Virginia Banker March/April 2011

V irginia Banking March/April 2011

Virginia Bankers Association — Serving Virginia’s Financial Community Since 1893

The

Green Shoots

Growth of Economic

In This Issue

BOLI Risk Management | Optimizing Efficiency | Spring Eternal

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irginia V Banking V i r g i n i a B a n k e r s A s s o c i at i o n — S e rv i n g V i r g i n i a ’ s F i n a n c i a l C o m m u n i t y S i n c e 1 8 9 3

2010-2011 OFFICERS AND DIRECTORS OF THE VIRGINIA 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 Bank Randy K. Ferrell, The Fauquier Bank Pete Jones, Wachovia/Wells Fargo Monte L. Layman, The Page Valley Bank Gail Letts, SunTrust Bank Samuel L. Neese, Highlands Union Bank Susan Ralston, Bank @Lantec David P. Summers, Virginia Heritage Bank Jeffrey M. Szyperski, Chesapeake Bank Daniel G. Waetjen, BB&T Richard T. Wheeler, Jr., Franklin Federal Savings Bank Statements of fact and opinion are made on the responsibility of the authors alone and do not imply an opinion or endorsement on the part of the officers or members of VBA.

PUBLISHED BY

280 Summer Street, Boston, MA 02210 Phone: 617-428-5100 Fax: 617-428-5118 www.thewarrengroup.com

AT-LARGE MEMBERS Benefits Corporation Chair Richard M. Liles, McKenney Management Services Inc. Chair Frank Bell, III, Midlothian Government Relations Committee Chair Christopher W. Bergstrom, McLean VBA Education Foundation Chair J. Peter Clements, Carson EDITORIAL & EXECUTIVE OFFICES 4490 Cox Road Glen Allen, VA 23060 804-643-7469 Fax 804-643-6308 www.vabankers.org Bruce T. Whitehurst President and CEO Virginia Bankers Association Chandler Dewey Communications & Marketing Manager Virginia Bankers Association

March/April 2011

photo

12

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

features

SUBSCRIPTIONS If you would like to subscribe to Virginia Banking, contact Chandler Dewey at cdewey@vabankers.org.

8

Optimizing the Efficiency Ratio: Factors You Can Control to Increase Profitability The key to growing profitability lies in strategic planning. The efficiency ratio can help a community bank develop and refine its growth strategies.

10

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

Virginia Banking is published bi-monthly.

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Copyright 2011.

DIRECTORS Timothy M. Warren Timothy M. Warren Jr. David B. Lovins Vincent M. Valvo

Chairman CEO & Publisher President Group Publisher & Editor in Chief

FINANCE & ADMINISTRATION Jeffrey E. Lewis Controller / Director

of Operations EDITORIAL Christina P. O’Neill

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Custom Publications Editor Associate Editor

ADVERTISING George Chateauneuf

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Publishing Division Sales Manager Advertising Sales Manager Advertising Sales Manager Advertising, Marketing & Events Coordinator

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in every issue 4 Calendar of Events 5 Insights 7 Worth Noting 16 Washington Update 17 Legal Line

18 Legislative Update 19 Welcome New Associate Members 20 Compliance Corner 22 Bankers on the Move

Send us your thoughts or ideas on Virginia Banking! ©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.

Please e-mail Chandler Dewey at cdewey@vabankers.org. Has your information changed?

Please e-mail Kellee Edelin at kedelin@vabankers.org with your new contact information.

March/April 2011 | Virginia Banking 3

Calendar of

Events

Live Event

Online Seminar

INSTRUCTOR-LED SEMINARS

INSTRUCTOR-LED COURSES

Security Workshop, Charlottesville April 12-13

Principles of Banking April 18

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

Consumer Lending April 18

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

General Accounting April 18

Webinar

General Accounting May 9

HR and Benefits Symposium, Charlottesville May 1-3 Bank Call Officer Training, Glen Allen (Richmond) May 10 Introduction to Lending Compliance Seminar, Sandston May 10

Principles of Banking May 16 Consumer Lending May 16 Economics for Bankers May 16

Mortgage Update – B to Z Seminar, Sandston May 11

WEBINARS

Mastering HMDA Seminar, Sandston May 12

Current Trends in Agricultural Lending April 12

Operations and Technology Workshop Stonewall Jackson, Staunton May 17-18

The Basics on HSAs April 13

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

Optimizing Pricing Decisions in ALCO April 14 Proactive Relationship Development April 18 A Practical Guide to Consumer Lending April 26 Global Cash Flow April 26

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________________________________________________________________ Phone___________________________

Fax_________________________

State/Zip______________________________

E-mail___________________________________

For more information go to www.vabankers.org.

4 Virginia Banking | March/April 2011

www.vabankers.org

Insights Signs of Spring

T

hose who know me well know that I

Bruce Whitehurst President and CEO, Virginia Bankers Association

of darkness and not much daylight.

am not a fan of cold weather. Those

Fortunately, winters do not last forever, nor

cold days and early dark evenings just

do economic downturns in the United States, no

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

matter how severe. We are beginning to see signs

note of the extra few minutes of daylight every

of spring and we are becoming more optimistic

day as we move through January and February.

about what lies ahead. Recent economic indicators

When we have warmer days – currently the case

are encouraging and economists are talking more

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

and more about the “green shoots” that indicate

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

economic growth. As we see signs of spring, our

summer and fall, but you can have winter, snow

moods lift and we begin to see potential in ways

and all.

that were hard to imagine during those winter

In many respects, our industry and our entire

months.

nation have been through a long and rough winter

As often happens in early spring, we will have

since the fall of 2008. The housing market down-

warm days and cold days. Sometimes we may feel

turn has had a chilling effect on our economy as

like we are taking two steps forward and one step

it drove us from financial crisis to recession. The

back. But overall, we will be making progress as

unemployment rate and the high level of foreclo-

we head to more sustainable good times.

sures have added to our challenges. The banking

To be sure, we have many challenges and no

industry has been vilified, with broad generaliza-

small amount of change in store for our industry.

tions from the media and some political leaders

The recent financial winter will be throwing new

that completely confused traditional banking

compliance burdens our way for some time to

from Wall Street and from the shadow banking

come. It will be more expensive to operate a bank, and that will chal-

“

lenge us as we

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.

”

adapt and move forward.

The

VBA will be very focused on helping our member banks stay on top of emerging regu-

system. We have witnessed a huge overreaction

latory and legislative issues, and we will be ask-

to this financial winter in the form of costly new

ing bankers to continue your excellent grassroots

compliance burdens that will work against con-

communications that have become so important to

sumer benefit; we will have to work even harder

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

to reach a more appropriate balance. We have seen

you whenever you see ways that the VBA can be

regulators plow through our industry even when

supportive of your bank.

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

Good riddance winter and welcome spring!

Bruce Whitehurst can be reached by e-mail at bwhitehurst@vabankers.org. www.vabankers.org

March/April 2011 | Virginia Banking 5

VBA Benefits Corporation More Than Just a Medical Plan

More 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.

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

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

Qualifying programs include:

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.

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 Best

For 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!

Noting

Worth

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. Gutshall 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, became chairman at the 2011 ICBA National Convention and Techworld, held March 20-24 in San Diego. Jeffrey L. Gerhart, chairman 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, Franklin, West Virginia, was nominated to become ICBA vice chairman. James D. MacPhee, CEO of Kalamazoo County State Bank, Schoolcraft, Michigan, became ICBA immediate past chairman.

A special congratulations to Bill Loving of Pendleton Community Bank, a VBA member bank, on his nomination as ICBA vice chairman. www.vabankers.org

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 Integra 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 Resource Development and Educational Leadership. Over the past five years, Steinbacher has actively participated in numerous industry-wide leadership initiatives, advisory councils and nonprofit community boards.

March/April 2011 | Virginia Banking 7

Optimizing the Efficiency Ratio: Factors You Can Control to Increase Profitability

By Kevin Tweddle

H

igher

health benefits and training/recruiting

With continued pressure on deposit ser-

nity banks know that the key

performing

commu-

and flex hours. Adjustments in these

vices charge fee income, it will become

to growing profitably and

areas can immediately improve your

increasingly difficult to justify underper-

bank’s efficiency.

forming branches.

building franchise value is to control what they can and strategically man-

Higher-performing banks also pay

For new locations, consider the aver-

age against market factors they can-

close attention to how they staff their

age square feet per branch (ask yourself,

not. The efficiency ratio has become a

branches in both thriving and turbulent

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

prime focus as banks strive to offset

markets. When is the last time you took

ing leased locations, can and should you

the additional expense of loan loss pro-

a hard look at your bank’s staffing per

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

visions to cover asset quality issues.

branch? High performers typically hire

market right now); and if sale/leaseback

The efficiency ratio is comprised of non-

fewer employees who take on multiple

is an option that could provide your bank

interest expense, noninterest income and

responsibilities, and compensate them

with short-term benefits. Also examine

net interest margin. However, let’s focus

well. High performers also do an excel-

where technology could reduce occupan-

on expense management and fee income.

lent job of setting forth achievable incen-

cy costs. For example, Voice over Internet

Community banks have the greatest con-

tives that are aligned with shareholder

Protocol technology or remote branch

trol over these variables, which are criti-

objectives, especially those actions that

capture could potentially save thousands

cal to maintaining or optimizing overall

generate revenue to drive better individ-

of dollars in communications costs.

earnings performance.

ual and overall bank performance.

Other non-interest expenses – It’s vi-

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

Occupancy expenses – Branch profit-

tal to review every vendor contract care-

lowing categories – personnel, occupancy

ability plays a huge role in overall fran-

fully and categorize each by need. Can

and other non-interest expenses.

chise performance, yet banks don’t often

you rationalize each on an annual basis?

focus on this factor. Occupancy expenses

Consider economies of scale and vendor

personnel expense runs about 54 percent

represent about 14 percent of noninter-

consolidation.

of non-interest expense for banks and

est expense, so evaluate them as with

FDIC premiums, an expense you can’t

thrifts in the United States. Personnel

personnel expenses on an annual basis –

control, are likely to go up. Develop a

decisions are amongst the most difficult

small adjustments here can make a big

strategy to make up those costs through

to make and many banks put off these

impact. One simple metric to analyze is

fee adjustments or by lowering your

decisions although they can have the

revenues generated per branch office.

bank’s cost of funds. Another way to

greatest impact on the bottom line.

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

keep expenses in check is to employ tech-

Examine hiring and salary increases

success will be determined based upon

nologies to lower payment costs. Lastly,

(freezes may be necessary for cutting

your specific operating strategy. Often,

take full advantage of your association

costs and even saving jobs) and items

banks do not generate enough revenue to

memberships and their benefits; you may

such as 401(k) discretionary/matching,

support even the fixed costs of a branch.

be able to leverage association programs

Personnel expenses – The average

8 Virginia Banking | March/April 2011

www.vabankers.org

that reduce the costs of things like sup-

market to make this effort worthwhile. Trans-

ever, no all-encompassing target ratio ap-

plies, subscriptions and insurance.

action activity volume must be solid and

plies to all banks. Each bank’s efficiency

customers’ current price sensitivities must

ratio reflects the specific kind of business

Increase Noninterest Income

be considered. Establishing clear bench-

Most banks have already cut expenses

marks, understanding the demographics of

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

significantly; they have no more to gain

your market and price analysis through peer

right now and expense reduction is not

analysis are factors critical to the success of a

sustainable for the long term. The other

wealth management program.

important side of the equation is fee

Every community bank’s efficiency ra-

income, which offers banks of all sizes the

tio can be optimized by gaining greater

greatest opportunity to improve efficiency,

control of expenses and by taking steps to

but the current climate necessitates that

increase or add revenue streams. How-

will be dependent upon its specific operating strategy.

Kevin Tweddle is executive vice president of sales and operations for Bank Intelligence Solutions from Fiserv. Reach him at kevin. tweddle@fiserv.com.

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 overdraft/NSF fee income. Banks mus come up with alternatives. We recommend a full review of all customer charges, focusing on those that incent the proper customer behavior and don’t penalize your better customers. Examples include charging higher foreign ATM fees, charging 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 accounts. High performers grow small business/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 demand for wealth management products (primarily comprised of trust, brokerage and insurance) in your bank’s particular www.vabankers.org

March/April 2011 | Virginia Banking 9

Demystifying the Purchase and Risk Management of BOLI

By John H. Milne, JD, LLM and Gerald L. Martin, CPA MMB Consulting, LLC, Richmond

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.

10 Virginia Banking | March/April 2011

Attendees at bank regulatory and

There are two basic types of BOLI

professional association meetings often

products: whole life and universal life.

ask how to take the mystery out of the

This article, however, should not be per-

purchase and risk management of BOLI.

ceived as promoting any particular in-

The following simple “Nine-Step Due

surance carrier or type of BOLI product.

Diligence Process” is often the answer.

A whole life product is the more tradi-

It was first presented at the OCC’s Na-

tional form of life insurance. It is a bun-

tional Capital Markets Conference in De-

dled product and is actuarially designed

cember 2009.

such that based upon a set premium

The nine steps should be viewed from

payment the product is guaranteed to

the perspective that the purchase and risk

provide permanent life insurance protec-

management of BOLI is nothing more

tion. This form of guarantee is not found

than making a long-term, variable inter-

in a universal life product.

est rate loan to an insurance company.

The great preponderance of BOLI is

(The Interagency Guidelines governing

universal life. Universal life is an “unbundled

the purchase and risk management of

product.” Simply put, it should be thought

BOLI are found in OCC Bulletin 2004-56

of as a life insurance product made up of

and FDIC FIL-127-2004; hereinafter, the

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

guidelines.)

represents the cash value and the other

First, a little background about BOLI

bucket, the “death benefit bucket,” the death

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

benefit. As long as there is sufficient cash in

plus life insurance companies in the U.S.,

the cash bucket through premium payments

only about 40 carriers have ever had a

and investment earnings to cover the cost

true, single premium BOLI product. Of

of the death benefit in the death benefit

these, probably about half are still active

bucket, the policy owner has life insurance

in the BOLI market.

protection. www.vabankers.org

Universal life can be further broken

compared to the growth and

down into three subcategories: general

profitability objectives that are typically

account, separate account, and hybrid.

the focus of stockholder-owned

The reference to “general account”

insurers.” Moody’s 2009 Report said

simply means the cash in the cash bucket

that “the U.S. mutual life insurance

is held and managed in the carrier’s

companies have more successfully

general portfolio and the crediting rate

protected and maintained their credit

is dependent on the carrier’s declared

worthiness than their stockholder-

crediting rate.

owned rivals.” All things being equal, a

A separate account product is a

mutual company may be preferred.

universal life product in which the assets

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 investment returns. A comparison should be made to other BOLI carriers. The comparison will show how efficiently the carrier operates, which may indicate how one BOLI product might perform long-term against another.

Continued on page 14

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 universal 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 selection 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.

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.

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 www.vabankers.org

Thomas Compliance Associates, Inc. 2846 N. Mildred Avenue, Suite 150 Chicago, Illinois 60657 1-800-934-7347

www.tcaregs.com

March/April 2011 | Virginia Banking 11

More Than 350 Bankers Visit General Assembly for

Banker Day2011 On Jan. 13, Speaker Bill Howell welcomed the over 350 bankers who attended VBA Banker Day 2011, all of whom were proudly sporting buttons reading “Proud to be a Virginia Banker.” This was the largest crowd that has ever participated in this event. The meetings on Banker Day provide the bankers with an opportunity to discuss upcoming legislation that may impact the banking industry and an opportunity for the legislators to ask questions of the bankers. A large crowd on Banker Day makes a real difference. Thank you to those bankers who contributed to a successful General Assembly session – which started out with their participation on Banker Day 2011.

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

1

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

5

General Assembly Building with bankers.

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

2

7 Delegate Glenn Oder (R), middle, on Banker Day. 8 Delegate Bill Janis (fourth from left) meets with bankers from

6

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.

3

7

4

8

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.

12 Virginia Banking | March/April 2011

www.vabankers.org

9

12 10 13

11 www.vabankers.org

14 March/April 2011 | Virginia Banking 13

Continued from page 11 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 because 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-

to make their product more marketable

are back end loaded. Again, this review

by illustrating “teaser” returns in the

is best done in comparison with other

early years. This can be accomplished

carriers’ products.

either by providing a higher initial gross crediting rate or by back end loading the mortality and expense charges.

The sales illustration should indicate 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 backend loading the insurance costs. Short

ally do not.

of hiring an actuary, the bank may be

5. Review the illustration for cash values and death benefits out to age 100.

done by simply comparing the cash

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

14 Virginia Banking | March/April 2011

able to determine whether this is being 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

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 product 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.

first several years might indicate costs

www.vabankers.org

7. Ask how the bank is protected if the carrier withdraws from the market.

A number of BOLI carriers have either withdrawn from the market or have suspended BOLI sales. The question is whether the carrier will continue to support its BOLI product if it is no longer active in the market. It’s best if the carrier has a consistent track record

ing rate on the BOLI. If the bank is close

tions, which would make it expensive or

to obtaining a breakpoint, it should look

time consuming to make the exchange.

to structure its purchase to obtain that

A second option is simply to surren-

breakpoint. Diversification is important,

der the policy. A surrender, however,

but be mindful of breakpoints, too.

would trigger income tax on the investment gain in the policy plus a 10 percent

9. What are the bank’s options if the carrier has problems?

tax (MEC) penalty on that gain.

The bottom line is the bank should be

The bank’s options are generally lim-

in the market. Most BOLI products

ited if the carrier has a problem. One

today have restrictions and penalties

option might be to exchange out of the

that make it difficult to exchange out

product tax-free under Section 1035 of

of the product. The opportunities to

the Internal Revenue Code. This option,

change carriers in the future can be

however, is not always available. The

severely limited.

bank must have an insurable interest in the person insured by the policy. If the

8. Does the BOLI have breakpoints?

Most BOLI products have commission breakpoints. Typically, these breakpoints 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-

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 experienced health problems, an exchange may no longer be possible. Finally, there could be exchange charges and restric-

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 attract, retain, and reward the bank’s key talent. That being the case, the bank’s BOLI should be as good as it can possibly be. The nine-step due diligence process should help the bank achieve that goal.

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March/April 2011 | Virginia Banking 15

Washington

Update

Bankers are Leading by Example

S

everal things have impressed me in the

million bankers perform the basic blocking

weeks leading up to my becoming the

and tackling that keeps our nation’s economy

American Bankers Association’s new

moving.

president and CEO on Jan. 1:

Frank Keating President and CEO, ABA

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

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

and your banks are essential to your customers

You can and do improve the quality of people’s

and communities, and that you are essential to

lives, through the loans that you make and the

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

savings that you keep safe, and all the other

message gets lost in the halls of Congress. We

extras, such as supporting charitable activities.

have to reinforce it, again and again.

A great example is Union First Market Bank,

This is our job. Working together with your

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

state bankers association, we are your voice

ees surpassed their fundraising goal and gave

and your advocate. We are your champion in

more than $172,000 to the Rappahannock and

promoting your bank’s – and your customers’ –

Greater Richmond/Petersburg United Ways.

Main Street values.

We’ve been highlighting banks’ efforts like

When we advocate for you, ensuring that

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

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

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

advocating what is best for your community.

stories with us by sending them to ProudtoBea-

That’s a powerful and compelling combination.

Banker@aba.com. We want every part and parcel of our nation represented in these examples of how you lead in your communities and support your local economies.

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,

You should be proud of what you do. Your

and the other by association with smarter people.”

accomplishments should also be recognized

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

by

your thoughts with me as we move forward,

others,

including

our

lawmakers

and

policymakers in Washington. Each day, two

together.

“

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 ProudtoBeaBanker@aba.com. We want ever y part and parcel of our nation represented in these examples of how you lead in your communities and support your local economies.

”

Gov. Frank Keating can be reached by e-mail at fkeating@aba.com.

16 Virginia Banking | March/April 2011

www.vabankers.org

Line

Legal

Court Rules for Bank in Counterfeit Check Case Involving Law Firm

L

Joseph E. Spruill General Counsel, Virginia Bankers Association

aw firms have become attractive targets for

ed that the check had cleared. The law firm contended

criminals involved in international check

that this misled it to believe that funds were available

fraud schemes. In a recent court case, a law

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

firm that was victimized in such a scheme for nearly

wire transfers. The law firm argument was essentially

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

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

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

that “available” merely meant that there were funds in

contains some important lessons for banks (and law

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

firms).

ance represented collected funds.

Under the facts of the case, the law firm received

In ruling for Citibank, the court focused on the terms

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

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

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

ment gave customers the ability to make use of funds

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

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

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

turned unpaid. The court pointed out that the deposit

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

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

accessed this account through Citibank’s online bank-

posit may be returned unpaid after we have made the

ing website and saw that funds in excess of the amount

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

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

the returned check will be deducted from your account

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

balance.”

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

In addition, the UCC expressly gives a depositary

attorney trust account to an account in South Korea. A

bank the right of charge-back to unwind withdrawals

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

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

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

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

same day the Federal Reserve returned the $225,351

bank was merely following common industry practic-

Wachovia check to Citibank as a counterfeit item.

es, according to the court.

Citibank charged back the amount of the returned

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

check against the law firm’s attorney trust account,

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

which created an overdraft. Citibank then set apart the

wind the wire transfers before the money was lost to

amount necessary to cover the overdraft from the law

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

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

plied with the applicable provisions of Article 4A of the

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

UCC (Wire Transfers) and was not negligent.

requested Citibank to cancel and recall the two wire

The case shows how solid deposit agreement lan-

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

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

cessful because the funds had already been withdrawn

better controls by law firms to avoid check scams like

from the accounts in South Korea and Canada.

this from succeeding. A law firm should exercise cau-

The law firm sued Citibank for breach of contract

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

and negligence. The law firm argued that by indicating

ent who then immediately requests that the funds be

that the funds were “available” before they had been

withdrawn by wire: this is a common practice em-

collected from Wachovia, Citibank implicitly represent-

ployed by fraudsters.

Joseph E. Spruill can be reached by e-mail at jspruill@vabankers.org. www.vabankers.org

March/April 2011 | Virginia Banking 17

Legislative

Update

Springing to Action

A

Matt Bruning Director of Government Relations, Virginia Bankers Association

ppropriately enough, March has come

our industry’s top concerns with House Major-

roaring in like a lion on the VBA gov-

ity Leader Eric Cantor at the VBA office in early

ernment relations front. The Virginia

February. Lastly, we again visited with our repre-

General Assembly adjourned on the last weekend

sentatives as part of the VBA/ABA Government

of February, concluding its “short” session. The

Relations Summit in March.

VBA was able to beat back sustained, zealous ef-

Delivering the message that the consequences

forts to modify Virginia’s foreclosure process to

of recent federal action – from the financial conse-

slow down, disrupt and inject judicial roadblocks

quences of the Durbin Amendment on interchange

into our banks’ ability to move on those borrowers

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

who fall into default. Despite heightened rhetoric

al Reserve Bank, to the disquieting uncertainty of

and aggressive proposals, all measures dealing

the new Consumer Financial Protection Bureau –

with foreclosures were either defeated or sent to

will have real and negative effects on our institu-

Gov. Bob McDonnell’s Foreclosure Task Force for

tions’ ability to carry out our business remains an

further study. Thanks to outstanding feedback

ongoing priority of the VBA. As we did during the

from many of the members of our various boards

Dodd-Frank debate, the VBA will be vigilant in

and work groups, the VBA was able to offer a

keeping our members apprised of opportunities

positive, proactive alternative to these harmful

to voice their concerns directly to federal decision-

bills. While that effort was swept up with the less

makers. Please be on the lookout for requests to

friendly proposals, the good faith effort displayed

make contacts to help shape the course of federal

by our industry did not go unnoticed by reason-

policy.

able members of the legislature.

One of the critical ways you can help ensure a

Just as the state legislature was concluding, the

strong banking environment nationally, and here

new Congress was quickly ramping up its action.

in Virginia, is through your participation in the

Several VBA member banks and VBA staff visited

VBA’s BankPAC. We have kicked off our annual

the Washington offices of all our newly-elected

campaign that will run through the summer. We have set an aggressive campaign goal and will

“

need your commitment to keep our outreach

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

”

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 special events to benefit BankPAC, including the return of our golf tournament and a new silent auction at our annual convention. If you have any questions about how you or your institution can

members of the Virginia delegation, as well as the

participate in the campaign, and help in this key

office of Sen. Mark Warner in late January, and

component of our overall government relations

were effective in bringing our united message

strategy, please do not hesitate to contact me. With

directly to our federal officials. Several members

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

in central Virginia also had the chance to discuss

success.

Matt Bruning can be reached by e-mail at mbruning@vabankers.org.

18 Virginia Banking | March/April 2011

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March/April 2011 | Virginia Banking 19

Compliance

Corner

Regulators Share Compliance Insights

By Donna Rakes and Jim Dray Thomas Compliance Associates, Inc.

C

ompliance reporting is surprisingly even

HMDA

across the country. Because of that, what fed-

Home Mortgage Disclosure Act (HMDA) data collec-

eral regulators told a compliance meeting in

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

Chicago is pertinent in Virginia. At that meeting, representatives from the FDIC, OCC and OTS had quite a lot

ting HMDA data collection right.

•

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

to say about violations that result in citations and what

plication register are used to scope a fair lending

bankers can expect as 2011 progresses.

review. That makes it especially important for Loan Application Register data to be accurate.

Fair Lending • •

•

•

OTS indicated some of its institutions are using

OCC is citing more of its national banks for

the preapproval code on the loan application reg-

redlining.

ister even though the institution does not have a

OTS wants examiners to focus on pricing dis-

formal preapproval program. OTS has assessed

parities, which have been occurring more often

civil money penalties when the number of mis-

with brokered transactions.

takes caused by the improper use of the preap-

The FDIC has increased its focus on banks re-

proval code was beyond the error threshold.

quiring spousal signatures on loan contracts even though only one of the two applies and qualifies for the loan.

•

•

Compliance Management •

OTS does not want the president of an institution

All of the banking agencies have increased re-

to also serve as compliance officer. The agency’s

ferrals to the Department of Justice for fair lend-

reasoning: A financial institution president has

ing violations.

many other responsibilities and cannot possibly

The regulators told bankers in Chicago that they

dedicate the time needed to be an effective com-

would not consider a loan with preferential

pliance officer.

terms and conditions granted to an individual

•

compliance officer with no other duties.

family or commercial property to be a violation of fair lending regulations – apparently because

Once an institution reaches $200 to $250 million in assets, OTS believes it should have a full-time

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

The FDIC threshold is even lower. Once a bank

safety and soundness regulators have been very

reaches $100 million in assets, the FDIC represen-

aggressive in encouraging institutions to dis-

tative believes it should have a full-time compliance officer. The OCC did not offer an opinion.

pose of real estate owned or to provide financing to remove the real estate from their balance

•

Each agency spokesperson stressed the importance of training. Many violations have been a

sheets.

result of a lack of training or of poor training.

Some have resulted in civil money penalties and

The representatives indicated their compliance divi-

enforcement actions.

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

Hardship programs/workouts usually will not be examined for fair lending purposes.

Flood Flood insurance violations continue.

•

20 Virginia Banking | March/April 2011

Examiners have been citing the notice to borwww.vabankers.org

rower in a special flood hazard area

compliance with Regulation GG –

as not being acknowledged by the

Prohibition on Funding of Unlawful

more than $10 billion in assets will be

borrower or not being provided to

Internet Gambling – will be exam-

regulated by the CFPB, national banks

ined during BSA examinations.

still will be visited by OCC examiners

The federal representatives indicated

because the OCC will continue to have

nancial institutions for not obtaining

that when a long-time customer indi-

examination authority for compliance

new notices for flood loans that are

cates a new tax identification number

with BSA, CRA and flood rules.

renewed.

because the original tax identifica-

The agencies stated that if a loan

tion number was not assigned to him

not find a loan file that has been re-

is secured by multiple properties,

or her, the customer should be con-

quested, then examiners most likely

the bank should have a separate

sidered a high risk and a SAR should

will select another file for review.

flood determination form for each

be filed. The bank should also verify

They also indicated that a bank will

property.

that the tax identification number is

be cited for record retention violations

valid and assigned to the customer.

if the failure to locate files is a recur-

the borrower in a timely manner.

•

•

The agencies have also been citing fi-

•

High-Priced Mortgage Loans Regulators have been citing banks for not meeting the requirements for high-priced

If, during an examination, a bank can-

ring event.

•

Agencies do not currently examine for compliance with the Americans

Although none of the agency representatives stated specifically why

•

Although financial institutions with

Other Compliance Issues

mortgage loans (HPML).

•

•

with Disabilities Act. •

The agencies do not yet examine so-

banks are being cited, they did indi-

cial media sites during reviews, part-

cate that smaller financial institutions

ly because the agencies’ own Internet

which historically have not escrowed

filtering parameters do not allow ex-

for real estate taxes and insurance are

amination staff to visit social media

the ones having the most difficulty

websites.

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 regional office in Rustburg. Dray is president of TCA. TCA is the VBA’s endorsed provider of compliance services.

complying with the HPML requirements. These institutions do not establish an escrow account when the annual percentage rate exceeds the HPML threshold.

•

The agencies indicated the only remedy to HPML violations is to either lower the interest rate or establish an escrow account.

Bank Secrecy Act •

Federal regulators are seeing an increase in the number of suspicious activity reports (SARs) – and discovering during examinations that directors are not being made aware of the filings at their regularly sched-

Housing Equity Funds of Virginia Over 20 years of profitable investing

uled meetings.

•

The agency representatives indicated that Office of Foreign Assets Control 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

www.vabankers.org

For more information contact Arild Trent at 804.343.1200 x116 or atrent@vacdc.org Virginia Community Development Corporation | vacdc.org March/April 2011 | Virginia Banking 21

Move

Bankers on the

Boyd

Elliott

Hershey

Bank of Clarke County, Berryville Robert C. Boyd, Senior Vice President and Senior Credit Officer Jon Elliott, Assistant Vice President and Branch Manager J. Andrew Hershey,Vice President and Loan Officer Gregory L. Jay, Senior Vice President and Loan Officer

Nhe-Navamal

Nelson

Jonathan Reimer, Bank Officer Vonnie Symathong, Bank Officer

Rader

Reimer

Symathong

James

First National Bank, Covington Chris Lemons, Assistant Vice President and Branch Manager

Carter Bank & Trust, Rocky Mount Rhonda T. James,Vice President and Managing Officer

Are your bankers on the move?

E-mail submissions to cdewey@vabankers.org.

Š2011 PULSE

Cardinal Bank, Tyson’s Corner Bun Nhe-Navamal, Bank Officer Steve Nelson, Commercial Services Executive Brennan Rader, Bank Officer

Jay

22 Virginia Banking | March/April 2011

www.vabankers.org

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Black

Munson

Davis

O’Bannon

Fauntleroy

Edmonds

M&T Securities, Inc., Central Virginia Region Dennis Schlachter,Vice President for Institutional Fixed Income Sales

StellarOne Bank, Christiansburg Patrick O’Bannon,Vice President and Business Banking Relationship Manager

Old Point National Bank, Hampton Erin Black,Vice President and Marketing Director

StellarOne Bank, Culpeper Sean J. O’Toole, Business Banking Relationship Manager

Old Point National Bank, Norfolk Ben Munson, Branch Officer Select Bank, Lynchburg T. Clay Davis, President

StellarOne, Richmond Robert “Bobby” Fauntleroy, Senior Portfolio Manager, Wealth Management Division StellarOne Bank, Roanoke Angela Edmonds, Financial Center Manager

Swortzel

English

Yeloushan

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March/April 2011 | Virginia Banking 23

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