rst step.

“Fraud is always going to be aproblem and something that com-munity bankers need to be awareof in order to fi ght it,” says Bach-man. He adds that while no onereally knows the exact amountof bank losses due to fraud, theACFE projects total losses acrossall industries to reach $994 bil-lion this year.

One future trend convention-eers will likely hear more aboutfrom vendors is software solu-tions that cross boundaries, saysJ-B Rambaud, executive vicepresident, chief security and riskoffi cer at Fiserv EFT in Portland,Ore., which processes debit trans-actions for fi nancial institutionsnationwide. To catch crooks, heexplains, data security systemsshould talk to each other andbroadly check patterns in all oftheir customers’ fi nancial activi-ties. Fiserv EFT is researchingsoftware that will examine fraudfrom multiple dimensions. Thetechnology will search for andcombine information relatedto all types of fraudulent activi-ties, not just check or credit cardfraud. This way, Rambaud says,banks develop an accurate pic-ture of all customers, especiallythose who pose a high risk.

According to Rambaud, fi nan-cial institutions need to activelyinvolve customers in fraud pre-vention. He believes customerscan offer all types of assistance,from alerting banks to theirupcoming travel plans to request-ing phone or e-mail security alertswhen checks or credit card pur-chases exceed a predetermineddollar amount. “Communitybankers need to not be afraid to

National Convention and Techworld

All Points Security

Within the next fi veyears, Ralph Sum-merford believes

community bankers will beusing biometric systems toprotect their customer infor-mation and help combatfi nancial fraud. All biomet-ric systems operate in similarways, says the president ofForensic/Strategic SolutionsPC, a consulting group thatsupports forensic accoun-tants and fraud examiners inDallas, Texas, and Birming-ham, Ala. A scanner capturesa high-resolution image of aspecific part of the humanbody—like a fingerprint orthe distance between a per-son’s eyes—then compares itagainst images stored in thebank’s central database.

“The biometric profilecan’t be stolen or used byanyone else,” Summerfordsays. In the meantime, hesays, financial institutionsshould consider the latestanti-fraud analysis softwaresystems that spot abnormalpatterns in customer transac-tion and fi nancial activities.

“Community bankers needto be aware of everythingthat’s out there and avail-able in the marketplace,”he says. “That’s the reasonfor a convention. There’sno better place to get that[information].”

March 18 to 22


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engage [customers] a little morein the battle,” he says.

Hot TrendsAs a Techworld exhibitor at

the upcoming ICBA NationalConvention, Fiserv EFT will bemarketing its latest service—RiskOffi ce—at the convention. RiskOffice provides real-time fraudinvestigation and answers bank-ers’ requests for live investigatorswho understand fraud to helpthem stop it from spreading toother banks in real time.

Likewise, another Techworldexhibitor, ATTUS TechnologiesInc., has received an increase inrequests for information securityreviews. Lori Moore, director ofcompliance at Charlotte, N.C.-based ATTUS, stresses that thecompany offers technology-based products and solutionsrelated to fraud prevention, riskmanagement and regulatorycompliance.

Among several factors drivingsuch requests are the new “redflag” consumer identity theftprevention regulations, whichwent into effect Nov. 1, 2008.The regulations require banksto develop comprehensive pro-grams, policies and proceduresthat minimize identity theft andfraud for both new and existingaccounts. “The requirements,responsibilities and obligationswith respect to fraud prevention,information security and home-

land security have become sooverwhelming that the banks arestarting to look more toward thirdparties,” Moore explains. “It’s afull-time job, and a lot of smallbanks can’t afford to employ per-sonnel specifi cally for that task.”

ATTUS introduced new soft-ware in June, called Out of

Wallet, that can help commu-nity banks comply with the newlaw and authenticate the identityof a person seeking to open anaccount. To confi rm a customer’sidentity, the software pulls infor-mation from credit reports—forexample, current and previoushome addresses or the name ofthe individual’s mortgage servicecompany—that only the prospec-tive accountholder would know.

The company also employsethical hackers, sometimes calledwhite hat hackers, who helpfi nancial institutions proactivelyidentify crime magnets or vul-nerabilities within their internalnetwork.

Out of Harm’s WayWith the increase in elec-

tronic payments, fund transfersand storage of electronic data,Moore reports that more com-munity banks are falling victimto fraud and appreciate the need

to take advantage of comprehen-sive fraud prevention services andtools.

Town and Country Bank inStephenville, Texas, with $155million in assets, lost nearly$25,000 last year, says Jim Cham-bers, the bank’s president andCEO. “I plan on attending theconvention this year to look intotech issues, since fraud is a big

“Fraud is always going to be a problem andsomething that community bankers need to beaware of in order to fight it.” —Allan Bachman, fraud examiner

12|2008 ICBA I d d t

(Continued on page 49)


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20th Annual BankDirector Current IssuesSeminarIndustry experts discussin-depth the currentissues affecting bankboards. Topics includecurrent regulatory issues,capital market mergerand acquisition trends,and advice to attract andretain baby boomer fi nan-cial assets.

ICBA SERVICESNETWORK SEMINARS

Forum for FamilyOwned and CloselyHeld Banks (ICBAFinancial Services)This invitation-only eventprovides expert insightson what your businessneeds to know.

The Mortgage Opportu-nity Explosion(ICBA Mortgage)Learn how to capturemore residential lend-ing market share and bethe fi nancial resourcefor your customers forgenerations.

The Investment Port-folio—What to Do Now(ICBA Securities)Identify and explorehigh-value portfolioinvestment alternativesamid a market providingnarrow yields.

Understanding Con-sumer PaymentTrends—2009(ICBA Bancard)Understand markettrends to learn how tomaximize your bank’scredit card revenue forevery marketplace.

Building ShareholderValue (ICBA CapitalMarkets)Hear insights on effectivecapital management fromhigh-performingcommunity banks.

Trends in Card Fraud(ICBA Bancard)Explore dynamic datasecurity tools andtechniques to keepcardholders and cardportfolios safe.

Developing an Effec-tive Marketing Plan(ICBA Bancard)Learn how to increaserevenue and build cus-tomer loyalty throughyour bank’s debit cardprogram.

New Era for PortfolioManagement(ICBA Securities)Discover the upside ofwhat appears to be badnews in institutional port-folio investing, and learnhow to take advantage ofthe opportunities.

The 2009 ICBA National Convention and Techworld in Phoenix in Marchwill once again offer several preconvention educational opportunities for

community bankers and directors. On Wednesday, March 17, eight preconventionseminars sponsored by the ICBA Services Network are available to convention-goers. The20th Annual Bank Director Current Issues Seminar, a half-day conference for communitybank directors, also takes place on the same day.

Preconvention Education Events

For the latestinformation on

these seminars, go onlineto ICBA’s National Conventionand Techworld Web page at

www.icba.org/convention.Bookmark the site and use it forall your convention plans. It willoffer information on workshops

and speakers, Techworldtradeshow exhibitors,and hotel and travel

bargains.


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issue that concerns our bank,” says Chambers. “We can sustain the $25,000 losses but want to prevent the $1 million losses.”

Fidelity National Information Services (FIS) in Jacksonville, Fla., which offers a suite of risk fraud solutions, routinely surveys its 8,500 bank and credit union clients nationwide. Over the past two years, the growth in the num-ber of deposit account charge-offs

due to fraud soared by 66 percent, says Kay Nichols, the executive vice president who also manages the decisions solutions division at FIS in Jacksonville, Fla.

Still, some financial institu-tions are underreporting fraud, Nichols says. “They’re not record-ing [fraud] under the appropriate categories,” she says. “It would get refl ected as a charge-off that wasn’t necessarily fraudulent. Now banks are embracing the fact that they’ve got a fraud prob-lem.” However, most financial institutions that have been using a broader set of anti-risk tools

over the last couple of years are making greater strides in fi ghting fraud, she adds.

Several hundred community banks, according to Nichols, have recently signed up for FIS Red Flag solution. The company’s five bundled technologies help banks comply with red fl ag rules. One of its software programs introduced in July—Address Analysis—analyzes customers’

address or zip code changes and flags the potential for account takeovers.

I n r e s p o n s e t o t h e h u g e demand, Nichols adds, the FIS convention exhibit booth at Techworld will include a team of fraud experts and a central database that the company is building. The new database will contain information about fraud-ulent activities reported by client banks that can then tap into it to identify fraudsters or high-risk individuals and learn about new bank scams. Next year, the com-pany also plans to launch new

technology that collects data from multiple bank areas to establish customer patterns and, hopefully, prevent fraud from spreading beyond one or two banks.

Nichols believes that tech-nology ultimately will catch up to financial criminals. Stolen customer data, she says, will become useless once sophisti-cated technology helps banks accurately predict certain indi-

vidual patterns—like how much money people usually withdraw from ATMs, whether they use wire transfers, and where they use their credit cards.

“Unless fraudsters know the exact behavior the consumer exerts at every point, they won’t be able to use the stolen data because they won’t be able to copycat that pattern of behav-ior,” says Nichols. “We’ll be able to shut that fraud down before it even happens.” ib

Carol Patton is a freelance writer in Las Vegas, Nev.

Financial institutions need to actively involve customers in fraud prevention.

Site of the Action—The Phoenix Convention Center will be ground central for community bankers during the ICBA National Convention and Techworld in March.


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Here’s what happens when you move from one legacy system to another.

Swapping old technologies simply won’t move your bank forward.Legacy core processing systems date back to the ’60s. They are inefficient, risky and they put banks at a severe disadvantage. To thrive in today’s competitive market, banks must examine how relevant their technology is to their current and future needs.

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B ankruptcies, conserva-torships and excessivelyvolatile credit markets

have portfolio managers increas-ingly searching for investmentsthat offer the safety of principaland liquidity with only a ter-tiary, at best, concern for yield.Small Business Administration(SBA) pools have always been asafe harbor in times of volatility.SBA pools offer the full faith andcredit of the U.S. government;uncapped, adjustable couponrates keeping them in step withchanging market rates; and yieldswell above alternative short-duration investments.

In addition, the spreads avail-able in SBA pools are currentlywider than their historical levels,thus removing much of the pre-mium exposure typical to theseinvestments (see Chart I). So,if you had previously dismissedSBAs because of yield concerns,or if improving your risk-basedcapital ratio has appeal, pleaseread on.

Safety of PrincipalSince 1984, more than $50

billion of SBA pools have beencreated. They are composed ofloans to small business customersand are guaranteed by the U.S.government, and therefore havea zero percent risk weighting.Because of this explicit guaran-tee, SBA pools have the samecredit quality as U.S. Treasuryobligations (as do Ginnie Maesecurities, which were covered in

October’s Portfolio Managementcolumn). Portfolio managersfocused primarily on safety ofprincipal can take comfort inowning any of these products.

Minimal Price VolatilityThere are two aspects of SBA

pools that limit their price vola-tility: the lack of credit risk andadjustable coupon rates.

Credit deterioration has been asignifi cant catalyst in much of themarket turmoil over the past 12 to15 months. As a result, the liquid-ity of most fi xed-income sectorshas been dramatically reduced,causing signifi cant price volatilityand the inability to sell securi-ties when needed. For example,yield spreads on 15-year, agency-issued mortgage-backed securities(MBSs) have widened 139 basispoints since the duress began inthe summer of 2007. In that sameperiod, spreads on SBA premium10-year weighted average matu-rity (WAM) pools have widenedjust 71 basis points. This vari-ance is even more pronouncedwhen comparing SBA pools toother riskier asset classes likesome corporate debt or mortgagederivatives.

Additionally, the uncapped,adjustable coupon rates on mostSBA pools allow them to keeppace with current market yields.This point is particularly germanewhen investing during periods oflow interest rates. Adjustable-rateSBA pools generally have a three-month fl oating coupon rate that


By Jim Reber and Craig Dismuke

Full Faith and Credit,Plus Spread

Quality Yields Current Yield 1

Par SBA Sample Pool

Premium SBA Sample Pool

Fed Funds Rate

3-month Treasury Bills

3-month Fannie Mae Discount Notes

2.36%

3.12%

2.00%

0.99%

2.2%

1 Based on current offering rates — 9/30/2008

C H A R T 1

Short Duration, High Credit


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Jan. 2

003

Jan. 2

004

Jan. 2

005

Jan. 2

006

Jan. 2

007

Jan. 2

008

9.00

8.00

7.00

6.00

5.00

4.00

3.00

2.00

1.00

0.00

3-Month LIBOR

Money Market Investment PoolPrime RateFed Funds

Correlation Between Prime, Fed Fundsand Money Market Rates

C H A R T 2 adjusts at a fixed spread to theprime rate. Prime is an excellentindex for many investors becauseof how well it correlates to alter-native product yields: Fed Funds,money market funds, investmentpools, commercial paper orLondon interbank offered rate(LIBOR) fl oaters. Chart 2 illus-trates the correlation of the primerate to some key indices.

Yields Have ImprovedThe yield available in SBA

pools varies from structure tostructure with particular empha-sis on the amount of premiumpaid. Investments priced withinone point (1 percent) of partypically offer a slight spreadover the Fed Funds target rate,whi le premium pools o f fermore spread. The spreads onpar-priced pools have widened,offering premium-averse buy-ers a unique opportunity in thissector. However, the spreads inpremium products have widenedalso (see Chart 3) and continueto be much wider than par-pricedpools, offering an equally uniqueopportunity.

Like other MBS-type securitiesthat are prepayable, the premiumrisk must be considered whenpaying premiums for SBA pools.However, the premium risk hasbeen more easily projected in thepast with SBA pools because theirprepayments have been moreconsistent and much less sensi-tive to changes in interest ratesthan their MBS counterparts.These loans require consider-able effort to refinance, thushindering the economic value ofrefi nancing.

Still, the question can be raisedas to why an instrument that haszero credit risk has gone down

C H A R T 3

-1.50%

-1.70%

-1.90%

-2.10%

-2.30%

-2.50%

-2.70%

BEEM (Spread to Prime)

Oct. 2

005

Jan. 2

006

April

2006

July

2006

Oct. 2

006

Jan. 2

007

July

2007

April

2007

Oct. 2

007

Jan. 2

008

April

2008

July

2008

Oct. 2

008

S o u r c e : V i n i n g S p a r k s S B A T r a d e D e s k - 1 0 - Y e a r W A MP r i m e + . 3 2 5 % - . 3 7 5 % P r e m i u m S B A P o o l

SBA Premium 10-Year WAM BEEM


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in price relative to U.S. Trea-sury obligations. The answer, in a nutshell, is liquidity. While the SBA market has reason-able depth, and bid/ask spreads are comparable to agency MBS markets, the fact that the pools are not fully fungible and have

uncertain (albeit fairly predict-able) cash fl ows means that they will yield more than Treasury obligations. And, since the cur-rent market is beset by liquidity issues, all product spreads have widened. This is most likely a temporary situation.

Diversify and ConquerSBA pools stand out as an excel-

lent alternative to money market funds in terms of yield. While the yield on these instruments will not currently be as attractive as longer duration, fi xed-rate alter-natives, the benefits of owning uncapped, fl oating-rate securities will be evident when rates rise.

And for the masses of investors simply looking for strong credit,

the full faith and credit of the U.S. government is reassuring. The spread widening in the SBA sector has removed some of the premium exposure in these pools, leaving them as even more attrac-tive investment options. For more information regarding the value in SBA pools, please contact your account representative. ib

Jim Reber is president of ICBA Securities, ICBA’s institutio-na l b r oke r - d ea l e r f o r c om-munity banks. Reach him at [email protected]. Craig Dismuke is senior vice president of ICBA Securities. Reach him at cdismuke@icbasecurit ies .com. Both can be reached at (800) 422-6442.

Holtmeyer & Monson, an ICBA Preferred Service Provider, assists community banks in the origination, sale and servicing of SBA loans. Contact Arne Monson, the company’s president, at (800) 340-7304.

More Advice

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capital markets


s the banking crisis grindson and on, communitybanker s a re g rowing

increasingly weary of the monot-onous stream of negative eco-nomic news. The status quo nowseems to be a distant memory.Virtually all banks must face fi vevery diffi cult challenges: signifi -cant write-downs of govern-ment-sponsored enterprise hold-ings, uncertain net core depositlevels, unprecedented bank stockdevaluations, a dearth of liquidityand capital, and continued creditportfolio deterioration.

T h e F D I C ’ s c l o s u r e s o fbanks—in the double-digits forthe fi rst time since 2002—dem-onstrate that inaction based oneternal optimism of asset appre-ciation is no longer a viableoption.

Over the past several quarters,many community bank execu-tives have reported a signifi cantspike in their nonperformingassets. Based on second-quartertrends, the growth in nonper-forming assets continues to faroutpace the growth in net charge-offs. Of even greater concern is

By Bill Sammon and Ken Segal

Dealing with Nonperforming AssetsTo Preserve Capital Long Term

S o u r c e : S N L F i n a n c i a lF I G U R E 1

NCOs/Total AssetsNPAs/Total Assets(NPAs 90+ DPD)/Total Assets

1.20%

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%

0.51% 0.50%0.46%

0.38%0.30%

0.38%

0.62%

0.75%

0.85%

0.94%1.05%

1.14%

0.39% 0.39% 0.40%

0.32% 0.33%

0.06% 0.06% 0.06% 0.06% 0.05%

0.26%

0.05%0.09%

0.13%0.20%

2001

2002

2003

2004

2005

2006

2007

Q1-200

8

Q2-200

8

Perc

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NPAs/Total Assets Versus NCOs/Total Assets


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the growth of delinquent loanbalances—a leading indicatorsuggesting that nonperformingasset balances should presentan ongoing strain for quarters tocome.

Figure 1’s data represent theratios of nonperforming assets tototal assets, nonperforming assets90-plus days past due to totalassets, and net charge-offs to totalassets for publicly traded U.S.banks with assets ranging from$250 million to $10.25 billion.

Before our industry can be onthe road to recovery, rising non-performing asset levels must,ultimately, be addressed eitherthrough loan work-outs or assetsales, or those assets must be con-verted to net charge-offs. We useSNL Financial data and discus-sions with hundreds of bankers,

investors, regulators and inter-ested parties to sort through thecurrent situation and advise ourclient banks on how to deal withthe ongoing crisis.

Banks and savings institu-tions are structured as regulatedand leveraged entities that areentrusted to take in deposits,make loans that will be repaid,manage a net interest margin andgenerate positive returns to theirstakeholders. From an economicperspective, many good lendingdecisions are required to offseteven one bad loan. It is importantfor banks to rely on credit analy-sis, recognize potential issues andresolve problem loans as early aspossible.

As Figure 2 shows, the surge innonperforming assets is adverselyaffecting banks in virtually all

Median Nonperforming Assets/Total Assets (%)

S o u r c e : S N L F i n a n c i a l

Northeast

Southwest

Mid-Atlantic

West

Southeast

Total U.S.

Midwest

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

2001

2002

2003

2004

2005

2006

2007 TT

M

Q1-200

8 TTM

Q2-200

8

F I G U R E 2

Five challengesthat all banksmust face:

1 Signifi cantwrite-downs ofgovernment-sponsoredenterprise holdings

2 Uncertain net coredeposit levels

3 Unprecedentedbank stockdevaluations

4 A dearth of liquidityand capital

5 Continuedcredit portfoliodeterioration

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capital markets

58 ICBA IndependentBanker 12|200858 ICBA IndependentBanker 12|2008

regions. The Southeast and theMidwest had been enduring thegreatest brunt of the economicstorm over the last several years,as nonperforming assets in thoseregions were consistently abovethe U.S. median (see the bluedashed line in Figure 2).

Of greatest concern, however,are the rapidly disturbing trendsin the West, which has expe-rienced a 15-fold increase in

nonperforming assets since 2006(see the goldenrod yellow line inFigure 2).

Given the rising number ofbank failures and regulatorycensures and the erosion inboth investment and loan port-folios, “evaluating options” with

little intent to make the toughdecisions is a fl awed approach—particularly in the current diffi -cult environment. If banks are tosurvive and ultimately prosper,they must create proactive gameplans, make the tough decisionsand tenaciously do what is neces-sary to ensure their survival.

Do we observe any com-mon approaches to success?Absolutely.

The banks that recognize theirnonperforming assets as early aspossible, establish defendablemarket values for those assets and,ultimately, sell those assets atclose to their established marketvalues are positioning themselvesto survive. Surging nonperform-

ing assets industrywide suggest acontinued strain on the overallfi nancial system, and the banksthat are less aggressive in recog-nizing their troubled assets andare valuing assets at non-market-driven book values are facinggreater scrutiny both internallyand externally.

For publicly traded banks, theequity markets offer an objectiveand impersonal assessment ofbank value and health. As Figure3 suggests, outside stakehold-ers are valuing banks based onpublicly available informationon both the bank and its peergroup. While the connection isclear, Figure 3 affi rms that thereremains an inverse correlationbetween nonperforming assetsand the stock price of a bank.

On a national basis, Figure3 confirms the hypothesis thatequity values have been nega-tively affecting banks with rising

F I G U R E 3

1.50%

1.30%

1.10%

0.90%

0.70%

0.50%

0.30%

0.10%

-0.10%

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

Q4-200

5

Q1-200

6

Q3-200

6

Q2-200

6

Q1-200

7

Q4-200

6

Q2-200

7

Q3-200

7

Q4-200

7

Q1-200

8

Q2-200

8

NPAs (%)

Stock ($)

It is important for banks to rely on creditanalysis, recognize potential issues andresolve problem loans as early as possible.


360 Banks ($250 Million - $10 Billion) Median Bank: $1.2 Billion

Pric

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Equity Value Versus Nonperforming Assets


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problem assets. The West andSouthwest regions of the UnitedStates are enduring the greatestlevel of stress (see Figure 4).

Consequently, many bankexecutives are better servingtheir shareholders by proactivelyaddressing nonperforming assetswith a greater focus on mar-ket rather than book values.Regardless of reported GenerallyAccepted Accounting Princi-ples (GAAP) equity values, theequity markets already appearto be applying estimates to non-performing asset values that arerefl ected in quoted share prices.So the data suggest that greatershareholder value can be cre-ated by managing nonperformingassets with relatively less focus ontheir impact to book equity andmore on the arguably more effi -cient equity markets.

In the ongoing crisis, manybanks are facing challenges that

are testing their ability to survive.They are struggling to remain sol-vent, liquid and viable, and mostbanks now realize that portfoliosmay get worse before improving.

Now is the time to proactivelyassess the current and anticipatedhealth of your community bank’sloan portfolio. The banks that can“return to being a bank” will bethose that address their problemshead-on and aggressively focuson the true valuation and liquid-ity of their loan portfolios.

So, given the downward valu-ation of troubled loans andshrinking capital bases, how arebanks specifically disposing oftheir troubled assets?

It is impractical for many banksto withstand the capital chargesassociated with a completedivestiture of their nonperform-ing assets. Assuming that thoseassets range from being slightlyto severely troubled, many banks

are opting to divest themselves oftheir most troubled (and markeddown) exposures. By doing so,those institutions are removingtheir most concerning exposuresat market values that are pre-sumably relatively close to theirinternally marked values.

The ideal result is a reductionin reported nonperforming assetsthat minimally impacts a bank’sincome statement and capitalbase. ib

Bill Sammon is the director of cap-ital markets for ICBA Securities,ICBA’s institutional broker-dealerin Memphis . Reach him [email protected] or(800) 880-4693. Ken Segal is asenior vice president and directorof the asset fi nance services divi-sion with Howe Barnes Hoefer &Arnett Inc. Reach him at [email protected] or (781) 631-2227.

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

1.50%

1.30%

1.10%

0.90%

0.70%

0.50%

0.30%

0.10%

-0.10%

Q4-200

5

Q1-200

6

Q3-200

6

Q2-200

6

Q1-200

7

Q4-200

6

Q2-200

7

Q3-200

7

Q4-200

7

Q1-200

8

Q2-200

8

F I G U R E 4

NPAs (%)

Stock ($)


West and Southwest

Pric

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Perc

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Equity Value Versus Nonperforming Assets for the West and Southwest Regions

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vantage point

By Brian King

Real-Time Core ProcessingComputing to speed transactions and increase operational efficiency

s more community banksimplement check imag-ing in the back offi ce and

as the acceptance of distributedcheck capture in bank branches,remote offices and consumers’homes increases, so too willdemand for real-time core pro-cessing and access to transactioninformation.

Traditionally, checks were col-lected at branches throughout theday and transported to regionalor centralized processing sites tobe encoded, proofed, sorted andposted to accounts during thenight. This batch model providedno real-time access to checkinformation; the items were pro-cessed and posted overnight.

Fortunately, imaging, datarecognition and distributed cap-ture offer a solution. Using thesetechnologies, tellers can balancedeposits and release items fordeposit in about the same amountof time required for traditionalcheck processing. The continued

emergence of e-payments (thinkmobile banking) and f iercecompetition between depositoryinstitutions (and in some cases,their nonbank competitors) willdemand that organizations equipthemselves with real-time pro-cessing and ways to use it.

Both consumers and smallbus ines s owner s who havebecome used to the real-timeenvironment of the Internet, theATM network and their mobilephones are feeling entitled toreceive that same immediacyin all their transactions. What’smore, as the volume of paperchecks continues to decline,driving up the per-unit cost ofprocessing, financial servicesinstitutions increasingly will lookto reengineer their processes toachieve greater efficiencies,namely reducing the amount ofhuman intervention.

The rapid transit ion frompaper to electronic payments issteadily strengthening the casefor moving beyond traditionalbatch processing to real-timetransaction processing. Real-time processing provides agilitythat cannot be achieved with abatch-processing model, meaninginstitutions can respond quicklyto unanticipated business oppor-tunities. For instance, a fl exiblereal-time platform allows for atimely response to market andregulatory changes.

Little wonder that a studyreleased earlier this year byFinancial Insights, an IDC com-pany, found that 23 percent of


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vantage point

banks plan on replacing their core banking systems in the next three years.

Generally speaking, check imaging already is delivering sig-nificant process improvements over traditional check processing, including reduced sorter time, fewer courier runs and less time required to prepare cash letters. Combining check imaging with real-time core processing enables remote capture to increase the number of “once and done” transactions a bank handles. It also generates major cost savings by eliminating memo-post sys-tems, reengineering the handlingof transactions and installing newer hardware and software, which carry lower maintenance costs.

Real-time core processing also delivers more data much faster. Until now, banks have relied on manual processes to comply with regulations such as those from the Sarbanes-Oxley Act. But they have a unique opportunity to re-architect systems to manage a torrent of real-time data as well as implement business processes to leverage and make sense of it all.

Community banks can use this information to drive enter-prise systems for fraud detection, compliance, audit, data min-ing and more. Using real-time check fraud detection services, banks can identify check fraud at the point of deposit, protecting against losses to the bank and its customers. The move to real-time

processing can be compared to a gold rush, where all of a sudden, there’s this wealth of informa-tion. But instead of panning for nuggets, banks will use analytics, data mining and information fi lters.

And with an integrated real-time core processing system, community banks can reduce the time and resources required for applications development and computer operations support, ease the integration of acquired institutions and, most impor-tant, get a consolidated view of a customer’s accounts across the enterprise.

Financial institutions that move to real-time processing could benefit by reducing back-office volumes and lowering trans-portation and processing costs. And the benefi ts could be huge, including savings on back-offi ce effi ciency and lowered transpor-tation and processing costs, since items no longer would need to be couriered to centralized facili-ties for processing. Banks also will realize immediate savings by moving from old legacy sys-tems to new software with lower annual license renewal fees and more affordable upgrades.

Most important, real- t ime core processing holds the prom-ise to provide an adaptive, agile and scalable platform to support inevitable industry changes—particularly the migration from centralized paper check pro-cessing to distributed electronic banking and payments—that are on the way. ib

Brian King is senior vice president for BenchMark Consulting Inter-national, an FIS Total Solution Partnership.i


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lender l ife


Large banks that fell into laxunderwriting practices inpursuit of subprime loans

have been forced to curtail muchof their small business lending.Although community banksaren’t immune to the broadereconomic ripple effects of thecredit crunch (that the bank-ing giants helped create), theirlongstanding fi nancial prudenceallows them to take advantage oflending opportunities that the bigbanks can no longer exploit.

Now community banks arecarefully moving to meet thecapital needs of small businessesthat are short on credit, leavingthe largest fi nancial institutionsto fi ght for survival. “What we’refi nding is that the loan demandis very strong for our clients, andit’s stronger than we’ve seen inquite a while,” says Pete Sposito,president and CEO of Bankers’

Bank Northeast in Glastonbury,Conn., which serves 180 com-munity banks and has a strongreading of the region’s lendingpulse. “And I attribute that to thebig banks being less aggressive.”

The FDIC’s second-quarterreport shows that banks withunder $1 b i l l i on in a s se t sincreased their commercial andindustrial (C&I) loans by 2.99percent in the second quarter of2008, up from 2.10 percent inthe previous quarter. Conversely,banks in the $50-billion-plus-asset category saw a 0.08 percentnet decrease in the rate of C&Iloans in the second quarter, afterposting a 3.42 percent increasein the first. The percentage oflarge banks thinning out theircommercia l and indus t r ia lportfolio in the second quarteralmost tripled, from 13 percent to37 percent.

lender l ife

By Ray Pelosi

Moving To Meet DemandAdhering to principles, community banks fill the large-bank lending gap

SecondQuarter2008

FirstQuarter2008

FourthQuarter2007

ThirdQuarter2007

SecondQuarter2007

FirstQuarter2007

Total Quarterly % Change in Dollars 2.99 2.10 3.69 2.41 3.54 2.54

% That Decreased C&I Lending 40 40 39 44 38 40

SecondQuarter2008

FirstQuarter2008

FourthQuarter2007

ThirdQuarter2007

SecondQuarter2007

FirstQuarter2007

Total Quarterly % Change in Dollars -0.08 3.42 4.10 11.99 4.61 3.03

% That Decreased C&I Lending 37 13 18 13 13 24

For information, visit www2.fdic.gov/qbp. Source: FDIC

FDIC Quarterly Banking Profi le

Banks with more than $50 billion in assets:Outstanding Commercial and Industrial Loans

Banks with less than $1 billion in assets:Outstanding Commercial and Industrial Loans

Now communitybanks are

carefully movingto meet the

capital needs ofsmall businessesthat are short on

credit, leaving thelargest financial

institutions tofight for survival.


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Is it possible to change your namewithout changing your signature?

Absolutely.

Feel free to call your local Silverton representative any time. In fact, we’d encourage you to talk to anyone atSilverton Bank. You’ll find they haven’t changed much either. 800.277.2265 www.silvertonbank.com

Yes, The Bankers Bank has changed its name to Silverton Bank. However, the real

news is what hasn’t changed. Strong partnerships, responsible fiscal management and a

commitment to not compete with our customers — these are just some of the core traits

that have defined our bank for the past 21 years. And with the same ownership and same

leadership that certainly won’t change now. If anything, the dedication clients have come

to expect from us will only continue to grow stronger. You have our word, and our

signatures.

Board of Directors

Paul T. Bennett,President,South Banking Company, GA

Tom A Bryan,President/CEO,Silverton Bank, GA

Michael Carlton,President/CEO,Crescent State Bank, NC

W. Roger Crook,President/CEO,Bank of Walterboro, SC

J. Michael Ellenburg,President/CEO,First Southern State Bank, AL

Brian R. Foster,President/CEO,First Chatham Bank, GA

Charles F. Harper,Chairman/President,The Commercial Bank of Ozark, AL

Christopher B. Maddox,President/CEO,The Peoples Bank, GA

J. Edward Norris,President/CEO,Plantation Federal Bank, SC

Stephen L. Price,Chairman/President/CEO,Florida Community Bank, FL

Bobby Shepard,President/CEO,PlantersFIRST, GA

R. Ronald Swanner,President/CEO,Home Savings Bank, NC

Silverton Bank. Member FDIC. Equal Housing Lender.

Ronald F. Miller,President/CEO,Summit Community Bank, VA

James J. Penland,Chairman/CEO,First Vision Bank, TN


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lender l ife

“The customers are just cominghome to the community banks,”adds Steve Brown, president andCEO of San Francisco-basedPacific Coast Bankers’ Bank,which extends service to severalhundred community banks.“Some individuals who ownbusinesses—sort of as sole propri-etors—and small business ownersare saying, ‘I have all my eggs inthis one bank’s basket, and thereseems to be a lot of noise around[it]. I need to spread it out.’”

Now there’s a lot more low-h a n g i n g f r u i t f o r c o m m u -nity banks to pick, adds TomTenwalde, executive vice pres-ident-lending for Great LakesBankers Bank in Gahanna, Ohio.“We have had numerous reportsfrom client banks that largerbanks are actively pushing bor-rowers out the door,” Tenwaldesays. “This includes borrowerswith apparently solid credit his-tories. [So] community banks aresorting through these transactionsto see which are bankable whilepreserving liquidity for existingclients.”

Part of the big-bank lendingfalloff, notes Sposito, is that thesecondary market has bottled upsignificantly. Big banks can nolonger offer long-term, fi xed-ratedeals at below-market rates oncommercial loans and then sellthem to Wall Street. “Of coursemany of [the big banks] couldn’tsell [their loans] quickly enoughand got stuck with them on theirbooks,” he adds.

Participation loans also haveprovided an ideal way for bankers’banks—by becoming conduits ofpooled lending capital for severalcommunity banks—to supportthe lending projects of commu-nity banks, explains Sposito.

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120

115

110

105

100

95

90

Market Price Volatility


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Even so, the big-bank crisisdoes have a downside for com-munity banks. “As some of theselarger guys run into liquidityproblems, they’re raising theinterest rates that they pay ondeposits,” says Tim Mayberry,senior vice president and chieflending offi cer of First NationalBank of Pasco in Pasco County,Florida. “It makes funding prob-lematic for us.”

Communi ty banks ’ l end-ing activities aren’t necessarilyimmune from the overall slump-ing economy. The FDIC reportfound that small business loansgrew at just 3.4 percent for theyear ending in June 2008—lessthan half the growth rate of theprevious year. David Ochsner,president and CEO of NebraskaBankers’ Bank in Lincoln, Neb.,thinks that community bankswith less business loan activitymay just be hunkering down forthe time being.

“It may just be the bank itself isnot being as aggressive and is try-ing to get through this downturnin the economy, too,” Ochsnersays. “Even in smaller towns,people are pulling back, regard-less of what the bank does.”

Nevertheless, there’s recent sta-tistical evidence that communitybanks, as common sense lenders,have made better, sounder com-mercial lending decisions thanthe big banks. In the FDIC’sQuarterly Banking Profi le for thesecond quarter of 2008, bankswith assets of more than $1 bil-lion had an average charge-offrate of 1.46 percent—more thantriple the 0.44 percent averagefor banks below the $1 billionasset level.

In Mayberry’s view, some largerbanks gambled—unwisely—that

the collateral for their payment-option loans would grow bigenough to fully repay those loans.What separates community banklending from their much largerand less careful brethren is dispa-rate core lending principles, heobserves.

“We underwrite for charac-ter and capacity, with collateralvalue being a distant third consid-

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eration,” he explains. “Becauseof that we have very few problemloans.”

How few? First National Bankof Pasco has less than one-half ofone percent of its $152 millionin assets in nonaccruals and onlythree classifi ed loans. ib

Ray Pelosi is a freelance writer inDecatur, Ga.

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FifthThird Processing Solutions . . . . . 17 . . . . . . www.eft.53.com

fi sCAL Financial Analysis . . . . . . . . . . 2 . . . . . . . www.fi scalsoftware.net

FLOODWATCH. . . . . . . . . . . . . . . . . . 4 . . . . . . . www.fl oodwatch.fprsi.com

Harland Financial Solutions . . . . . . . . c2 . . . . . . www.harlandfi nancialsolutions.com

ICBA . . . . . . . . . . . . . . . . . . . . . . . . . 21 . . . . . . www.icba.org

ICBA Services Network . . . . . . . . . . . 8 . . . . . . . www.icba.org

ICBA Services Network . . . . . . . . . . . 44 . . . . . . www.icba.org

Kansas Bankers Surety Co. . . . . . . . . 40

LendingTools.com . . . . . . . . . . . . . . . 13 . . . . . . www.lendingtools.com

Metavante. . . . . . . . . . . . . . . . . . . . . . 7 . . . . . . . www.metavante.com

NADA Used Car Guide Co. . . . . . . . . 66 . . . . . . www.nada.com/b2b

National CD Rateline Inc. . . . . . . . . . . 43 . . . . . . www.cdrateline.com

National Processing Company. . . . . . 63 . . . . . . www.npc.net

Open Solutions Inc. . . . . . . . . . . . . . . 51 . . . . . . www.opensolutions.com

Panini North America . . . . . . . . . . . . . 50 . . . . . . www.paninina.com

Redwing Software . . . . . . . . . . . . . . . 20 . . . . . . www.redwingsoftware.com

Remote Deposit Capture.com . . . . . . 38 . . . . . . www.remotedepositcapture.com

Sandler O’Neill & Partners . . . . . . . . . 10 . . . . . . www.sandleroneill.com

SCAN COIN . . . . . . . . . . . . . . . . . . . . 18 . . . . . . www.scancoin-usa.com

SHAZAM Inc. . . . . . . . . . . . . . . . . . . . 15 . . . . . . www.shazam.net

Silverton Bank . . . . . . . . . . . . . . . . . . 65 . . . . . . www.silvertonbank.com

Suntell. . . . . . . . . . . . . . . . . . . . . . . . . 5 . . . . . . . www.suntell.com

Taylor Bean & Whitaker . . . . . . . . . . . 61 . . . . . . www.taylorbean.com

Triton Systems . . . . . . . . . . . . . . . . . . 39 . . . . . . www.triton.com

Wolters Kluwer Financial Services . . . 19 . . . . . . www.wolterskluwerfs.com

Young & Associates Inc. . . . . . . . . . . 18 . . . . . . www.younginc.com

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M SaGEF


M SaGEF

http://www.americanbanksystems.com

http://www.bancvue.com

http://www.benchmarkinternational.com

http://www.coreim.com

http://www.elanfinancialservices.com

http://www.eft.53.com

http://www.harlandfinancialsolutions.com

http://www.icba.org

http://www.icba.org

http://www.icba.org


http://www.lendingtools.com


http://www.nada.com/b2b

http://www.cdrateline.com

http://www.npc.net

http://www.opensolutions.com

http://www.paninina.com

http://www.redwingsoftware.com

http://www.Capture.com


http://www.sandleroneill.com

http://www.scancoin-usa.com

http://www.shazam.net

http://www.silvertonbank.com


http://www.taylorbean.com


http://www.wolterskluwerfs.com

http://www.younginc.com

http://www.fidelityinfoservices.com

http://www.fiscalsoftware.net

http://www.floodwatch.fprsi.com

http://www.icba.org


http://www.icba.org


15 minutes with ...

Roger PlemensPresident and CEO of $1.07 billion-asset MaconBank Inc. in Franklin, N.C.

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Tell me about the time you were most proud to identify yourself as acommunity banker.

It was in 1988, and we had only occupied our new building for about two yearswhen it was struck by lightning during a storm at 2 a.m. on a Saturday.Our building was burned and totally destroyed.

However, through the efforts of our employees and community,we opened for business in a temporary facility on [the following]Monday morning at 8:30 a.m. So we did not miss a day of work.It was a great effort by everyone.

You serve as chairman of the Macon County EconomicDevelopment Commission. Explain your work through thecommission in promoting Macon County as the “mostlivable” county in Western North Carolina.

The word that we want to get out is that this community is notjust a second-home or retirement community. We have good ac-cess to water, sewer, natural gas, great infrastructure, quality oflife and are strategically located. By getting this information out, wehope to attract a more diverse group of new residents to the area.

What extra measures does your staff take to give back to theMacon County community?

We put our money where our mouth is. Our employees are encouragednot to just go to work and go home but to become a part of the com-munity—by joining civic clubs and donating their time to charities andchurches.

As an institution, we give back monetarily. We donated $50,000 to our locallibrary a couple of years ago and also donated funds to our community college.

What kind of student were you in school?

I went to school full-time and worked full-time during college because I wasmarried after my sophomore year. I was an honor student, but it did not comenaturally to me so I worked very hard.

All these years later, how does your approach to school infl uence the wayyou approach your current job?

In school, I developed a great work ethic and learned how to multitask by balanc-ing studying and working, and doing well at both. I apply those skills to my work atMacon Bank Inc. on a daily basis.

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M SaGEF


M SaGEF

http://www.icba.org


http://www.icba.org


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M SaGEF


M SaGEF

http://www.moneypass.com

http://www.icba.org


http://www.icba.org


p

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M SaGEF


M SaGEF

http://www.fidelityinfoservices.com

http://www.icba.org


http://www.icba.org


Documents

Independent Banker (December 2008)