Virginia Banker March/April 2011

In ThIs Issue BOLI RIsk ManageMent | OptIMIzIng effIcIency | spRIng eteRnaL

BankingirginiaV March/April 2011

Virginia Bankers association — serVing Virginia’s Financial community since 1893

Green ShootsGreen Shootsof economIc

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2010-2011 OFFICERS AND DIRECTORS OF THEVIRGINIA BANKERS ASSOCIATION

Charles H. Majors, Chairman, Danville

William Couper, Chairman-Elect, Washington, D.C.

H. Watts Steger, III, Immediate Past Chairman, Buchanan

O.R. Barham, Jr., StellarOne Corporation

Katherine E. Busser, Capital One Financial Corporation

Charles K. Collum, Jr., Burke & Herbert Bank & Trust Co.

Larry G. Dillon, C&F BankRandy K. Ferrell,

The Fauquier BankPete Jones,

Wachovia/Wells FargoMonte L. Layman,

The Page Valley BankGail Letts, SunTrust BankSamuel L. Neese,

Highlands Union BankSusan Ralston, Bank @LantecDavid P. Summers,

Virginia Heritage BankJeffrey M. Szyperski,

Chesapeake BankDaniel G. Waetjen, BB&TRichard T. Wheeler, Jr., Franklin

Federal Savings Bank

statements of fact and opinion are made on the responsibility of the authors alone and do not implyan opinion or endorsement on the part of the officers or members of VBa.

AT-LARGE MEMBERSBenefits Corporation Chair

Richard M. Liles, McKenneyManagement Services Inc. Chair

Frank Bell, III, MidlothianGovernment Relations

Committee ChairChristopher W. Bergstrom, McLean

VBA Education Foundation ChairJ. Peter Clements, Carson

EDITORIAL & EXECUTIVE OFFICES4490 Cox Road Glen Allen, VA 23060804-643-7469 Fax 804-643-6308www.vabankers.org

Bruce T. WhitehurstPresident and CEOVirginia Bankers Association

Chandler DeweyCommunications & Marketing ManagerVirginia Bankers Association

SUBSCRIPTIONSIf you would like to subscribe to Virginia Banking, contact Chandler Dewey at [email protected]. Virginia Banking is published bi-monthly. subscription price is $25 per year and $45 for two years for nonmembers. copyright 2011.

featuresOptimizing the Efficiency Ratio: factors you can control toIncrease profitabilitythe key to growing profitability lies in strategic planning. the efficiency ratio can help a community bank develop and refine its growth strategies.

More Than 350 Bankers Visit General Assembly for Banker Day 2011On Jan. 13, members of the VBa met with state representatives.

4 calendar of events 5 Insights 7 Worth noting16 Washington Update17 Legal Line

18 Legislative Update19 Welcome new associate Members20 compliance corner 22 Bankers on the Move

send us your thoughts or ideas on Virginia Banking!

please e-mail chandler Dewey at [email protected]. Has your information changed?

please e-mail kellee edelin at [email protected] with your new contact information.

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BankingirginiaVVirginia Bankers association — serVing Virginia’s Financial community since 1893

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in every issue

Demystifying the Purchase and Risk Management of BOLInine steps to analyze and manage bank-owned life insurance policies.

DIRECTORSTimothy M. Warren Chairman Timothy M. Warren Jr. CEO & Publisher David B. Lovins President Vincent M. Valvo Group Publisher & Editor in Chief

FINANCE & ADMINISTRATIONJeffrey E. Lewis Controller / Director of Operations

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©2011 the Warren group Inc. all rights reserved. the Warren group is a trademark of the Warren group Inc. no part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. advertising, editorial and production inquiries should be directed to: the Warren group, 280 summer street, Boston, Ma 02210. call 800-356-8805.

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March/April 2011 | Virginia Banking 3

march/April 2011

instructor-leD seminars

Security Workshop, CharlottesvilleApril 12-13

Advanced Commercial Lending 2011, Glen Allen (Richmond)April 18-19

Problem Loan Workout and Business Development During Challenging Times, Glen Allen (Richmond)April 26

HR and Benefits Symposium, Charlottesville May 1-3

Bank Call Officer Training, Glen Allen (Richmond)May 10

Introduction to Lending Compliance Seminar, SandstonMay 10

Mortgage Update – B to Z Seminar, SandstonMay 11

Mastering HMDA Seminar, SandstonMay 12

Operations and Technology Workshop Stonewall Jackson, StauntonMay 17-18

BSA 2 Day School, Glen Allen (Richmond)May 18-19

instructor-leD courses

PRInCIPLeS Of BAnkInGAPRIL 18

COnSUMeR LenDInGAPRIL 18

GeneRAL ACCOUnTInGAPRIL 18

GeneRAL ACCOUnTInGMAy 9

PRInCIPLeS Of BAnkInGMAy 16

COnSUMeR LenDInGMAy 16

eCOnOMICS fOR BAnkeRSMAy 16

WeBinars

CURRenT TRenDS In AGRICULTURAL LenDInGApril 12

THe BASICS On HSASApril 13

OPTIMIZInG PRICInG DeCISIOnS In ALCOApril 14

PROACTIve ReLATIOnSHIP DeveLOPMenTApril 18

A PRACTICAL GUIDe TO COnSUMeR LenDInGApril 26

GLOBAL CASH fLOWApril 26

Live event Online Seminar Webinar

Information and online registration is available at the vBA website. Please either go to www.vabankers.org or use this form to check the box next to the program you want information about, then fax the form to the vBA office at 804-643-6308. The vBA will send you information about the program as soon as it is available, usually eight weeks before the program.

name_________________________________________________ Bank/firm___________________________________________

Address_____________________________________________________________________________________________________

City________________________________________________________________ State/Zip______________________________

Phone___________________________ fax_________________________ e-mail___________________________________

For more information go to www.vabankers.org.

4 Virginia Banking | March/April 2011 www.vabankers.org

Calendar of Events

Those who know me well know that I

am not a fan of cold weather. Those

cold days and early dark evenings just

don’t appeal to me, so much so that I actually take

note of the extra few minutes of daylight every

day as we move through January and February.

When we have warmer days – currently the case

as I write this column – it feels like I have stolen a

day or two from Old Man Winter. Give me spring,

summer and fall, but you can have winter, snow

and all.

In many respects, our industry and our entire

nation have been through a long and rough winter

since the fall of 2008. The housing market down-

turn has had a chilling effect on our economy as

it drove us from financial crisis to recession. The

unemployment rate and the high level of foreclo-

sures have added to our challenges. The banking

industry has been vilified, with broad generaliza-

tions from the media and some political leaders

that completely confused traditional banking

from Wall Street and from the shadow banking

system. We have witnessed a huge overreaction

to this financial winter in the form of costly new

compliance burdens that will work against con-

sumer benefit; we will have to work even harder

to reach a more appropriate balance. We have seen

regulators plow through our industry even when

there is no snow to be moved. We have had plenty

of darkness and not much daylight.

Fortunately, winters do not last forever, nor

do economic downturns in the United States, no

matter how severe. We are beginning to see signs

of spring and we are becoming more optimistic

about what lies ahead. Recent economic indicators

are encouraging and economists are talking more

and more about the “green shoots” that indicate

economic growth. As we see signs of spring, our

moods lift and we begin to see potential in ways

that were hard to imagine during those winter

months.

As often happens in early spring, we will have

warm days and cold days. Sometimes we may feel

like we are taking two steps forward and one step

back. But overall, we will be making progress as

we head to more sustainable good times.

To be sure, we have many challenges and no

small amount of change in store for our industry.

The recent financial winter will be throwing new

compliance burdens our way for some time to

come. It will be more expensive to operate a bank,

and that will chal-

lenge us as we

adapt and move

forward. The

VBA will be very

focused on help-

ing our member

banks stay on top

of emerging regu-

latory and legislative issues, and we will be ask-

ing bankers to continue your excellent grassroots

communications that have become so important to

our industry’s future. We also want to hear from

you whenever you see ways that the VBA can be

supportive of your bank.

Good riddance winter and welcome spring!

Bruce Whitehurst

President and CeO,

virginia Bankers Association

Bruce Whitehurst can be reached by e-mail at [email protected].

signs of spring

March/April 2011 | Virginia Banking 5 www.vabankers.org

”“ fortunately, winters do not last forever, nor do economic downturns in the United States, no matter how severe. We are beginning to see signs of spring and we are becoming more optimistic about what lies ahead.

Insights

VBA Benefits Corporation

Through this program, you can:

Improve your employees’ health, Increase productivity, Reduce future healthcare costs, Reduce absenteeism and turnover, Increase employee morale, And enhance the bank’s image

More Than Just a Medical PlanMore than just medical benefits, the VBA Benefits Corporation brings you programs that address the TOTAL HEALTH of your employees.

We understand that, as a bank operating in your community, you want to be seen as the employer of choice. Through the health promotion and wellness programs offered by VBA Benefits, you can achieve this status by participating in Banking on Wellness.

Banking on Wellness also benefits your bank by offering financial incentives from the Benefits Corporation for providing programs promoting healthier lifestyles.

Qualifying programs include:

Future Moms Health Risk Assessments Weight Management Bank Healthy Challenges Walking Competitions Health Screenings

In 2011, banks who complete a Banking on Wellness scorecard will be refunded one month’s medical administration fee.

Bringing You All the BestFor several years, all preventive care screenings have been covered in the VBA medical plans according to Anthem’s Preventive Health Guidelines, long before the Healthcare Reform Mandate. Several years ago, preventative vision screening exams were added to all the medical plans to encourage employees to keep their eyes healthy too. More recently, the Benefits Corporation added the Employee Assistance Program to the benefits that all banks receive if they have medical coverage through the VBA. This program provides your employees with resources for dealing with life’s day-to-day issues.

At VBA Benefits, we’re attuned to your objectives and committed to bringing you ALL THE BEST!

Roy Allison (right), VBA Benefits Corporation, delivers the 2010 grand prize Banking on Wellness check to Farmers & Merchants Bank. Accepting the check (pictured from left) are Sharrie Harrison, Human Resources, Ellen Branner, Sr. Vice President-Human Resources, and Dean Withers, CEO, of Farmers & Merchants Bank. The VBA Benefits Corporation again distributed over $20,000 to banks participating in the Banking on Wellness program in 2010.


BankPac achieVes annual FunDraising recorD

The ABA National BankPAC Committee has reported another

impressive year for BankPac, which reached a year-end total of

$1.8 million! A huge majority of the state associations put forth

a tremendous effort to achieve or exceed their fundraising goals.

Thirty state associations raised 100 percent or more of their goal

in 2010, with Virginia reaching 205 percent of its goal for the

second year in a row. Virginia was listed as reaching the highest

percentage of its goal, and it was also a “Top Dollar State” after

it reached over $100,000.

community Bankers’ Bank anD cBB Financial corP. name neW Directors

The board of directors of CBB Financial Corp. has elected Ellis

L. Gutshall and Christopher J. Honenberger as members. Guts-

hall is president and CEO of Valley Bank in Roanoke, a position

he has held since in 1996. Honenberger is president and CEO of

ClearPoint Financial Solutions, Inc., a national nonprofit credit

counseling organization headquartered in Richmond. He is a

member of the Virginia Bar Association and has practiced law

in Orange and Charlottesville and was president and CEO of

Second Bank & Trust in Culpeper from 2000 to 2007. Both have

previously served on the board of Community Bankers’ Bank

and as chairman of the board of the bank.

Gutshall will also serve as a director of Community Bankers’

Bank, while Honenberger will serve as an advisory director.

icBa announces nominees For 2011-2012 executiVe committee

Salvatore Marranca, ICBA chairman-elect and president and

CEO of Cattaraugus County Bank, Little Valley, New York, be-

came chairman at the 2011 ICBA National Convention and Tech-

world, held March 20-24 in San Diego. Jeffrey L. Gerhart, chair-

man of Bank of Newman Grove, Newman Grove, Nebraska, was

nominated as ICBA chairman-elect, while William A. Loving

Jr., president and CEO of Pendleton Community Bank, Frank-

lin, West Virginia, was nominated to become ICBA vice chair-

man. James D. MacPhee, CEO of Kalamazoo County State Bank,

Schoolcraft, Michigan, became ICBA immediate past chairman.

A special congratulations to Bill Loving of Pendleton Commu-

nity Bank, a VBA member bank, on his nomination as ICBA vice

chairman.

three generations oF Whitehursts come together at the general assemBly

During the 2011 General Assembly Session, VBA President

and CEO Bruce Whitehurst’s son, Carson, served as a page for

the Virginia House of Delegates. Joining Carson on the floor on

February 3 were Bruce and his father, Rev. Walter Whitehurst,

who delivered the morning prayer to the House of Delegates.

carDinal Bank names neW Director oF human resources

The board of directors of Cardinal Bank recently announced

the election of Cheryl L. Steinbacher as senior vice president

and director of human resources. In this position, Steinbacher

will lead initiatives in human resource management within the

Cardinal network.

Prior to joining Cardinal, Steinbacher spent six years at Inte-

gra Bank in Indiana, where she held roles in human resources

and leadership development. She has a bachelor’s degree from

the University of Tennessee, as well as a master’s degree from

Vanderbilt University, both with concentrations in Human Re-

source Development and Educational Leadership. Over the past

five years, Steinbacher has actively participated in numerous

industry-wide leadership initiatives, advisory councils and non-

profit community boards.

NotingWorth

Higher performing commu-

nity banks know that the key

to growing profitably and

building franchise value is to control

what they can and strategically man-

age against market factors they can-

not. The efficiency ratio has become a

prime focus as banks strive to offset

the additional expense of loan loss pro-

visions to cover asset quality issues.

The efficiency ratio is comprised of non-

interest expense, noninterest income and

net interest margin. However, let’s focus

on expense management and fee income.

Community banks have the greatest con-

trol over these variables, which are criti-

cal to maintaining or optimizing overall

earnings performance.

To begin, let’s focus on three of the fol-

lowing categories – personnel, occupancy

and other non-interest expenses.

Personnel expenses – The average

personnel expense runs about 54 percent

of non-interest expense for banks and

thrifts in the United States. Personnel

decisions are amongst the most difficult

to make and many banks put off these

decisions although they can have the

greatest impact on the bottom line.

Examine hiring and salary increases

(freezes may be necessary for cutting

costs and even saving jobs) and items

such as 401(k) discretionary/matching,

health benefits and training/recruiting

and flex hours. Adjustments in these

areas can immediately improve your

bank’s efficiency.

Higher-performing banks also pay

close attention to how they staff their

branches in both thriving and turbulent

markets. When is the last time you took

a hard look at your bank’s staffing per

branch? High performers typically hire

fewer employees who take on multiple

responsibilities, and compensate them

well. High performers also do an excel-

lent job of setting forth achievable incen-

tives that are aligned with shareholder

objectives, especially those actions that

generate revenue to drive better individ-

ual and overall bank performance.

Occupancy expenses – Branch profit-

ability plays a huge role in overall fran-

chise performance, yet banks don’t often

focus on this factor. Occupancy expenses

represent about 14 percent of noninter-

est expense, so evaluate them as with

personnel expenses on an annual basis –

small adjustments here can make a big

impact. One simple metric to analyze is

revenues generated per branch office.

U.S. average is about $2.1 million, but

success will be determined based upon

your specific operating strategy. Often,

banks do not generate enough revenue to

support even the fixed costs of a branch.

With continued pressure on deposit ser-

vices charge fee income, it will become

increasingly difficult to justify underper-

forming branches.

For new locations, consider the aver-

age square feet per branch (ask yourself,

how much do you really need?); for exist-

ing leased locations, can and should you

renegotiate leases (after all, it is a buyer’s

market right now); and if sale/leaseback

is an option that could provide your bank

with short-term benefits. Also examine

where technology could reduce occupan-

cy costs. For example, Voice over Internet

Protocol technology or remote branch

capture could potentially save thousands

of dollars in communications costs.

Other non-interest expenses – It’s vi-

tal to review every vendor contract care-

fully and categorize each by need. Can

you rationalize each on an annual basis?

Consider economies of scale and vendor

consolidation.

FDIC premiums, an expense you can’t

control, are likely to go up. Develop a

strategy to make up those costs through

fee adjustments or by lowering your

bank’s cost of funds. Another way to

keep expenses in check is to employ tech-

nologies to lower payment costs. Lastly,

take full advantage of your association

memberships and their benefits; you may

be able to leverage association programs


optimizing the efficiency Ratio: factors You can control to Increase Profitability

By kevin tweddle

that reduce the costs of things like sup-

plies, subscriptions and insurance.

INCREASE NONINTEREST INCOME

Most banks have already cut expenses

significantly; they have no more to gain

right now and expense reduction is not

sustainable for the long term. The other

important side of the equation is fee

income, which offers banks of all sizes the

greatest opportunity to improve efficiency,

but the current climate necessitates that

you think of new and creative ways to

generate it. Following are things that the

high performing banks are doing:

Deposit service charge fees. Now that

many banks have completed the Reg E

opt-in process, they will find that that

even in the most optimistic cases they will

have lost about 20 perecent of their over-

draft/NSF fee income. Banks mus come

up with alternatives. We recommend a

full review of all customer charges, fo-

cusing on those that incent the proper

customer behavior and don’t penalize

your better customers. Examples include

charging higher foreign ATM fees, charg-

ing for incoming wires, raising limits on

reward programs (i.e. debit card usage)

and annual card fees.

Remote capture/cash management.

For commercial-oriented institutions in

metro areas, remote deposit capture is a

“must-have” product. It reduces courier

expenses and is a great way to bring in

non-interest bearing demand deposit ac-

counts. High performers grow small busi-

ness/commercial deposits by packaging

commercial and retail accounts, and by

tying loans and other products to deposits

(and vice versa), to offer preferential rates.

It’s critical to know the competition and

their small business offerings so that your

bank can clearly differentiate itself.

Wealth management. It’s important to

consider whether there is sufficient de-

mand for wealth management products

(primarily comprised of trust, brokerage

and insurance) in your bank’s particular

market to make this effort worthwhile. Trans-

action activity volume must be solid and

customers’ current price sensitivities must

be considered. Establishing clear bench-

marks, understanding the demographics of

your market and price analysis through peer

analysis are factors critical to the success of a

wealth management program.

Every community bank’s efficiency ra-

tio can be optimized by gaining greater

control of expenses and by taking steps to

increase or add revenue streams. How-

ever, no all-encompassing target ratio ap-

plies to all banks. Each bank’s efficiency

ratio reflects the specific kind of business

it’s in, so the strength of your bank’s ratio

will be dependent upon its specific oper-

ating strategy.

Kevin Tweddle is executive vice president

of sales and operations for Bank Intelligence

Solutions from Fiserv. Reach him at kevin.

[email protected].


Demystifying the Purchase and Risk Management of BOLI

Attendees at bank regulatory and

professional association meetings often

ask how to take the mystery out of the

purchase and risk management of BOLI.

The following simple “Nine-Step Due

Diligence Process” is often the answer.

It was first presented at the OCC’s Na-

tional Capital Markets Conference in De-

cember 2009.

The nine steps should be viewed from

the perspective that the purchase and risk

management of BOLI is nothing more

than making a long-term, variable inter-

est rate loan to an insurance company.

(The Interagency Guidelines governing

the purchase and risk management of

BOLI are found in OCC Bulletin 2004-56

and FDIC FIL-127-2004; hereinafter, the

guidelines.)

First, a little background about BOLI

is warranted. Out of a universe of 1,000-

plus life insurance companies in the U.S.,

only about 40 carriers have ever had a

true, single premium BOLI product. Of

these, probably about half are still active

in the BOLI market.

There are two basic types of BOLI

products: whole life and universal life.

This article, however, should not be per-

ceived as promoting any particular in-

surance carrier or type of BOLI product.

A whole life product is the more tradi-

tional form of life insurance. It is a bun-

dled product and is actuarially designed

such that based upon a set premium

payment the product is guaranteed to

provide permanent life insurance protec-

tion. This form of guarantee is not found

in a universal life product.

The great preponderance of BOLI is

universal life. Universal life is an “unbundled

product.” Simply put, it should be thought

of as a life insurance product made up of

two buckets. One bucket, the “cash bucket,”

represents the cash value and the other

bucket, the “death benefit bucket,” the death

benefit. As long as there is sufficient cash in

the cash bucket through premium payments

and investment earnings to cover the cost

of the death benefit in the death benefit

bucket, the policy owner has life insurance

protection.

A great majority of the banks in the U.s. have either

bought or are considering the purchase of bank-

owned life insurance (BOLI) to address employee benefit

costs and/or offset the costs of executive or director benefit

plans. It’s likely that the use of BOLI will continue to grow

with the anticipated rise in healthcare costs under the new

healthcare laws.

By John h. milne, JD, llm and gerald l. martin, cPammB consulting, llc, richmond


Universal life can be further broken

down into three subcategories: general

account, separate account, and hybrid.

The reference to “general account”

simply means the cash in the cash bucket

is held and managed in the carrier’s

general portfolio and the crediting rate

is dependent on the carrier’s declared

crediting rate.

A separate account product is a

universal life product in which the assets

are placed in a fund that is separate from

the carrier’s general account and are

separately managed.

The hybrid product has features of both

separate account and general account and

is promoted as having potentially lower

risk weighting features; a claim that

banks should independently validate by

conducting their own analysis.

Due to space limitations, this article

will necessarily concentrate only on

whole life and general account univer-

sal life BOLI products, which constitute

most of the BOLI products found in the

market today.

The nine-step due diligence process

is designed to help minimize the risk

that a bank will make some missteps

in building and/or managing its BOLI

portfolio:

1. THE BANK SHOULD REVIEw THE INSURANCE CARRIER’S RATINGS FROM BEST, S&P, FITCH, AND MOODY’S.

The guidelines state that “carrier selec-

tion is one of the most critical decisions

in a BOLI purchase [and] credit quality

is a key variable.” The ratings reflect the

carrier’s claims paying ability, which is

the bank’s ultimate investment risk. The

bank should also review the carrier’s

past financial ratings for trends.

2. IS THE CARRIER A STOCK OR A MUTUAL COMPANY?

According to Moody’s 2005 Report

on Life Insurers, “mutual companies

are relatively more concerned with

solvency and financial strength

compared to the growth and

profitability objectives that are typically

the focus of stockholder-owned

insurers.” Moody’s 2009 Report said

that “the U.S. mutual life insurance

companies have more successfully

protected and maintained their credit

worthiness than their stockholder-

owned rivals.” All things being equal, a

mutual company may be preferred.

3. HOw EFFICIENTLY DOES THE CARRIER OPERATE ITS BUSINESS?

The bank should review the carrier’s

operating fundamentals; i.e., mortality

and expenses, lapse ratios, and invest-

ment returns. A comparison should be

made to other BOLI carriers. The com-

parison will show how efficiently the

carrier operates, which may indicate

how one BOLI product might perform

long-term against another.


Continued on page 14

It’s only a sampling, but look what’s in the compliance services package TCA provides VBA member banks:

• Hands-on help, with scheduled on-site audits.• Timely, accurate information about compliance issues and trends.• Advice about how to meet federal compliance requirements.• An e-newsletter heads-up when the rules change.• Access to the TCA compliance professionals, the people who make TCA the

most respected source of compliance information and assistance in banking.

Whether your need is BSA/AML, IT vulnerability scans and web site security reviews, or training that keeps your staff — and directors — up-to-date, TCA is your Compliance Advantage.

Call us . . . today . . . to learn more. 1-800-934 -7347.

Thomas Compliance Associates, Inc.2846 N. Mildred Avenue, Suite 150Chicago, Illinois 606571-800-934-7347

www.tcaregs.com


1 Over 350 bankers came out to the Capitol this year for

Banker Day.

2 VBA Chairman Charley Majors introduces keynote speaker

Governor Bob McDonnell at the Banker Day luncheon.

3 Senator Edd Houck (D) with VBA President and CEO Bruce

Whitehurst.

4 Speaker of the House Bill Howell (R) with Billy Beale.

5 Delegate Ward Armstrong (D), second from left, outside the

General Assembly Building with bankers.

6 Senator Richard Saslaw (D), fourth from left, participated in

Banker Day.

7 Delegate Glenn Oder (R), middle, on Banker Day.

8 Delegate Bill Janis (fourth from left) meets with bankers from

Capital One.

9 Governor Bob McDonnell addresses the bankers at lunch at

the SunTrust Building.

10 Delegate Todd Gilbert (R), third from right, meets with some

of the participants.

11 Senator Mark Obenshain (R), third from left, with a group of

attendees.

12 30 members of the newly created VBA Leadership Division

participated in Banker Day this year.

13 Senator Richard Saslaw (D), second from right, with bankers

from his district.

14 Bruce Whitehurst, Brandon Atkins, Bill Via, Delegate Danny

Marshall (R), Jeff Haley and Charley Majors.

On Jan. 13, speaker Bill Howell welcomed the over 350 bankers who attended VBa Banker Day 2011, all of whom were proudly sporting buttons reading “proud to be a Virginia Banker.” this was the largest crowd that has ever participated in this event. the meetings on Banker Day provide the bankers with an opportunity to discuss upcoming legislation that may impact the banking industry and an opportunity for the legislators to ask questions of the bankers. a large crowd on Banker Day makes a real difference. thank you to those bankers who contributed to a successful general assembly session – which started out with their participation on Banker Day 2011.

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7

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More Than 350 Bankers Visit General Assembly for

2011BankerDay


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4. EXAMINE THE BOLI ILLUSTRATION FOR CASH VALUES AND DEATH BENEFITS AT GUARANTEED CHARGES AND CREDITING RATES.

Most BOLI products have a minimum

guaranteed crediting rate. These same

products also have guaranteed charges

and expenses. It is important to review

the illustration at the guarantees be-

cause it may indicate the policy has the

potential of actually losing cash value

and lapsing at its guarantees. Most

universal life products will lapse at the

guarantees. Whole life products gener-

ally do not.

5. REVIEw THE ILLUSTRATION FOR CASH VALUES AND DEATH BENEFITS OUT TO AGE 100.

BOLI is frequently sold from a rate

sheet showing returns on the BOLI for

the first year or the first five years or so.

Carriers know this and the temptation is

to make their product more marketable

by illustrating “teaser” returns in the

early years. This can be accomplished

either by providing a higher initial gross

crediting rate or by back end loading the

mortality and expense charges.

The sales illustration should indi-

cate what the crediting rates are in the

product. If the sales illustration shows

a higher initial gross crediting rate than

its ultimate gross crediting rate then the

carrier is enhancing the product’s early

return.

It can, however, be more difficult to

determine whether the carrier is back-

end loading the insurance costs. Short

of hiring an actuary, the bank may be

able to determine whether this is being

done by simply comparing the cash

value returns in the early years to the

returns in the later years. Returns should

decline as the insured gets older but a

precipitous decline especially after the

first several years might indicate costs

are back end loaded. Again, this review

is best done in comparison with other

carriers’ products.

6. REqUEST ILLUSTRATIONS SHOwING wHAT THE RETURN wOULD BE TODAY HAD THE BOLI BEEN PURCHASED FROM THE SAME CARRIER SEVERAL YEARS EARLIER.

If the bank is looking at a BOLI product

for a new purchase or for replacement of

an existing product, it should ask what

the net rate of return on the cash value

would be today had it bought that prod-

uct several years earlier. If the new rate is

superior to what is being earned on the

carrier’s earlier block of BOLI, it could

be attributable to policy enhancements

or the carrier could be subsidizing new

sales off of its old policy owners? Once

the bank purchases the BOLI, it is an old

policy owner, so knowing how it will be

treated going forward is important.

Continued from page 11


7. ASK HOw THE BANK IS PROTECTED IF THE CARRIER wITHDRAwS FROM THE MARKET.

A number of BOLI carriers have either

withdrawn from the market or have

suspended BOLI sales. The question

is whether the carrier will continue

to support its BOLI product if it is no

longer active in the market. It’s best if

the carrier has a consistent track record

in the market. Most BOLI products

today have restrictions and penalties

that make it difficult to exchange out

of the product. The opportunities to

change carriers in the future can be

severely limited.

8. DOES THE BOLI HAVE BREAKPOINTS?

Most BOLI products have commis-

sion breakpoints. Typically, these break-

points occur at premium purchases of $5

and $10 million. The lower commissions

paid at these breakpoints can result in

a direct improvement in the net credit-

ing rate on the BOLI. If the bank is close

to obtaining a breakpoint, it should look

to structure its purchase to obtain that

breakpoint. Diversification is important,

but be mindful of breakpoints, too.

9. wHAT ARE THE BANK’S OPTIONS IF THE CARRIER HAS PROBLEMS?

The bank’s options are generally lim-

ited if the carrier has a problem. One

option might be to exchange out of the

product tax-free under Section 1035 of

the Internal Revenue Code. This option,

however, is not always available. The

bank must have an insurable interest in

the person insured by the policy. If the

insured person is no longer employed at

the bank, then the bank no longer has an

insurable interest and an exchange may

not be made. If the policy is medically

underwritten and the insured has expe-

rienced health problems, an exchange

may no longer be possible. Finally, there

could be exchange charges and restric-

tions, which would make it expensive or

time consuming to make the exchange.

A second option is simply to surren-

der the policy. A surrender, however,

would trigger income tax on the invest-

ment gain in the policy plus a 10 percent

tax (MEC) penalty on that gain.

The bottom line is the bank should be

aware of its limited ability to exchange

out of a carrier’s BOLI product. Getting

it right from the start is, therefore,

extremely important.

CONCLUSION

BOLI can be an excellent way for a

bank to address rising benefit costs. It

can also be used very effectively to

cover the cost of a plan designed to at-

tract, retain, and reward the bank’s key

talent. That being the case, the bank’s

BOLI should be as good as it can pos-

sibly be. The nine-step due diligence

process should help the bank achieve

that goal.

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Frank keating President and CeO,

ABA

Bankers are Leading by example

Several things have impressed me in the

weeks leading up to my becoming the

American Bankers Association’s new

president and CEO on Jan. 1:

One is the work that all of you do as bankers.

You can and do improve the quality of people’s

lives, through the loans that you make and the

savings that you keep safe, and all the other

extras, such as supporting charitable activities.

A great example is Union First Market Bank,

based in Richmond. This year, the bank’s employ-

ees surpassed their fundraising goal and gave

more than $172,000 to the Rappahannock and

Greater Richmond/Petersburg United Ways.

We’ve been highlighting banks’ efforts like

these, big and small, on our website at www.

aba.com. We want you to continue to share your

stories with us by sending them to ProudtoBea-

[email protected]. We want every part and parcel

of our nation represented in these examples of

how you lead in your communities and support

your local economies.

You should be proud of what you do. Your

accomplishments should also be recognized

by others, including our lawmakers and

policymakers in Washington. Each day, two

million bankers perform the basic blocking

and tackling that keeps our nation’s economy

moving.

I’m preaching to the choir when I say that you

and your banks are essential to your customers

and communities, and that you are essential to

our economy. We all get this. But, too often, this

message gets lost in the halls of Congress. We

have to reinforce it, again and again.

This is our job. Working together with your

state bankers association, we are your voice

and your advocate. We are your champion in

promoting your bank’s – and your customers’ –

Main Street values.

When we advocate for you, ensuring that

your bank has the ability to compete, we’re also

advocating what is best for your community.

That’s a powerful and compelling combination.

I’m looking forward to meeting, listening and

learning from you in the year ahead.

A fellow Oklahoman, Will Rogers, once said,

“A man only learns in two ways: one by reading,

and the other by association with smarter people.”

I like to do plenty of both, so don’t hesitate share

your thoughts with me as we move forward,

together.

Gov. Frank Keating can be reached by e-mail at [email protected].

Update

“ We’ve been highlighting banks’ efforts like these, big and small, on our website at www.aba.com. We want you to continue to share your stor ies with us by send-ing them to [email protected]. We want ever y part and parcel of our nation represented in these examples of how you lead in your communities and support your local economies . ”


Washington

court Rules for Bank in counterfeit check case Involving Law firm

Law firms have become attractive targets for

criminals involved in international check

fraud schemes. In a recent court case, a law

firm that was victimized in such a scheme for nearly

$250,000 sought to shift the loss to its depositary bank.

The case, Fischer & Mandell v. Citibank (2d. Cir. 2/3/11),

contains some important lessons for banks (and law

firms).

Under the facts of the case, the law firm received

what appeared to be an “official check” in the amount

of $225,351 drawn on Wachovia from a new client. (The

client, as it turns out, was a crook out to defraud the law

firm.) The law firm deposited the check in its attorney

trust account at Citibank. A few days later the law firm

accessed this account through Citibank’s online bank-

ing website and saw that funds in excess of the amount

of the deposited check were “available.” In reliance on

this information, and per its client’s instructions, the

law firm requested a wire transfer of $182,780 from its

attorney trust account to an account in South Korea. A

day later, the law firm requested a second wire trans-

fer on behalf of its client to an account in Canada. That

same day the Federal Reserve returned the $225,351

Wachovia check to Citibank as a counterfeit item.

Citibank charged back the amount of the returned

check against the law firm’s attorney trust account,

which created an overdraft. Citibank then set apart the

amount necessary to cover the overdraft from the law

firm’s money market account at the bank under author-

ity set forth in the deposit agreement. The law firm then

requested Citibank to cancel and recall the two wire

transfers. Citibank attempted to do so, but was unsuc-

cessful because the funds had already been withdrawn

from the accounts in South Korea and Canada.

The law firm sued Citibank for breach of contract

and negligence. The law firm argued that by indicating

that the funds were “available” before they had been

collected from Wachovia, Citibank implicitly represent-

ed that the check had cleared. The law firm contended

that this misled it to believe that funds were available

as of right, and that it relied on this in initiating the two

wire transfers. The law firm argument was essentially

that “available” meant “collected.” The bank argued

that “available” merely meant that there were funds in

the account available to be withdrawn, not that the bal-

ance represented collected funds.

In ruling for Citibank, the court focused on the terms

of the bank’s deposit agreement. The deposit agree-

ment gave customers the ability to make use of funds

provisionally, subject to charge-back if checks were re-

turned unpaid. The court pointed out that the deposit

agreement provided: “Please note that a check you de-

posit may be returned unpaid after we have made the

funds available to you. If this happens, the amount of

the returned check will be deducted from your account

balance.”

In addition, the UCC expressly gives a depositary

bank the right of charge-back to unwind withdrawals

of available funds. By allowing access to the funds on a

provisional basis subject to a right of charge-back, the

bank was merely following common industry practic-

es, according to the court.

The court also ruled for the bank on the law firm’s

claim that the bank had been negligent in failing to un-

wind the wire transfers before the money was lost to

the fraudsters. The court found that the bank had com-

plied with the applicable provisions of Article 4A of the

UCC (Wire Transfers) and was not negligent.

The case shows how solid deposit agreement lan-

guage can help in court. It also points to the need for

better controls by law firms to avoid check scams like

this from succeeding. A law firm should exercise cau-

tion when it receives a cashier’s check from a new cli-

ent who then immediately requests that the funds be

withdrawn by wire: this is a common practice em-

ployed by fraudsters.

Joseph e. spruill

General Counsel,virginia Bankers

Association

Joseph E. Spruill can be reached by e-mail at [email protected].

Line


Legal

springing to action

Appropriately enough, March has come

roaring in like a lion on the VBA gov-

ernment relations front. The Virginia

General Assembly adjourned on the last weekend

of February, concluding its “short” session. The

VBA was able to beat back sustained, zealous ef-

forts to modify Virginia’s foreclosure process to

slow down, disrupt and inject judicial roadblocks

into our banks’ ability to move on those borrowers

who fall into default. Despite heightened rhetoric

and aggressive proposals, all measures dealing

with foreclosures were either defeated or sent to

Gov. Bob McDonnell’s Foreclosure Task Force for

further study. Thanks to outstanding feedback

from many of the members of our various boards

and work groups, the VBA was able to offer a

positive, proactive alternative to these harmful

bills. While that effort was swept up with the less

friendly proposals, the good faith effort displayed

by our industry did not go unnoticed by reason-

able members of the legislature.

Just as the state legislature was concluding, the

new Congress was quickly ramping up its action.

Several VBA member banks and VBA staff visited

the Washington offices of all our newly-elected

members of the Virginia delegation, as well as the

office of Sen. Mark Warner in late January, and

were effective in bringing our united message

directly to our federal officials. Several members

in central Virginia also had the chance to discuss

our industry’s top concerns with House Major-

ity Leader Eric Cantor at the VBA office in early

February. Lastly, we again visited with our repre-

sentatives as part of the VBA/ABA Government

Relations Summit in March.

Delivering the message that the consequences

of recent federal action – from the financial conse-

quences of the Durbin Amendment on interchange

fees, to the troubling, expanded scope of the Feder-

al Reserve Bank, to the disquieting uncertainty of

the new Consumer Financial Protection Bureau –

will have real and negative effects on our institu-

tions’ ability to carry out our business remains an

ongoing priority of the VBA. As we did during the

Dodd-Frank debate, the VBA will be vigilant in

keeping our members apprised of opportunities

to voice their concerns directly to federal decision-

makers. Please be on the lookout for requests to

make contacts to help shape the course of federal

policy.

One of the critical ways you can help ensure a

strong banking environment nationally, and here

in Virginia, is through your participation in the

VBA’s BankPAC. We have kicked off our annual

campaign that will run through the summer. We

have set an aggressive campaign goal and will

need your commitment to keep our outreach

through BankPAC strong. We are proud that VBA

staff got us off on a great start with 100 percent

participation in the campaign. Also, be on the

lookout for upcoming information on some spe-

cial events to benefit BankPAC, including the re-

turn of our golf tournament and a new silent auc-

tion at our annual convention. If you have any

questions about how you or your institution can

participate in the campaign, and help in this key

component of our overall government relations

strategy, please do not hesitate to contact me. With

your help, this year’s campaign will be a roaring

success.

matt Bruning Director of

Government Relations,

virginia BankersAssociation

Matt Bruning can be reached by e-mail at [email protected].

Update


“ Be on the lookout for upcoming information on some special events to benefit BankPAC , includ-ing the return of our golf tournament and a new silent auction at our annual convention. ”

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New Associate Members

Compliance reporting is surprisingly even

across the country. Because of that, what fed-

eral regulators told a compliance meeting in

Chicago is pertinent in Virginia. At that meeting, repre-

sentatives from the FDIC, OCC and OTS had quite a lot

to say about violations that result in citations and what

bankers can expect as 2011 progresses.

FAIR LENDING

OCC is citing more of its national banks for •

redlining.

OTS wants examiners to focus on pricing dis-•

parities, which have been occurring more often

with brokered transactions.

The FDIC has increased its focus on banks re-•

quiring spousal signatures on loan contracts

even though only one of the two applies and

qualifies for the loan.

All of the banking agencies have increased re-•

ferrals to the Department of Justice for fair lend-

ing violations.

The regulators told bankers in Chicago that they •

would not consider a loan with preferential

terms and conditions granted to an individual

who is purchasing a bank-owned, one- to four-

family or commercial property to be a violation

of fair lending regulations – apparently because

safety and soundness regulators have been very

aggressive in encouraging institutions to dis-

pose of real estate owned or to provide financ-

ing to remove the real estate from their balance

sheets.

The representatives indicated their compliance divi-

sions want to see the real estate disposed of as well.

Hardship programs/workouts usually will not be ex-

amined for fair lending purposes.

HMDA

Home Mortgage Disclosure Act (HMDA) data collec-

tion is a concern: Financial institutions still are not get-

ting HMDA data collection right.

The OCC stated that data from a bank’s loan ap-•

plication register are used to scope a fair lending

review. That makes it especially important for

Loan Application Register data to be accurate.

OTS indicated some of its institutions are using •

the preapproval code on the loan application reg-

ister even though the institution does not have a

formal preapproval program. OTS has assessed

civil money penalties when the number of mis-

takes caused by the improper use of the preap-

proval code was beyond the error threshold.

COMPLIANCE MANAGEMENT

OTS does not want the president of an institution •

to also serve as compliance officer. The agency’s

reasoning: A financial institution president has

many other responsibilities and cannot possibly

dedicate the time needed to be an effective com-

pliance officer.

Once an institution reaches $200 to $250 million •

in assets, OTS believes it should have a full-time

compliance officer with no other duties.

The FDIC threshold is even lower. Once a bank •

reaches $100 million in assets, the FDIC represen-

tative believes it should have a full-time compli-

ance officer. The OCC did not offer an opinion.

Each agency spokesperson stressed the impor-•

tance of training. Many violations have been a

result of a lack of training or of poor training.

Some have resulted in civil money penalties and

enforcement actions.

FLOOD

Flood insurance violations continue.

Examiners have been citing the notice to bor-•

Regulators share compliance Insights

By Donna rakes and Jim Dray Thomas

Compliance Associates, Inc.

Corner


Compliance

rower in a special flood hazard area

as not being acknowledged by the

borrower or not being provided to

the borrower in a timely manner.

The agencies have also been citing fi-•

nancial institutions for not obtaining

new notices for flood loans that are

renewed.

The agencies stated that if a loan •

is secured by multiple properties,

the bank should have a separate

flood determination form for each

property.

HIGH-PRICED MORTGAGE LOANS

Regulators have been citing banks for not

meeting the requirements for high-priced

mortgage loans (HPML).

Although none of the agency rep-•

resentatives stated specifically why

banks are being cited, they did indi-

cate that smaller financial institutions

which historically have not escrowed

for real estate taxes and insurance are

the ones having the most difficulty

complying with the HPML require-

ments. These institutions do not es-

tablish an escrow account when the

annual percentage rate exceeds the

HPML threshold.

The agencies indicated the only rem-•

edy to HPML violations is to either

lower the interest rate or establish an

escrow account.

BANK SECRECY ACT

Federal regulators are seeing an in-•

crease in the number of suspicious

activity reports (SARs) – and dis-

covering during examinations that

directors are not being made aware

of the filings at their regularly sched-

uled meetings.

The agency representatives indicated •

that Office of Foreign Assets Con-

trol screenings are not meeting BSA

requirements, although none of the

spokespersons elaborated on which

requirements were not being met.

All of the agencies indicated that •

compliance with Regulation GG –

Prohibition on Funding of Unlawful

Internet Gambling – will be exam-

ined during BSA examinations.

The federal representatives indicated •

that when a long-time customer indi-

cates a new tax identification number

because the original tax identifica-

tion number was not assigned to him

or her, the customer should be con-

sidered a high risk and a SAR should

be filed. The bank should also verify

that the tax identification number is

valid and assigned to the customer.

OTHER COMPLIANCE ISSUES

Agencies do not currently examine •

for compliance with the Americans

with Disabilities Act.

The agencies do not yet examine so-•

cial media sites during reviews, part-

ly because the agencies’ own Internet

filtering parameters do not allow ex-

amination staff to visit social media

websites.

Although financial institutions with •

more than $10 billion in assets will be

regulated by the CFPB, national banks

still will be visited by OCC examiners

because the OCC will continue to have

examination authority for compliance

with BSA, CRA and flood rules.

If, during an examination, a bank can-•

not find a loan file that has been re-

quested, then examiners most likely

will select another file for review.

They also indicated that a bank will

be cited for record retention violations

if the failure to locate files is a recur-

ring event.

VBA members seeking information or more

direct assistance with federal regulations

should call TCA’s Donna Rakes or Jim

Dray. The toll-free number is 800-934-7347.

Rakes is manager of TCA’s East Coast re-

gional office in Rustburg. Dray is president

of TCA. TCA is the VBA’s endorsed provid-

er of compliance services.


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Virginia Community Development Corporation | vacdc.org

Bank of clarke county, Berryville

robert c. Boyd, Senior Vice Presidentand Senior Credit OfficerJon elliott, Assistant Vice President andBranch ManagerJ. andrew Hershey, Vice President andLoan Officergregory l. Jay, Senior Vice Presidentand Loan Officer

cardinal Bank, tyson’s cornerBun nhe-navamal, Bank Officersteve nelson, Commercial ServicesExecutiveBrennan rader, Bank Officer

Jonathan reimer, Bank OfficerVonnie symathong, Bank Officer

carter Bank & trust, rocky mount

rhonda t. James, Vice President andManaging Officer

First national Bank, covingtonchris lemons, Assistant Vice Presidentand Branch Manager

Boyd elliott Hershey JamesJay nhe-navamal nelson rader reimer symathong

Move


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Documents

Virginia Banker March/April 2011