community banker update - january 2015

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HYBRID BOLIUnder Basel III

Recruiting and RetainingBANK DIRECTORSACCOUNTSWITCHINGA Wake Up Call fromthe Wireless Industry

CYBERSHOWDOWNWashingtonWatch:

2 COMMUNITY BANKER UPDATE | JANUARY 2015

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January 6 HMDA:WhattoKnowNow&What’sontheHorizon?

January 7 ApplePay,theMobilePaymentsGameChanger

January 8 DisasterManagement&ContinuityPlanning, IncludingCriticalVendors

January 13 IRASeries:IRA&HSAUpdate2014-2015TaxYears

January 14 CFPBRulesforMortgageLoanOriginatorCompensation

January 15 AdvancedEndorsements:POAs,Businesses, Trusts&More

January 21 DirectorSeries:FDICTrends&DeficienciesCited inMattersRequiringBoardAttention

January 22 SecurityOfficerReportstotheBoard:Compliance &BestPractices

January 23 CallReports:BaselIII&RC-RChangesLinebyLine

January 27 CustomerComplaint&ResponseManagement

January 28 DealingwithACHTaxRefunds:Exceptions, Posting&BankResponsibilities

January 29 EmergingLeaderSeries:UnderstandingPeer GroupComparisontoImproveBankPerformance

JANUARY 2015 WEBINAR LINE-UP

COMMUNITY BANKER UPDATE | JANUARY 2015 3ICBA_7347_WPS_H_Page Island.indd 1 12/9/14 4:27 PM

Community Bankers of Iowa1603 22nd Street, Suite 102

West Des Moines, Iowa 50266Phone: 515.453.1495

In This IssueJanuary2015WebinarLineup........... 2

FromtheCEO&EVP......................... 3

SavetheDate:LeadershipDevelopmentConference................. 5

BankDirectors......................... 6-9, 13

FromtheTop:ResolvetoGetInvolved..................10

FinePoints:WorkingtheLevers.....11

W2sandPPACA...............................12

AccountSwitching..................... 14-15

WelcomeNewMembers.................15

WashingtonWatch:CyberShowdown........................16-17

HybridBOLI................................ 18-19

RuralMainstreetSurvey........... 20-22

NEW DIRECTIONSWhenIbeganmycareeratCBI(thenIowaIndependentBankers)in1998,ourofficeswerelocatedinsharedsuitesintheTwoRuanBuildingindowntownDesMoines.MyhomewasinClive,justoff128thstreetwhichmeantIwouldtakeInterstate80and235downtowneachmorning.Twolanesoftraffic,eachdirection.Sevenminutestops.IIBmovedtoWestDesMoinesearlyin2000wherewehavebeeneversince.

I-235ontheotherhandhasbeenundervirtuallyconstantconstructioneversincethattime,andtheconstructionhasmovedontoI-35andwidenedbothto3-4lanesineachdirection.Evenso,manymorningsasIcrossunderallsixlanesofI-235gettingtotheCBIoffices,Iseetrafficstoppedorcreepingalongasspaceisapparentlystillinsufficient.Sometimeschangeprecedesneed.Othertimeswe’rejuststrugglingtocatchup.

Ascommunitybankersbeginanewyear,thissentimentiswellunderstood.Wehavebeenbombardedwithchangeinthewakeofthefinancialcrisisandarebracingforwhatmightbecomingintheyearahead.You’restrugglingtoadapttonewrulesandregulations,technologicalinnovationsandchangingdemographicsofyourcustomerbasewhiletryingtomaintainyour“community”connection.

Youcouldsaywe’reallcaughtsomewherebetweenwhatweareandwhatwe’llneedtobecomeforourfuturecustomers.CBI,asanorganization,isrespondingtothissamereality.We’rewalkingtworoadssimultaneously:ononehandrespondingtomemberdemandstodeliverinnovativeproductandserviceresources.Ontheother,we’regroundingourselvesinCBI’sproudhistoryandheritagebasedononesimpleobjective:connectingpeoplewithoneanothertoshareideasandrisetogethertoconfrontallindustrychallenges.

ThisissueofCBI’ssignaturepublication,theCommunity Banker Updateanditssistere-newsletterCommonCENTS,alsoreflectthisdualreality.Youhaveprobablyalreadynoticedafewchangesinthelookandfeelofthesepublicationsandyou’llfindmoreasyouflipthroughtheminthemonthsahead.It’sfamiliarbutdifferent,groundedinthepastbutleaningtowardthefuture.OurgoalistoseeknewdirectionsandwaystocapturetheessenceanduniquenessofIowacommunitybankingandtheindustryasawhole,whilepayinghomagetothehistoryofouroverforty-fiveyearnewsletter.Changeprecedingneed.

AnditisreflectiveofCBI’sleadershipandstaffitself:alwaysattemptingtoanticipatememberneedsbeforeyou,ourmembers,do.

SoIhopeyouenjoythelookandfeelofthemagazinebutmoreimportantly,enjoyitscontents.Weinviteyourfeedbackandsuggestionsforimprovement.Ourconstructionisaworkinprogress,andwelookforwardtothewaysinwhichthispublication,andorganization,willcontinuetoevolvetomeetyourneeds.Wearepleasedtosharethat99%ofourmembershaverenewedtheirmembershipfor2015.

AndnexttimeyouareheadedintoDesMoines,taketheroadlesstraveled.Ifyoucanfindone.

NATIONAL CONVENTION

The Community Banking Event of the Year!

Register before

January 19 and save $300

with early-bird pricing!

March 1-5, 2015

Gaylord Palms Resort & Convention Center

ORLANDO, FLORIDA

Learn more at www.icba.org/convention2015

General Session Speakers (as of November 15)

Join us and be amazed how these four days will impact

your career, your bank and your community.

More than 60 education sessions with CPE credits

Networking and entertainment opportunities

Products and services from more than 240 providers

Access to influential leaders and experts

Cam Fine John Carly Fiorina David Kat Cole Buhrmaster Gregory

BanquetEntertainment

The Midtown Men

COMMUNITY BANKER UPDATE | JANUARY 2015 5

Building theNext Generation of

Community Banking LeadershipTheLeadersofTomorrowDevelopmentGroupwillholdtheir12thAnnualLeadershipDevelopmentConferenceonMarch 26th & 27th,attheMarriottHotelindowntownDesMoines.

OntheConference’sopeningday,attendeeswillmeetwithJim Schipper,SuperintendentofIowaDivisionofBanking,followedbyBreakoutSessionsonAg,Compliance/OperationsandCyberSecuritytopics.Anetworkingdinnerwillalsobeheldthatnighttogiveattendeestheopportunitytonetworkwithotherup-and-comingcommunitybankingleaders.

TheConferencewillcontinueonFridayandwillinvolveaPresidents’PanelincludingSuku RadiafromBankersTrustinDesMoines,Steve LanefromSecuritySavingsBankinGowrieandJosh GuttaufromTSBankinTreynor.ClosingtheConference,keynotespeakerAlan FeirerfromGroupDynamicLeadershipTrainingwillpresentonTeamwork.

Visitourwebsiteatwww.cbiaonline.orginthecomingmonthsformoreinformationandtoregister,orcalltheCBIofficeat515-453-1495ore-mailtocbia@cbiaonline.org.Plantoattend,orsendtheup-and-comingleadersinyourbanktothiseducational,networkingevent!

2015 LOTLeadership Development

Conference

March 26-27, 2015


by Cynthia L. CourseCPA, Director

Federal Reserve Bank of San Francisco

COMMUNITYBANKD I R E C T O R S

RECRUITING AND RETAINING

Reprinted with permission of Community Banking Connections®Copyright 2014 Federal Reserve System.


AscommunitybanksmovebeyondtheGreatRecessionandexplorenewopportunitiesforgrowthandprofitability,theiroutsidedirectorswillplayanincreasinglyimportantroleinguidingthebanksthroughbothfamiliarandunchartedterritories.Thoughitmaynotbeaseasytorecruitandretainnewexternalcommunitybankdirectorstodayasithasbeeninthepast,thechallengesarenotinsurmountable.Thisarticleisnotintendedtoestablishordescribesupervisoryexpectationsforboardsofdirectors.Rather,itsuggestssomewaysthatcommunitybankscanthinkaboutrecruitingandretainingqualified,effectivedirectorsandpotentiallyevaluatingtheeffectivenessoftheboardthroughself-assessments.ManyofthesuggestionsforwaystorecruitandretainqualifieddirectorscomefromapanelsurveyofcommunitybankersinthewesternUnitedStates.Is There an “Ideal” Director Profile?Giventhepaceandscopeofchangeinthebankingenvironment,theboardofdirectorscollectivelyandeachmemberindividuallyplayacriticalroleintheoverallsuccessofacommunitybank.Thisdoesnotmeanthateachboardcandidatehastobeanexpertinbankingtobeconsideredforboardmembership.1Tothecontrary,thediversityofexperiences,education,views,andopinionscanmakethestrengthofacommunitybankboardgreaterthanthesumofitsparts.Giventheimportanceofbankdirectorsinoverseeingthesuccessfuloperationofthebank,istherean“ideal”directorprofile?Inaword—no.Asnotedpreviously,acommunitybank’sboardofdirectorscanbestrengthenedbydiversity.TheFederalReserverecentlyissuedsupervisoryguidancethatdiscussescertainpersonalorbusinessexperiencecharacteristicsthathaveprovenproblematicwhenreviewingapplicationsfordirectorsatdenovoandtroubledinstitutions.2Inshort,individualswhosebackgroundsraisequestionsregardingtheirintegrity,financialresponsibility,orcompetence,orotherwiseraisedoubtabouttheirabilitytofulfilltheresponsibilitiesofabankdirector,havebeenviewedunfavorably.However,forthepurposesofthisarticle,itmaybemoreinformativetoconsiderthecombinationofcharacteristicsthatcouldindicatethelikelihoodthatadirectorwillbeagoodfitfor

thebank.Mostlikely,thiscombinationwillbeamixofpersonalattributes,experienceandeducation,andawillingnessandabilitytodedicatethenecessarytimetothisimportantrole.

Theboxbelowillustratessomeofthepersonalattributes,experience,education,andotherqualitiesthataregenerallyfoundincapablecommunitybankdirectors.

Whiletherewilllikelybequiteabitofsimilarityintheattributesofacapabledirectoracrossdifferentcommunitybanks,thefitofeachindividualdirectorshouldbeconsideredwithinthecontextoftheinstitution’sstrategicdirectionandcultureaswellastheattributes,experience,andeducationofthedirectorsalreadyonorbeingconsideredfortheboard.

Recruiting Community Bank DirectorsGivenanunderstandingofthedesiredcharacteristicsofadirector,howcanacommunitybankrecruitcapabledirectors?

(Bank Directors continued on next page)

RECRUITING AND RETAINING

Qualities of an Ideal DirectorPersonal Attributes

Honesty and Integrity

Experience and Education

Engagement

Analytical Skills

Community

Banking

Business

• Puts bank interests ahead of personal interests• Avoids actual and perceived conflicts of interest in life, at work, and while serving on the board• Thinks independently, rather than simply following the pack

• Is inquisitive• Provides constructive guidance and opinions• Asks tough questions and expects satisfactory answers• Voices constructive dissent when appropriate

• Draws analogies between past experiences and current challenges• Is willing to learn and develop new skills• Is strategically engaged but operationally distant

• Possess financial, business, and managerial acumen• Actively engaged in the field of employment• Has connections with other businesses and industries

• Has knowledge of the communities served• Actively engages in and with community groups

• Has a basic understanding of banking, regulatory systems, laws, and regulations• Is willing to fill knowledge gaps

Other Qualities

Has Time To.... Complementary Attributes

• Learn the business• Commit to board activities -- Prepare for and attend meetings -- Review examination and audit reports and ensure responsiveness -- Keep up with the affairs of the bank• Pursue professional development opportunities

• Is independent of bank management• Possesses a skill set that complements those of the other directors• Has skills that support the bank’s long-range vision• Enhances board member diversity (e.g., gender, ethnicity, industry, socioeconomic profile)

LegalDisclaimer:TheanalysesandconclusionssetforthinthispublicationarethoseoftheauthorsanddonotnecessarilyindicateconcurrencebytheBoardofGovernors,theFederalReserveBanks,orthemembersoftheirstaffs.Althoughwestrivetomaketheinformationinthispublicationasaccurateaspossible,itismadeavailableforeducationalandinformationalpurposesonly.Accordingly,forpurposesofdeterminingcompliancewithanylegalrequirement,thestatementsandviewsexpressedinthispublicationdonotconstituteaninterpretationofanylaw,rule,orregulationbytheBoardorbytheofficialsoremployeesoftheFederalReserveSystem.


(Bank Directors continued from previous page)

Toensurethebestfitbetweenadirectorcandidateandthebank,theboard’snominatingcommitteeorsimilarsubsetoftheboardshouldassesstheskillsanddemographicprofileofitscurrentdirectors,comparetheskillsandprofileswiththebank’sstrategicdirectionandriskprofile,andidentifyanycollectivegaps.Thisexercisewillincreasethelikelihoodthattheboardwillfindanindividualwiththeskills,abilities,talent,andcommitmenttomakeadifference.Importantly,itwillbecomethe“bottomline”inthediscussionwiththecandidateabouthowheorshewillbeabletomakeadirectimpactonthebank’ssuccess.Admittedly,recruitingnewbankdirectorsmayhavebeeneasiertodointhepastthanitistoday.Historically,manybusinessandcommunityleadersconsidereditanhonortobeaskedtoserveontheircommunitybank’sboardofdirectors.Thesecandidatesviewedmembershipontheboardasevidenceoftheirbusinessexpertiseandprominenceinthecommunity,andtheyappreciatedtheshareholders’voteofconfidenceintheirskills.Whileservingonaboardofdirectorsisindeedanhonor,manymaynowalsoweighthebenefitsagainstthepotentialburdenorlegalliability.Today,recruitingnewdirectorsoftenrequiresthemembersofthenominatingcommitteeto“sell”potentialdirectorcandidatesonboardmembership.Thisincludeshavingfrankdiscussionswiththecandidateabouttheinstitution3andhowheorshecancontributetothebank’sfuture.Thisalsoincludesdiscussingthebenefitsofservingasabankdirectorandgivingreasonableassurancestothecandidateabouttheboard’sexpectationsofandcommitmenttoeachmember.Communitybankernominatingcommitteescanconsiderthepointsthataredetailedintheboxbelowwhenpreparingdiscussiontopicstousewhenapproachingdirectorcandidates.Whendoneeffectively,theprocessofrecruitingqualifieddirectorswillbeverysimilartorecruitingqualifiedexecutives,butwiththeshareholdershavingthefinalsayonthenominee.Retaining Strong Bank DirectorsOncethebank’sshareholdershaveelectedadirectortotheboard,theboard’sfocusshouldshiftfromrecruitingtoengagementandretention.Tobemosteffective,effortstoengageandretaincapabledirectorsshouldbeginthemomenttheyareappointedandshouldcontinuethroughouttheirtenure.Orientation.Effectivecommunitybankswilldevelopanorientationprogramthatistailoredtothesizeandcomplexityofthebankandtheexperienceandknowledgeofeachnewdirector.Elementsofacomprehensiveorientationprogramcouldinclude:• Meetingswiththeheadsofeachbusinesslinetogainan

understandingofthechallengesandopportunitiesineacharea;

• Meetingswithotherboardmembers;• Introductionstokeyexternalparties,suchasbankcounsel,

bankauditors,andbankexaminers;• Accesstomaterialsnotmadeavailableduringthe• recruitmentprocess,suchasbankexaminationsandaudit

reports;• Demonstrationsofaccesstovirtualprivatenetworksorother

information-sharingtoolsusedbytheboardofdirectors;

• Accesstodirectortrainingmaterialscommensuratewiththedirector’sexperience,suchastheFederalReserveSystem’sBankDirector’sDesktop.4

Culture and Atmosphere.Aprofessionalandinclusivecultureandatmospherewithintheboardandbetweentheboardmembersandmanagementshouldenhancedirectorretention.Directorsaremorelikelytoremainontheboardwhen:• Managementistransparentaboutallaspectsofthebank’s

operations.• Theboardreceivestimelyandsufficientinformationtomake

sounddecisions.• Theboardisempoweredtomakedecisions.• Theboardmembersaretreatedwithrespect.• Managementisrespectfuloftheboard’stime.

(Bank Directors continued on next page)

Institution Profile

• Publicly available information

• Non-public information, subject to constraints of federal and state law

• How the institution is providing value to its shareholders, employees, and the community

Discussion Points for Director Candidates

Director Profile

• How personal knowledge and talents align with the bank’s needs, today and in the future

• How candidates’ knowledge and talents will add value to the board

Benefits of Service

• Give back to the community

• Meet new people in the industry and the community

• Continually build upon existing skills and knowledge

• Stay abreast of local and national issues

• Receive a competitive compensation package

Assurances

• Transparency in all aspects of the bank’s operations

• Timely and sufficient information

• Opportunities to use their knowledge and skills for the benefit of the bank and the board

• Respect for their opinions, encouraging constructive discussion and dissent

• Appropriate training and educational opportunities

• Respect for their time

• Appropriate compensation and benefits, including liability insurance


(Bank Directors continued from previous page)

• Managementsincerelyseeksthedirectors’inputandshowsappreciationfortheboard’scontributions.

• Thereisaclearlinkagebetweentheboard’sactivitiesandtheorganization’ssuccess.

Education and Training.Ongoingeducationandtrainingareasimportantforcommunitybankdirectorsastheyareforthebank’sstaffandmanagement.However,thereisadelicatebalancebetweenmaintainingrespectforthedirectors’timecommitmentandensuringthattheyhavetheknowledgenecessarytomakeinformeddecisions.Whiledirectorsareexpectedtobringtotheboardroomtheviewsandperspectivesgainedfromtheirpersonalandprofessionalexperiences,theymustalsobeabletoputthoseviewsinthecontextofthebankandtheenvironmentinwhichitoperates.Eachdirectorshouldpossessknowledgeofthebankandthebankingindustrythatisappropriateforhisorhertenure.Inaddition,eachboardmembershouldbeexpectedtocompletecontinuingeducationandtrainingtobuilduponandmaintaintheskillsnecessarytobeaneffectivecommunitybankdirector.Boardmembersmayfindthatchoosingfromavarietyofeducationalopportunities,suchasthefollowing,helpsthembalancetimeconstraintsagainstinformationneeds:• Targetedtrainingoreducationsessionsasapartofboard

meetings;• Annualdirectorretreatsthatfocusontrainingaswellas

strategicplanningandbankoperations;• Subscriptionstoprintorelectronicperiodicalsand

newslettersthatdiscusscurrentandemergingcommunitybankissues;

• Attendanceatbankerassociation,tradegroup,orregulatoryconferencesandseminars,withformaldebriefingstotheotherdirectorsatboardmeetings.

Recognition.Recognizingdirectorcontributions,whetherthroughwordsandactionsorthroughmonetarycompensation,isalsoasignificantelementindirectorretention.Recognitionandcompensationcanbetailoredtoeachdirector’scontributions;however,theygenerallywillnotbesufficienttoretaincapabledirectorswithoutanatmosphereandculturethatisconducivetoeffectiveboardoperationsandsufficienteducationandtrainingtoensurethateachdirectoriswellinformed.Evaluating Board PerformanceToremainstrongandindependent,communitybankboardsofdirectorsmayfindvalueinperiodicallyevaluatingtheireffectivenessandidentifyingopportunitiesforimprovementandgrowth.Communitybankboardsmayfindthatself-assessmentsareeffectiveathighlightingemerginggovernanceissues.5Forexample,aboardself-assessmentatthehighestlevelcouldaskfocusedquestionsabouttheboard’sprimaryresponsibilities.Subsequentquestionscoulddrilldownintotheboardmembers’perceptionsaroundthebank’smissionandpurpose,theeffectivenessofstrategicplanning,thesufficiencyofsuccessionplanning,theappropriatenessoftheboard’smonitoring(Bank Directors continued on page 13)


Resolve To Get InvolvedWritten By: John H. Buhrmaster, Chairman of ICBA

AswecommunitybankersacrossthecountryringintheNewYear,weringinwithitourenthusiasmforthisgreatindustry,ourdedicationtothecommunitiesandcustomersweserve,and,I’msure,plentyofNewYear’sresolutions.

Whilemostfolkshavepersonalresolutionsthattheyhopetofocusonfor2015,Iwanttoencourageyouasacommunitybankertoaddaprofessionalresolutiontothemix.Andthisonedoesn’trequireadietorjoiningthegym—Ipromise—itsimplyrequiresthatyougetinvolved,onestepfurtherthanyoualreadyarewithourindustry.

Forexample,resolvetowritethreemoreletterstoyourmemberofCongressthisyearadvocatingoncommunitybankissues,toattendtheICBAWashingtonPolicySummitinAprilandlobbyyourmembersofCongress,togetinvolvedwithyourstateassociation,totakeaneducationcourse,oreventofocusonmentoringandbringingupafutureleaderinthecommunitybankingindustry.Thepointisthatthepossibilitiesareendless—thereisnoshortageofwaystogetinvolvedandmakearealdifference.

Soasyouthinkofbetteringyourselfovertheupcomingyear,thinkaboutwhatyoucanalsodotobettertheindustry.Iknowitwillgoalongwaytowardourfutureasanindustry.

Afterall,thefutureisbrightforcommunitybanks.Ourreputationcouldn’tbebetter,andthat’sbecauseofdecadesofhardwork,experienceandmakingsurewe’redoingourjobsright—alwaysactinginthebestinterestofourcustomersandcommunities.Wetakewhatwedoseriouslyanditshows.

It’sbecauseofthisstellarreputationthatcommunitybankshavebeenabletoaccomplishsomuchoverthepastyear,movingtheballonimportantissuesliketieredregulationandpairingdownregulatoryburden.Infact,overthepastseveralmonths,we’veheardanumber

oftopregulatorscomeoutinsupportoftieredregulationandeasingregulatoryburdensoncommunitybanks.LastmonthU.S.ComptrolleroftheCurrencyThomasCurrycalledonCongresstoexemptcommunitybanksfromtheVolckerrule,sayingthateliminatingunnecessaryrulesforcommunitybankswouldlowerthecostofregulatorycomplianceandmakeiteasierforthemtoservetheircommunities.Atthesameconference,FederalReserveGovernorLaelBrainardadvocatedtailoringregulationstothesize,businessmodelandriskprofileoffinancialinstitutions.Aone-size-fits-allapproachposesadisproportionatelylargecompliancecosttosmallerinstitutions,shesaid.

Whilethesearen’ttheonlyexamplesofregulatorsspeakingout,theyserveasagreatexampleofthetrueinfluencewecommunitybankershaveinWashington.AndwiththenewCongresscomingtotownthismonth,nowisn’tthetimetoloseourspark.It’sgametime,andit’spivotalinalotofways.

ThisiswhyIaskyou—communitybankertocommunitybanker—toresolvetotakeyouradvocacyeffortsonestepfurtherthisyearwithICBA,forthebenefitofnotonlyyou,butthisgreatindustrythatweallareluckyenoughtocallourown.

JohnH.BuhrmasterisChairmanoftheICBAandPresidentof1stNationalBankofScotia,inScotia,NewYork.

“...the possibilities are endless -- there

is no shortage of ways to get involved

and make a real difference.”

TOPFrom the


InWashington,theleversofpowerarecontinuallypushedandpulled.Sometimesthey’reconspicuouslycontrolledforeveryonetosee.Moreoftenthey’requietlyworked,ornudgedinonedirectionoranother,behindcloseddoors.Andhowthoseleversareoperated,forbetterorworse,isgreatlyinfluencedbytheingrainedmindsetsandbiasesofthosemaneuveringthem.

ForfartoolongWallStreetchieftainsappointedtothehighestunelectedpositionsoffinancialpolicymakinghaveexercised—quietly,subtlyandoutofpublicview—fartoomuchone-sidedthinkingandactioninWashington.Certainly,inWashington,anaivelypermissiveandmisplacedtrustinwheeling-dealingfinancialmega-institutionswasamajorfactoroftheWallStreetfinancialcrisis.AndhavingsomeonewithfirsthandcommunitybankingknowledgeatTreasury’shighestlevelswouldhaveavoidedthecavalierlydismissiveapproachtheagencytooktowardstrugglingcommunitybanksduringitsinitialemergencyresponsetothecrisis.

ForyearsICBAhaswarnedaboutthishazardousWallStreetbiasintheagencyhierarchies.Butthefinancialcrisisandthecostlyregulatoryreactionheapeduponblamelessbutalreadyoverburdenedcommunitybankshaveraisedthestakes.ThenlastfalltheObamaadministrationnamedaWallStreetinvestmentbankertobecometheTreasury’sundersecretaryfordomesticfinance,andICBAloudlysaid—enoughisenough!ThroughoutWashingtonpolicymakersarehearingourmessage—thattoomanypeoplewhoonlysee,knowandserveWallStreetareworkingtheleversofpowerhere.Whetherintentionallyorinadvertently,continuingtodisregardcommunitybanksonMainStreetharmsthepublicinterestandmuzzlesanimportantpolicyvoice.

Afterall,it’scommunitybanksthataretrulytheindispensibleheartofMainStreetandruralAmerica.

Soformorethantwoyears,aspartofourbroadregulatoryburdenreliefeffortsforcommunitybanks,ICBAhasconsistentlysoughtmoreassurancesthatcommunitybanksandMainStreetwillbeservedwhendecisionsarebeingmadebehindcloseddoorsinWashington.Aspartofthiseffort,ICBAhasspecificallypromotedlegislationtoestablishanundersecretarypostforcommunityfinancialinstitutionsatTreasury.And,inrecentyears,webeganpushinglegislationtorequiretheFederalReserveBoardtoalwayshaveagovernortherewithdirectcommunitybankingknowledgeandexperience.TheninawidelybipartisanpushinDecember,markingwhatwouldhavebeenahugevictoryforgenerationstocome,CongresscameveryclosetopassingthatlegislationaspartoftheTerrorismRiskInsuranceAct,whichwasblockedforunrelatedreasonsbyalast-minuteprotestbyasingleretiringsenator.

TheFederalReserveBoardbillhasanexcellencechanceofpassingtheCongressthisyear,signalingaseismicandconcreteshiftinthinkinginWashingtonthatacknowledgescommunitybanking’sessentialfinancialrole.SuchlegislationtobringgreatercommunitybankperspectivetoWashington’severydaydecision-makingislongoverdue.ThatcommunitybanksaredrowninginregulationsprovesthattieredregulationthatICBAhaslongadvocatedthatproperlyconsidersafinancialinstitution’ssize,activitiesandbusinessmodelmustbemorewidelyexpandedandfullyapplied—andsoon.ButCongress’sactionlastmonthshowswecangetallofthisdone.

Justasimportant,thankstoICBAandcommunitybankers,Washingtonisnowfocusingmorefullyontheneedsofthenation’scommunitybanksandMainStreet.WallStreethashaditssayforyears.Now,it’scommunitybanking’sturn.

Working the LeversWrittenBy:CamdenFine,PresidentandCEOofICBA

“...it’s community banks that aretruly the indispensible heart of

Main Street and rural America.”

Following Mr. FineMore than 1,000 people are following Camden Fine’s tweets @Cam_Fine— are you? Visit www.twitter.com/cam_fine.

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(Bank Directors continued from page 9) andcontrolactivities,andtheinvolvementofthebankinitscommunity.Self-assessmentscanalsoprovidevaluableinsightintothefunctioningoftheboardthroughquestionsthataddressethics,theinterpersonalrelationshipsamongboardmembers,theselectionandtrainingofdirectors,theeffectivenessofdialogue atboardmeetings,theengagementandcontributionofindividualdirectors,andtheorganizationoftheboardanditscommittees.Completingthecircle,theperiodicuseofself-assessmentsmayalsohelpacommunitybank’snominatingcommitteerecruitnewdirectors.Candidateslikelywillbemoreinterestedinjoiningacompanythatseeksoutandactsuponholisticdirectorfeedbackthanacompanyinwhichdirectorfeedbackissoughtonlyonverynarrowandspecificdecisions.Concluding ThoughtsBanksplayanimportantroleintheeconomiclivesoftheircommunities,andcommunitybankdirectorshaveagreatopportunitytoinfluenceandhelpshapetheirlocaleconomies.Foracommunitybank,recruitingandretainingqualifiedandeffectivedirectorsisasimportantasrecruitingandtraininganeffectivemanagementteam.Inthewordsofaformerboardchairmanandmember,“Attheendofthedaythere’snothinglikeastrongboardthatoperatesindependently,asksgoodquestions,anddoesitshomework.”6

Notes1Althoughboardcandidatesarenotrequiredtohaveexpertiseinbankingwhentheyareappointedtotheboard,theyareexpectedtoquicklybecomefamiliarwiththebasicsofbankinginordertoprovideeffectiveoversightofmanagementandtomakeinformeddecisions.Inaddition,abankthatisapubliccompanysubjecttoSecuritiesandExchangeCommissionoversightisrequiredtohaveanauditcommitteefinancialexpertonitsboardofdirectorsandauditcommittee.

2SeeSupervisionandRegulation(SR)letter14-2/ConsumerAffairs(CA)letter14-1,“EnhancingTransparencyintheFederalReserve’sApplicationsProcess,”availableatwww.federalreserve.gov/bankinforeg/srletters/sr1402.htm

3Federaland/orstatelawsmaylimitthenatureofinformationthatcanbesharedwithdirectorcandidates.Forexample,banksareprohibitedbylawfromdisclosingtheirbankandholdingcompanysupervisoryratingsandothernonpublicsupervisoryinformationtononrelatedthirdpartieswithoutwrittenpermissionfromtheappropriatefederalbankingagency.See“ConfidentialSupervisoryInformationDisclosureRules”intheFirstQuarter2013issueofCommunityBankingConnections,availableatwww.cbcfrs.org/articles/2013/Q1/Confidential-Supervisory-Information-Disclosure-Rules

4Seewww.bankdirectorsdesktop.org/

5Recommendingaspecificself-assessmentprocessisbeyondthescopeofthisarticle,andtheFederalReservedoesnotendorseanyspecificself-assessmenttoolsortemplates.However,avarietyofresourcesforcommunitybankboardsofdirectorsinterestedindevelopingself-assessmentsisavailablethroughtradegroupssuchastheBankDirectorwebsiteandmagazineatwww.bankdirector.com/.

6CommentbyLewPlatt,formerchairman,boardmember,andchiefexecutiveofHewlett-Packard,whileservingasaBoeingboardmember,asreferencedinKnowledge@Wharton,“Re-ExaminingtheRoleoftheChairmanoftheBoard,”December18,2002,availableathttp://ow.ly/Cghop.


AnAmerican’srighttomakedecisionsaboutwhatbusinessesheorshewillgivehisorhermoneytoisafundamentalfacetofhispersonalindependence.Whenanythingimpedesthatfreedomtomakechoices–aboutswitching

cellphonecarriersorbanks,forexample–theAmericanpublictakesaction.

TherecentpassageoftheUnlockingConsumerChoiceandWirelessCompetitionActisaperfectexampleofhowtheAmericanpubliccaneffectchangewhenitfeelsitisbeingtreatedunfairlybyanindustry.ApetitiontotheWhiteHousewithmorethan100,000signaturesonitsurelycontributedtothepassageofthebill,whichwillmakeiteasierformobileuserstoswitchphonecarrierswithouthavingtoincurtheexpenseofbuyinganewphone.

Consumers want portable account numbersThebankingindustryshouldviewtheevolutionofthecellphonelegislationasacautionarytale.Whenconsumersfeelcorneredandcomplainloudlyenough,thegovernmentcanstepin.It’snot

beyondtherealmofpossibilitythatthesamethingcouldhappeninthebankingindustryifenoughconsumersexpressangeroverhowdifficultitcanbetoswitchbanks.

Astudyconductedin2013byBTandYouGovrevealedthat61%ofbankingcustomersintheU.S.favorportablebankingaccountnumbers.Thesurveyofmorethan6,500peopleacrosssixcountriesfoundmostconsumersagreeingthataportableaccountnumber,whichwouldallowthemtoswitchbankswithoutchangingaccountdetailsandcausingmajordisruptions,wouldbeuseful.Infact,ithappenedintheUnitedKingdom,wherestricterruleshavemadebankersmoreaccountablefortheiractionsandeasierforconsumerstoswitchbanks.

Rightnowoneoftheprimaryfactorstyingconsumerstotheirbankisthehassleofswitching(onlinebillpay,automateddeposits,etc.);ifthisisremovedconsumerinertiawilltakeover.Thatsaid,thoughportableaccountnumberswouldsolvealltheissuesconsumerswouldfaceinswitchingaccounts,therewouldstillbethingslikeBillPaywhichwouldneedtobeaddressed.

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An Account Switching Wake-Up Call from the Wireless IndustryWrittenBy:ToddWeiss-Director,ProductManagement-Deluxe

WAKE UP CALL from theWireless Industry

An Account Switching

Written By: Todd Weiss - Director, Product Management - Deluxe


© Copyright Employers Mutual Casualty Company 2014. All rights reserved.

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(Account Switching continued from previous page)

Proactive is always bestFeelingtrappedyourselfrightnow?Therearethingsbankscandonowtohelpalleviatethissituation.Inbusiness,it’softenbesttobeproactiveandaddressproblemsbeforetheybecomemajorissuesandyoulosecontroloverthem.Thatcertainlyseemstobethecasewhenitcomestoboththedepartureandonboardingofbankcustomers.

Make their departure painlessYoumightlookatthatheadlineandwonderwhatiswrongwithme,butburningabridgewithcustomersisneveragoodpractice.I’vefoundthatconsumersoftenhaveashortmemorywhenitcomestooldbusinessrelationships,unlessyougivethemareasontorememberit.ThisbringstomindaconversationIhadwithacolleagueofmine.HewasunhappywithhisDSLinternetproviderbuttheonlyoptionwastogobacktothecableinternetproviderthatheusedtohave.Thingsendedsobadlywiththatrelationshipthathe’shesitanttogivethemanothershoteventhoughhewantstochangeproviders.

Customerswholeavewithabadtasteintheirmouthcanimpactyourbottomlinenotonlythroughactualnumericallosses,butbydamagingyourreputationaswell.Thisisonlymagnifiedintheeraofsocialmedia!Icertainlydonotadvocatethatbanksshouldhelpcustomersjumpship.Instead,theyshouldbelookingforwaystoconvinceon-the-fencecustomersthatit’sworthstayingput.Buildingastrongretentionprogramcoupledwith

greatcustomerserviceareatthecoreforbankslookingtokeepvaluablecustomers.

Give them a great experience from day oneAdditionally,youneedtostarttheexperienceoutstronglyfromdayonewithanonboardingprocessthatisassmoothandpain-freeaspossible.

Everyonehastheirownswitchkit,butdoesthisreallymakeitmucheasierforconsumers?It’sreallyjustawaytohelpthemorganizetheirthoughts.Attheendoftheday,theconsumerstilldoesallthework…andinmanycasestheworkloadistoomuchandtheyskipitandstaywiththeiroldbank.

Customersthatstartouthappyaremuchmorelikelytostickaroundandremainhappy.Considerthis:Ifallotherfactorsareequalbetweenyourbankandacompetitor,howyoutreatyouraccountholderscouldbeapositivedifferentiator.

Nooneappreciatesfeelingtrapped,hencethecellphoneindustryregulations.Acustomerwhohasapositiveexperienceleavingyourbankmaybemoreinclinedtoconsiderreturningatalatertimeifyouaddresstheissuesthatpromptedhimorhertolookelsewhereinthefirstplace.

Ultimately,theargumentinfavorofproactivelyaddressingthisissueissimple.Ifbanksdon’tfindawaytomanageitontheirown,theyfacetheveryrealriskthatregulatorswilldoitforthem.

First National BankCreston

Breda Savings Bank

Welcome NewCBI Members!The Community Bankers of Iowa

would like to welcome the following banks to the association, and thank

them for their support:


TherisingvisibilityofdatabreachesandthepervasivenessofhackingensurethatcybersecurityanddataprotectionwillbetopWashingtonprioritiesin2015.Despitethepublic’sapparentapathytotheseeminglydailyreportsofcyberthreats,CongressandtheregulatorsareunderincreasingpressuretoactintheaftermathofbreachesatHomeDepot,TargetCorp.andothermajorretailers.

ForICBAandcommunitybanks,thisrepresentsanewsetofopportunitiesandchallenges—toimprovethenation’scyber-defensesandrequiregreaterdataprotectionsamongretailerswithoutincurringadditionalandunnecessaryregulatoryburdens.Bysupportingcybersecurityinformation-sharingandconsistentdata-securitystandardsforallpaymentssystemparticipants,ICBAislookingtoreducesecurityrisksforcommunitybanksbybringingothersuptotheirstandard.

Bipartisan opportunityWhile2015willhavenoshortageofWashingtonpartisanship,

RepublicansandDemocratsappeartosharecommongroundinpursuingdata-securityandcybersecurityreforminthe114thCongress.FollowinganexecutiveorderfromPresidentObama,theNationalInstituteofStandardsandTechnologylastyearreleasedacybersecurityframeworkthatisvoluntaryandfocusedonaligningpolicy,businessandtechnologicalapproachestoaddresscyber-risksinallcriticalinfrastructuresectors.Similarly,aRepublicantaskforcerecentlyissuedaninnovationagendaforthenewCongressthatemphasizedpublic-privatepartnership,individualrightsandanon-regulatoryapproach.

Severalcongressionalcommitteeswillhaveahandincraftinglegislationoncybersecurityanddataprotection,sotheprocessmightgetunwieldyattimes.Butifpolicymakerssticktothesecoreprinciplesofvoluntarystandardsandcollaboration,communitybankswillhaveampleopportunitytoachievesuccessfulreformsofbothdata-securityandcybersecuritypolicies.

Data dutiesDatasecurityisfrontandcenterinWashingtonduetotheonslaughtofmassivedatabreachesatmajorretailers.ICBA’sdata-securityobjectivesfocusonensuringallparticipantsinthepaymentssystem—includingmerchants—arerequiredtoplaybythesamekindsofrulesandregulations.ThatmeansapplyingstandardssuchasthoseintheGramm-Leach-BlileyActonallparticipantsandrequiringthecostsofdatabreachestobebornebythebreachedparty.

ICBAalsowillcontinuetosupportanationaldata-securitybreachandnotificationstandardthatwillreplacethecurrentpatchworkofstatelaws.Further,ICBAopposeseffortstomakebanksliableforlossesincurredbybusinesscustomersasaresultoftheirpoorsecuritypractices.Andwhilecommunitybankscontinuetomovetochiptechnologyfordebitandcreditcards,policymakersand

(Cyber Showdown continued on next page)

Security Will Be TopWashington Priority in 2015

CYBERSHOWDOWN

Written By:Lilly Thomas and Aaron Stetter - ICBA


(Cyber Showdown continued from previous page)

otherstakeholdersshouldunderstandthatthesetechnologiesalonewouldnotpreventfuturedatabreachesanddonotprotectagainstfraudincard-not-presenttransactions,suchasonlinepurchases.

Communitybankshadtoreissuemorethan4millionpaymentscardsfollowingthedatabreachesatTargetandNeimanMarcusatacostofmorethan$40million,accordingtoanICBAstudy.Thisdoesn’tbegintoincludethesubsequentbreachesatHomeDepot,Kmart,P.F.Chang’sandcountlessothermerchants.Together,ICBA’sdata-securityinitiativesaredesignedtoreducethecostofretailerdatabreachesforcommunitybankswhileensuringthebreachedmerchantspaytheirfairshare.WiththepowerthatthelightlyregulatedretailsectorwieldsinWashington,increasingmerchantaccountabilitywillnotbeeasy.ButICBAandcommunitybankswilldoeverythingwecantopromoteafairersystemforourindustry.

Information sharingIntherealmofcybersecurity,ICBAisworkingtoensureWashingtonrecognizesthatcommunitybankstaketheissueseriouslyandalreadycomplywithabevyofmandatesunderexistingfederalandstatelaws,regulationsandguidance.Communitybanksandothersinthefinancialsectorareonthefrontlinesindefendingagainstcyberthreats.Protectingtheconfidentialityandintegrityofconsumerdataandmitigatingtherisksofhackingandcyberfraudarepartofthecommunitybankbusiness.

Toimprovehowweasanationcombatthispersistentthreat,thepublicandprivatesectorsmustbewillingandabletoshareadvancedthreatandattackdatainatimelymannerandamongfinancialinstitutionsofallsizes.Thisprincipleofequitableinformation-sharingisacentralpartofICBA’scybersecurityplatform,andfortunatelyitisatopissueforpolicymakersastheyconsiderlegislationtoencouragetwo-wayinformation-sharingamongthepublicandprivatesectorsincludingliabilityprotections

forprivate-sectorinstitutionsthatwouldencouragethemtosharecyberthreatinformationwiththegovernment.

Further,ICBAopposeseffortstomakebanksliableforlossesincurredbybusinesscustomersasaresultoftheirpoorsecuritypracticesandisworkingwiththeindustrytoenhancecardsecuritybyimplementingchiptechnology,tokenizationandend-to-encryption.Whilecommunitybanksarediligentinmanagingthesevendors,mitigatingcyberthreatstotheseoutsidepartiesisachallenge.Asaresult,we’recallingonregulatorstobeawareofthesignificantinterconnectivityofthesethirdpartiesandtoactivelycollaboratetomitigatetheirrisks.

Tools of the tradeTheimpactoftheupcomingWashingtonactiononcybersecurityanddatasecurityremainstobeseen,butthereareavailableresourcestohelpcommunitybanksprotectthemselvesandtheircustomersfrompersistentthreats.Forinstance,bankingregulatorsareencouragingallfinancialinstitutionstoparticipateintheFinancialServicesInformationSharingandAnalysisCenter.

FS-ISACprovidesalertsandreal-timeinformationonsecuritythreats.Themember-ownedorganization,whichoffersmembershipsstartingatnominalfees,isdesignedtofostercollaboration,gatherandvalidateinformation,anddisseminateinsightsonsecurityissues.Meanwhile,ICBAcontinuestoofferdata-andcybersecurityresourcesonitswebsite,includingatoolkittohelpcommunitybanksrespondtoretaildatabreaches.

ThestubbornthreatofcybercrimethatplaguesthepublicandprivatesectorshasputtheonusonWashingtontoactin2015.ICBAandcommunitybankswillworkdiligentlytomaximizetheeffectivenessofournation’sresponsewhilemitigatingthepotentialfornegativeconsequencesforourindustryandthecommunitiesweserve.

LillyThomas([email protected])isICBA’sVPandSeniorRegulatoryCounsel,andAaronStetter([email protected])isICBA’sSeniorVPofCongressionalRelationsandAdvocacy.


MostbanksfindtheirguidanceregardingBOLIpurchasesfromtheOCCBulletin2004-56andotherInteragencyStatements.TheOCC

Bulletin2004-56includesrulesrelatedtotheriskweightingofBOLIassets.WiththeadoptionofBaselIIIandthepassageofDoddFrank,banksmaynolongerrelysolelyonthemajorratingagenciestodeterminetheriskweightingoftheirBOLIassets.

Inaddition,newregulationshavebeenissuedregardingtheriskweightingofBOLIassetsheldinGeneralAccount,SeparateAccountandHybridAccountpolicies.Mostconcerning,istheambiguityofhowHybridBOLIwillbetreatedfromariskweightingperspectiveundertheNewBaselIIICapitalRules.ThepurposeofthisdocumentistoexplainthedifferencesintheproductsandexposethepotentialrisksofowningaHybridproductundertheNewBaselIIICapitalRules.

Let’sfirstexaminethedifferenttypesofproductsavailabletobanksinterestedinpurchasingBOLI.TheyincludeGeneralAccount,SeparateAccountandHybridSeparateAccountproducts.

Types of BOLIGeneral Account: GeneralAccountBOLIassumesthegeneralassetsoftheinsurancecompanyissuingtheBOLIpolicywillsupportthepolicy’scashvalues.Inadditionthecreditriskoftheportfolioareguaranteedbythecarrierandtypicallyaminimuminterestcreditingrateisprovided.GeneralAccountBOLIisandwillcontinuetoberecognizedatariskweightingat100%.

GeneralAccountBOLIpoliciesinvestasignificantportioninfixedincomeinvestmentswithasmallerpercentageinvestedinequities.SeparateaccountBOLIproductsalsoinvestinfixedincomeinvestments—basicallybankeligiblesecurities.Therefore,thepotentialdifferenceinyieldofunderlyingassetsbetweenGeneralAccountandSeparateAccountBOLIisusuallyminimal.

Theadvantageofawell-diversifiedtraditionalGeneralAccountproductisthatitincorporatealong-terminvestmentstrategythatisactivelymanaged,well-diversified,andcontainsalong-terminvestmenthorizon.Inaddition,productsissuedbymutuallifeinsurancecompaniescantakealongertermviewontheinvestmentfront,astheyarenotpressuredbyquarterlyperformanceresults.

(Hybrid BOLI continued on next page)

Hybrid BOLI: Beware of Treatment Under Basel III

Written By: R. David Fritz, Jr., CLU – Managing Partner and Co-Founder, Executive Benefits Network


(Hybrid BOLI continued from previous page)

Separate Account:InaSeparateAccountBOLIpolicy,thepolicycashvaluesaresupportedbyassetssegregatedfromthegeneralassetsoftheinsurancecompanyissuingthepolicy.Multipleinvestmentoptionsmaybeavailable;however,productstypicallyinvestinbankeligiblesecurities,suchasbondfundsandmortgagebackedsecuritiesfunds.Changesinthemarketvalueoftheseparateaccountportfoliofallthroughtothepolicycashvaluesonaproratabasis.

SeparateAccountBOLIundertheNewBaselIIICapitalRulesisconsideredtobeanequityexposuretotheinvestmentfund.Therearethreeapproachesfordeterminingtheriskweightingofseparateaccountassetsunderthenewrule.Inthepast,separateaccountproductshaveenjoyedaminimumriskweightingof20%followingthesethreeapproaches.ThismayormaynotbethecaseundertheNewBaselIIICapitalRules.

Hybrid Separate Account:InaHybridSeparateAccountpolicy,likeSeparateAccounts,thepolicycashvaluesarebackedbyassetssegregatedfromthegeneralassetsoftheinsurancecompany,butnotsubjecttotheclaimsfromothercreditorsoftheinsured.

UndertheHybridSeparateAccountstructure,policyownershavethechoicebetweeninvestingintheSeparateAccountoptionsofferedwithintheproductorintheGeneralAccountoftheunderlyingissuinginsurancecarrier.Theremaybeaminimuminterestratethatiscreditedtoguaranteeagainstinvestmentlosses.Typically,therearerestrictionsonhowassetscanbemovedfromeithertheGeneralAccounttotheSeparateAccount,orSeparateAccounttotheGeneralAccount.TheassetallocationmanagementwithinaHybridpolicycanberestrictive.

Effects of the New Basel III Capital Rules

ItisnotclearundertheNewBaselIIICapitalRuleswhetherhybridseparateaccountwillbetreatedasgeneralaccountorseparateaccountfordeterminingriskweighting.ThebankowningaHybridBOLIpolicywillmakethedeterminationonwhichriskweightingtoselecteitheramoreconservativeapproachormoreaggressiveapproach.

UnderthefinalrulesofBaselIII,thebankmustdetermineiftheproductqualifiesasaseparateaccountorageneralaccount.Toqualifyforaseparateaccount,thefollowingconditionshavetobemet:1. Theaccountmustbelegallyrecognizedunderapplicablelaw.2. Theassetsintheaccountmustbeinsulatedfromthegeneral

liabilitiesoftheinsurancecompanyunderapplicablelawandprotectedfromtheinsurancecompany’sgeneralcreditorsintheeventoftheinsurer’ssolvency.

3. Theinsurancecompanymustinvestthefundwithintheaccountasdirectedbythecontractholderintheinvestment

alternativesdesignatedorinaccordancewithspecificinvestmentobjectivesorpolicies.

4. Allinvestmentperformance,netoffeesandassessments,mustbepassedthroughtothecontractholder,providedthatcontractsmayspecifyconditionsunderwhichtheremaybeminimumguaranteebutnotaceiling.

ItwillbedifficultgoingforwardforHybridSeparateAccountpoliciestomeetthedefinitionofseparateaccountrequirementoutlinedinpointnumberfour.Withthisinmind,itmaybedifficultforbanksafterJanuary1,2015,totakeadvantageofthelowerriskweightingavailablewithsuchaproductduetotheclassificationrules.

How to Determine the Appropriate Risk WeightingToultimatelymakethedecisiononwhattheappropriateriskweightingisforaHybridSeparateAccountBOLIproduct,therearethreemethodologiesthatfinancialinstitutionswillselectfromtodeterminehowtoclassifytheirBOLIproductsfromariskweightingstandpoint.1. FullLook-ThroughApproach:Theaggregaterisk-weighted

assetamountsforallinvestmentsheldbythefundaremultipliedbythebankingorganizations’proportionalinterestinthefund.

2. SimpleModifiedLook-ThroughApproach:Abankingorganizationmultipliesitsexposuretothefundbythehighestriskweightofanyoftheassetsinthefund.

3. AlternativeModifiedLook-ThroughApproach:Calculaterisk-weightedassetamountbasedonpro-ratabasisbasedonpermittedmaximumallocationbysector.Risk-weightingover100%ispossible.

Risks to Banks Regarding Hybrid Separate AccountsInthepast,manyvendorspromotedHybridSeparateAccountproducts,primarilyduetothelowerriskweightingreflectedbymanyoftheseprograms,whiletechnicallyenjoyingtheGeneralAccountbenefits(i.e.,aminimuminterestcreditingrate).ThisaggressiveapproachtodeterminingriskweightingisnowcalledintojeopardyundertheNewBaselIIICapitalRules.

It is Executive Benefits Network’s opinion that relying on justification for a lower risk weighting for a Hybrid Separate Account product based on the fact that there is a Separate Account option within the investment portfolio is not grounds under the New Basel III Capital Rules for continuing this lower risk weighting. The result is that many banks who have structured their overall risk weighting calculations assuming a 20% risk weighting for their BOLI asset may find an unwelcome adjustment going forward.

Intoday’slowerinterestrateenvironments,GeneralAccountproductshavetypicallyoutperformedSeparateAccountproductsandalsocarryaguaranteedminimumcreditingrate.ItmaybeprudentforbankstorelyonGeneralAccountproducts,asthemorepredictable,reliableBOLIinvestmentoptionversusthemoreaggressiveHybridandSeparateAccountproducts.


December Survey Results at a Glance:• TheRuralMainstreetIndexwasunchangedfromNovember’s

weakgrowthreading.• Farmlandpricessankforthe13thstraightmonth.• Almosttwo-thirdsofbankersareopposedtoFannieMae’s

planstoreducedownpaymentrequirementsonhousingpurchases.

• Farm-equipmentsalesdeclinedforthe16thconsecutivemonth.

• Almostone-thirdofbankCEOsexpectholidayretailsalesintheirareatobeunchangedfrom2013levels.

OMAHA,Neb.–TheRuralMainstreetIndexforDecemberwasunchangedfromNovember’sreadingaccordingtothemonthlysurveyofbankCEOsinruralareasofa10-stateregiondependentonagricultureand/orenergy.

Overall:TheRuralMainstreetIndex(RMI),whichrangesbetween0and100,forDecemberwas50.0,unchangedfromNovember,butupfrom43.4inOctober.

“Lowerenergyandgrainpricescontinuetorestraingrowthintheruraleconomy,”saidErnieGoss,Ph.D.,JackA.MacAllisterChairinRegionalEconomicsatCreightonUniversity’sHeiderCollegeofBusiness.

Farming and Ranching:Thefarmlandandranchland-priceindexforDecemberadvancedtoaweak38.6fromNovember’s30.0.“Muchweakercroppricescontinuetotaketheairoutofthebubbleinagriculturallandprices.Thisisthe13thstraightmonththattheindexhasmovedbelowgrowthneutral,”saidGoss.

TheDecemberfarm-equipmentsalesindexexpandedto23.7from18.6inNovember.Theindexhasbeenbelowgrowthneutralfor17straightmonths.“Thismonth,weaskedbankershowtheyexpectedfarmerstoadjusttheirexpensestothelikelihoodoflowerrevenues,”saidGoss.“Approximately63.6percentexpectfarmerstoputoffequipmentpurchasesevenmoreduetopredictedrevenuedecline.”

Inanticipationoflowerfarmrevenues,almostoneinfivebankers,or18.2percent,anticipatesthatfarmerswillcutcashrents,7.3percentexpectfarmerstowaitforbetterseeddeals,and3.6percentand7.3predictlessfertilizerandchemicalusage.

HowardSchaan,CEOofFirstStateBankofHarvey,N.D.,said,“Wehaveseensometemporarydecreasesinrentsbasedonlowcommoditypricing.”

Banking:TheDecemberloan-volumeindexsoaredto76.7fromNovember’ssolid56.2.Thechecking-depositindexexpandedto62.1fromNovember’s57.9,whiletheindexforcertificatesofdepositandothersavingsinstrumentsgrewtoaweak44.0fromlastmonth’s37.7.

Hiring:Despiteweakercroppricesandpullbacksfrombusinesseswithclosetiestoagricultureandenergy,ruralMainstreetbusinessescontinuetohireatasolidpace.TheDecemberhiringindexslippedtoasolid55.2fromNovember’sveryhealthy61.9.“BusinessesonRuralMainstreetcontinuetoaddjobsatahealthypaceevenwiththeweakeragricultureconditionsandlowerenergyprices.Year-over-yearjobgrowthfortheregionisnowapproximately1.8percent,whichiswellabovethehistoricaverage,”saidGoss.

Confidence:Theconfidenceindex,whichreflectsexpectationsfortheeconomysixmonthsout,sankto42.5from44.7inNovember.“MuchweakercroppricesanddeclinesinenergypriceshavenegativelyaffectedtheoutlookofbankCEOsoverthelastseveralmonths,”reportedGoss.

LarryRogers,executivevice-presidentofFirstBankofUticainUtica,Neb.,said,“(I)didnotexpectcroppricestodropthisfarandwereallyarenotsurewhatthesix-monthtoone-yeareffectwillbe.”

Home and Retail Sales:TheDecemberhome-salesindexgrewtoatepid51.7fromNovember’s51.0.TheDecemberretail-salesindexreboundedto55.3from50.0inNovember.

Thismonth,FannieMaeandFreddieMacannouncedplanstoallowfirst-timehomebuyerstopayadownpaymentaslittleas3percentonahomepurchase.Manybankersexpressedconcernsregardingsuchaprogram,includingJeffBonnett,presidentatHavanaNationalBankinHavana,Ill.,whosaid,“Istillhaveabadtasteinmymouthregarding‘subprimelending’thathelpedcreatethe‘GreatRecession’thatwearejustnowgettingoutof.”

Bankerswereaskedtoassessthe2014holidayretail-buyingseasonintheirarea.“Approximately5.2percentexpectthestrongestbuyingseasonsincetherecession,60.3percentpredictthatthegainfor2014willbethesameasthegainfor2013,and32.8percentexpectlittleornoincreasefrom2013buying.Theremaining1.7percentofbankersanticipatesthe

(Rural Mainstreet continued on next page)

Main Street Economic Survey

C r e i g h t o nU N I V E R S I T Y

Rural Mainstreet Index Remains Weak for December:One-Third of Bank CEOs Expect Flat Holiday Sales

Ernie Goss


(Rural Mainstreet continued from previous page)

weakestbuyingseasonsincethebeginningoftherecession,”saidGoss.

AccordingtoPeteHaddelandCEOoftheFirstNationalBankinMahnomen,Minn.,“Weareseeingincreasedspendingfortheholidaysbecauseofthereductioningasolineprices.”

Eachmonth,communitybankpresidentsandCEOsinnonurban,agriculturallyandenergy-dependentportionsofa10-stateareaaresurveyedregardingcurrenteconomicconditionsintheircommunitiesandtheirprojectedeconomicoutlookssixmonthsdowntheroad.BankersfromColorado,Illinois,Iowa,Kansas,Minnesota,Missouri,Nebraska,NorthDakota,SouthDakotaandWyomingareincluded.ThesurveyissupportedbyagrantfromSecurityStateBankinAnsley,Neb.

Thissurveyrepresentsanearlysnapshotoftheeconomyofrural,agriculturallyandenergy-dependentportionsofthenation.TheRuralMainstreetIndex(RMI)isauniqueindexcovering10regionalstates,focusingonapproximately200ruralcommunitieswithanaveragepopulationof1,300.Itgivesthemostcurrent

real-timeanalysisoftheruraleconomy.GossandBillMcQuillan,formerchairmanoftheIndependentCommunityBanksofAmerica,createdthemonthlyeconomicsurveyin2005.

Colorado:Colorado’sRuralMainstreetIndex(RMI)remainedabovethe50.0thresholdforthe10thstraightmonth,thoughtheindexdippedto52.5fromNovember’s53.8.Thefarmlandandranchland-priceroseto48.6fromNovember’s46.5.Colorado’shiringindexforDecemberdeclinedtoahealthy62.3from72.5inNovember.ColoradoRuralMainstreetjobgrowthforthepast12monthswas3.9percent.

Illinois:Thestate’sRMIslippedto49.4fromNovember’s49.7.TheIllinoisfarmland-priceindexexpandedto36.9from26.2inNovember.Thenew-hiringindexfellto52.9from56.3inNovember.IllinoisRuralMainstreetjobgrowthforthepast12monthswas0.8percent.

Iowa:TheDecemberRMIforIowadecreasedto48.6fromNovember’s49.8.Thestate’sfarmland-priceindexforDecemberexpandedto35.1from30.2inNovember.Iowa’snew-hiringindex

(Rural Mainstreet continued on next page)

Table 2: The Rural Mainstreet Economy, December 2014Percentage of bankers reporting

Very supportive Supportive Indifferent Opposed Very opposed

Fannie Mae and Freddie Mac announced plans to allow first-time home owners to obtain a mortgage while putting down just 3 percent of the price of the home. Are you:

3.5% 22.8% 8.8% 43.9% 21.1%

Waiting for better seed

deals

Putting off farm equipment purchases

Cutting cash rents

Less fertilizer& chemicals Other

What are the top ways that crop farmers are reducing input costs for the 2015 crop year? 7.3% 63.6% 18.2% 3.6% 7.3%

Strongest since the beginning of recession

Same gain as 2012-13

Weakest since beginning of

recessionLittle or no

Change from 2013

For retailers in your area, how is the holiday buying season stacking up? 5.2% 60.3% 1.7% 32.8%

Tables 1 and 2 summarize survey findingsNext month’s survey results will be released on the third Thursday of the month, Jan. 15.

Table 1: Rural Mainstreet Economy Last Two Months and One Year Ago: (index > 50 indicates expansion)

December 2013

November 2014

December 2014

Area economic index 56.1 50.0 50.0Loan volume 66.7 56.2 76.7Checking deposits 66.0 57.9 62.1

Certificates of deposit and savings instruments 37.2 37.5 44.0Farmland prices 47.0 30.0 38.6Farm equipment sales 44.3 18.6 23.7Home sales 53.1 51.0 51.7Hiring 56.9 61.9 55.2Retail business 54.7 50.0 55.3Confidence index (area economy six months out) 47.0 44.7 42.5


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(Rural Mainstreet continued from previous page)

forDecemberslumpedto51.5fromNovember’s59.5.IowaRuralMainstreetjobgrowthforthepast12monthswas1.0percent.

Kansas:TheKansasRMIforDecemberclimbedto50.6fromNovember’s50.2.Thestate’sfarmland-priceindexincreasedto40.6fromNovember’s34.6.Thenew-hiringindexforKansassankto55.9from63.0inNovember.KansasRuralMainstreetjobgrowthforthepast12monthswas2.0percent.

Minnesota:TheDecemberRMIforMinnesotaadvancedto51.0fromNovember’s49.7.Minnesota’sfarmland-priceindexgrewto41.6from36.8inNovember.Thenew-hiringindexforthestatefelltoasolid56.7fromNovember’s75.7.MinnesotaRuralMainstreetjobgrowthforthepast12monthswas2.4percent.

Missouri:TheDecemberRMIforMissourideclinedto54.3fromNovember’s56.2.Thefarmland-priceindexexpandedto63.3fromNovember’s50.5.Missouri’snew-hiringindexdecreased74.1from75.7inNovember.MissouriRuralMainstreetjobgrowthforthepast12monthswas5.7percent.

Nebraska:TheNebraskaRMIforDecemberadvancedto48.8from48.3inNovember.Thestate’sfarmland-priceindex

expandedto32.9from21.5inNovember.Nebraska’snew-hiringindexsankto49.7fromNovember’s52.5.AccordingtoJonSchmaderer,CEOofTricountyBankinStuart,“Higherlivestockpricesarestrengtheningtheeconomyinnorth-centralNebraska.”NebraskaRuralMainstreetjobgrowthforthepast12monthswas0.2percent.

North Dakota:TheNorthDakotaRMIforDecemberslippedto56.7fromNovember’s57.0.Thefarmland-priceindexclimbedto71.7from61.5inNovember.NorthDakota’snew-hiringindexdippedto80.8fromNovember’s84.5.NorthDakotaRuralMainstreetjobgrowthforthepast12monthswas8.1percent.

South Dakota:TheDecemberRMIforSouthDakotaroseto49.6fromNovember’s49.0.Thefarmland-priceindexforDecemberincreasedto37.6fromlastmonth’s31.4.SouthDakota’snew-hiringindexslumpedto53.5from60.4inNovember.SouthDakotaRuralMainstreetjobgrowthforthepast12monthswas1.0percent.

Wyoming:TheDecemberRMIforWyomingslippedto50.5fromNovember’s51.0.TheDecemberfarmlandandranchland-priceindexgrewto42.8fromNovember’s36.2.Wyoming’snew-hiringindexsankto57.7fromNovember’s64.3.WyomingRuralMainstreetjobgrowthforthepast12monthswas1.9percent.

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community banker update - january 2015

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