Community Banker Update - June 2015
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Transcript of Community Banker Update - June 2015
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FUEL IN THE TANK?Mortgage-backed
SecuritiesPg. 9
WINNERS ANNOUNCED!Pgs. 4-5
Money Smart Week Poster Contest
REGISTER TODAY!
Peer ConnectionForum Pg. 8
RECAP
EffectiveLoan Policy Pt. 2
Pgs. 10-13
2 COMMUNITY BANKER UPDATE | JUNE 2015
Want To AttendA Webinar?
View a complete calendar andregister for CBI-sponsored webinarsand events at www.cbiaonline.org
or Call Us at 515.453.1495for more information.
Social Media Workshopincluding Local Community Bank Case Study
August 19-21
September 23-24
St. Charles, Missouri
Omaha, Nebraska
Bonus session August 19
Bonus session September 23
Presentations on:
For a conference brochure, go to www.mibanc.com and click on Upcoming Events.
Bonus Session Member FDIC
• DeliveringaRed-CarpetCustomerExperience• Fraud&PaymentSecurity• ERMThatCreatesValue• WhatShouldbeontheMindofCEOs• EMVCardRequirements• VendorManagement–TheBigPicture• MakingtheMostofSARs• TheEvolvingThreattoBankOperations• DebitFraudTrends• Andmanymore
Regulatory panel included
JUNE 2015 WEBINAR LINE-UP
June 2 CollectionCallTechniques:CompliantTelephoneScripts&Responses
June 3 ComplianceRulesLendersMustKnow
June 4 CommercialAppraisalReviewPart1:IncomeApproach
June 9 MasteringtheSBA7aLoanPart1:Eligibility&ProgramRequirements
June 10 BSAComplianceSeries:BSAOfficerReportstotheBoard
June 11 CountdowntotheIntegratedDisclosureDeadline:August1,2015
June 16 NewAccountsSeries:ProperlyHandlingFiduciaryAccounts: Authority,Ownership,Access&Liability
June 17 UsingtheNewFannieMaeCollateralUnderwriterforMortgages
June 18 WhenaBorrowerDies:NextSteps&BestPractices
June 23 FromFrontlinetoTellerSupervisor:DevelopingSkills&MakingaSmoothTransition
June 24 StressTestingYourLoanPortfolio:Regulations,Risk&ImpactonValue
June 25 IRASeries:ProcessingIRARollovers&Transfers
June 30 Top10DeficienciesinAuditFindingsfromRegulators&ExternalAuditors
COMMUNITY BANKER UPDATE | JUNE 2015 3
In This Issue
June2015WebinarLineup.......................2
FromtheEVP&CEO..................................3
MoneySmartWeekPosterContest...... 4-5
44thAnnualConvention........................ 6-7
PeerConnectionForum.............................8
Mortgage-BackedSecurities..............9, 21
DevelopmentandMaintenanceofanEffectiveLoanPolicy-Pt. 2...............10-13
FromtheTop............................................ 14
FinePoints............................................... 15
RuralMainstreetSurvey....................16-18
MembershipDevelopmentDirectorNeeded...................................... 18
Top5ThingstoDotoPrepareforSameDayACH......................................... 19
CBIMemberNews................................... 20
ConnectionQuandary............................. 22
Nominate a deserving Banker for the Founders’ Award
TheleadershipofCBIoverthelast44yearshasprovideddirection,support,andguidancetoyourassociation.Withoutthem,thespiritoftheoriginalfounderswouldnothaveresultedintheactiveandusefulorganizationservingyoutoday.Eachsummer,wetakeamomenttohonoroneofthoseleaderswiththeRobert D. Dixon Founders’
Award,recognizingacommunitybankerthathasnotonlymodeledthebestincommunityleadership,butalsoinservicetothecommunitybankingindustry.
Itisnowthattimeforthecommunitybankersacrossthestatetonominatememberstoreceivethisprestigiousaward.Previousrecipientshavebeen:
2014-SteveLane2013-DaleTorpey2012-C.E.Walsh
2011-KurtHenstorf2010-LarryWinum2009-JamesBrown2008-HaroldHarms
2007-StevenTscherter2006-ArnoldC.Schulz2005-O.JayThomson
2004-OllieHansen2003-RobertD.Dixon,JohnSpies,RichardE.Randall,JohnDean
Pleasetakeamomenttothinkaboutthebankersyouhaveknownwhohavedemonstrateddevotion,leadershipandinvolvementwiththecommunitybankingindustryandCommunityBankersofIowa,andnominatesomeoneforrecognitionthisyear.ThenominationformcanbecompletedonlineandisfoundontheCBIwebsiteatwww.cbiaonline.org,under“AboutCBI”and“RobertD.DixonFounders’Award”.
Nominations are due to the CBI office by June 19.
EVENTS CALENDARPAC AuctionDonations Due.... June 12
Robert D. Dixon Founders’ AwardNominations Due...................... June 19
44th Management Conference &Annual Convention............... July 15-17
8th Annual Golf Tournament...Aug. 11
LOT Quarterly Meeting............ Aug. 20
Certified Community LenderCertification Renewal............... Aug. 20
Community Bankers for ComplianceFall Session......................Sep. 22 & 23
Community Banking SummitsFall Sessions........................Oct. 13-15
LOT Quarterly Meeting.............Nov. 19
Community Bankers of Iowa1603 22nd St, Suite 102West Des Moines, Iowa 50266Phone: 515.453.1495www.cbiaonline.org
4 COMMUNITY BANKER UPDATE | JUNE 2015
The 2015 Money Smart Week Poster Contest winners have been chosen!
TheFirstPlaceWinnerofthisyear’scontestisRiley Long,4thGrade,submittedbyFirstNationalBankinCreston&Afton.SecondPlaceWinnerisJessica Luna,4thGrade,submittedbyNorthwestBankinFortDodge.ThirdPlaceWinnerisBreelle Streger,3rdGrade,submittedbyFidelityBank&TrustinDyersville.TheFirstPlacewinnerwasawardeda$500CD,withSecondandThirdprizeseachreceivinga$200CD.AnawardcertificateforHonorableMentionwasalsoawardedtoPeyton Long,4thGrade,submittedbyFirstNationalBankinCreston&Afton.
ToentertheMoneySmartWeekPosterContest,Iowaelementarystudentsin2ndthrough6thgradessubmittedover2,100posterdesignstoparticipatingcommunitybanksacrossIowa,whothensubmittedtheposterstheyreceivedtoCBI.Postersweredesignedtoanswerthequestion:“Whyisitimportanttoknowaboutmoney?”FinaljudgingtookplaceattheCBIoffice,andthetopthreeall-Iowaprizewinnerswerechosen.Designswereevaluatedonoverallmessage,creativity,andworkmanship.
Studentswerepresentedwithawardsduringspecialceremoniesattheirlocalschoolsbyteachersandschoolofficials,andbyexecutivesfromthecommunitybanksthatsubmittedtheprize-winningentriestoCBI.WhiletheMoneySmartWeekPosterContestisastate-widecompetition,manycommunitybankssponsorlocalcontestsintheircommunitiesaswell.LuckywinningstudentswereawardedprizeslikeKindlee-Readersandgoodiebagsfulloftreatsandgiftcards.
Since1999,CommunityBankersofIowahashostedtheMoneySmartWeekPosterContestaspartofApril’sCommunityBankingMonthfestivities,andtheMoneySmartWeekawarenesscampaignhostedbytheFederalReserveBankofChicagotoincreasefinancialliteracyamongchildren.Thisyear,MoneySmartWeekeventswereheldtheweekofApril18-25.FormoreinformationonMoneySmartWeek,visitmoneysmartweek.org.
IfyouhaveanyquestionsabouttheMoneySmartWeekPosterContest,pleasecalltheCBIofficeat515.453.1495oremailKrissyLeeatklee@cbiaonline.org.
Congratulationstothewinners,andaBIGthankyoutoallofthecommunitybanksandschoolsthroughoutIowathatparticipatedinthisyear’sPosterContestandpromotedfinancialliteracyinyourcommunities.We’realreadylookingforwardtonextyear!
1st Place Poster, by Riley Long, 4th Grade, of East Union Elementary in Afton.
2nd Place Poster, by Jessica Luna, 4th
Grade, submitted by Northwest Bank in
Fort Dodge.
3rd Place Poster, by Breelle Streger, 3rd Grade, submitted by Fidelity Bank & Trust in Dyersville.
Get a better look at the winning poster designs on our website at:www.cbiaonline.org> Events> Community Banking Month> Money Smart Week Poster Contest
Honorable Mention Poster, by Peyton Long, 4th Grade,
submitted by First National Bank in
Creston.
2015 Money Smart Week Poster ContestWinners Selected Among Over 2,100 Entries!
COMMUNITY BANKER UPDATE | JUNE 2015 5
First National Bank in Creston, ISSB and PCSB banks award their local
Poster Contest Winners with Kindle e-Readers. L-R: CBI Honorable
Mention Winner Peyton Long; CBI 1st Place Winner Riley Long; Nicole Lesan, ISSB; Dawn Loudon, PCSB Bank; Halle Evans; Sarah Young &
Sharon Higgins, First National Bank in Creston; Emmet Long.
Third Place Winner Breelle Streger displays her design with Fidelity Bank & Trust’s Market President Randy Ludwig and Dyersville Elementary 3rd
Grade teacher Mrs. Ohnken (left) and Principal Mrs. Martin (right).
Second Place Winner Jessica Luna receiving her award from Northwest Bank’s Vice President Michael Scacci (left) and Regional President John Taets (right).
Stacy Ferry of United Bank of Iowa and Janet Buman of Shelby County State Bank presented prizes to Harlan Community Elementary School Poster Contest winners
(L to R): Theresa Deason, Taylor Bieker, Darbie Argotsinger, Teya Frohlich, Amanda Burris, Ella
Plagman, Kami Stork & Cassidy Erlbacher
◄
Local contest winners show their designs and
receive goodie bags loaded with prizes from F&M Bank execs. Upper left: Kate Loecke, 3rd Grade - St. Mary’s Elementary with Human Relations VP Deann McDonald; Upper right: Lauren Johnson, 4th Grade - West Delaware Elementary and Customer Service Rep Susan Scherbring; Left: Kylie Chesnut, 5th Grade, Maquoketa Valley Elementary.
◄◄
◄◄
6 COMMUNITY BANKER UPDATE | JUNE 2015
Join Us at CBI’s 44th Management Conference & Annual Convention
REGISTER BY JUNE 15 & SAVE!
CommunityBankersofIowa’s44thManagementConferenceandAnnualConventionrepresentstheimportanceofcommunitybanks’personalserviceandcommitmenttotheircustomersandthecommunitiestheyservewiththetheme,“Where Everybody Knows Your Name.”
TheConventionstrivestounitecommunitybankersthrougheducationfromnationallyrecognizedspeakers,accesstothelatestproductsandservices,andnumerousopportunitiesfornetworking,camaraderie,andtheexchangeofideaswithcommunitybankersstatewide.MeetupwitholdfriendsandnewattheKickoff Reception,onthelakeduringtheEleventh Annual Catch and Release Fishing Tournament,onthegolfcourseduringtheMixed Pair and Bankers’ Golf Tournaments,andattheGala and PAC Auction.
GuestspeakersthisyearincludeJim Olson,formerCIA
operative;motivationalspeakerChip Eichelberger;comedicsendoffspeakerJeff Havens;andICBAImmediatePastChairmanJohn Buhrmaster.Greatbreakoutsessionsarescheduledaswell,featuringafederalRegulators’ Panel,SocialMediaDiscussionPanelmoderatedbyChris LorencewithICBA,andTrendsinDataBreachResponsewithDan KramerfromSHAZAM.
Join us at the family reunion during CBI’s 44th Management Conference and Annual Convention, July 15-17, 2015 in Okoboji, Iowa.Additionalinformationandregistrationisavailableonlineatwww.cbiaonline.org.Ifyouhaveanyquestionsabouttheconvention,pleasecallusat515.453.1495.
By the time Convention is over,everyone will know YOUR name!
July 15-17, 2015
Get detailed info on events and more in the 44th Annual Convention brochure!
John Buhrmaster
ChipEichelberger
Dr. JamesOlson
JeffHavens
DanKramer
JamesLaPierre
ChrisLorence
JeffJensen
JimSchipper
General Session Featured Speakers Regulators’ Panel
Take A Look At This Guest Speaker Lineup! Trends in Data Breach
Response
SocialMediaPanel
Get in early and register at reduced rates!
COMMUNITY BANKER UPDATE | JUNE 2015 7
bellbanks.com | Member FDIC
10115
Call one of us for quick response, competitive rates and fl exible underwriting.
• Participation loans (commercial, agricultural, construction, operating lines and term loans)
• Bank stock & ownership loans
• Bank building fi nancing
• Business & personal loans for bankers
• Multi-family permanent fi nancing
Partner with us for your participation and bank stock loan needs.
Gary [email protected]
Gene [email protected]
CBI PAC AuctionThurs. July 16, 2015
We Still need Donations!
CBI’s Live and Silent PAC Auctions are being held during our 44th Annual Convention. We still need more items to be auctioned!
If you’d like to donate cash or items to be put up for bids, download donation forms on the Convention page at cbiaonline.org and return them to the CBI office, fax to 515.453.1498, or email to [email protected]. Pictures of donations may also be emailed to [email protected] return completed forms by June 12, 2015.
Please bring all donated items to the registration deskin the lobby of the Arrowwood Resort in Okoboji, Iowano later than Wednesday evening, July 15, 2015.
Note that the CBI PAC cannot accept corporate contributions, anonymous contributions, or a contribution in the name of or on behalf of another person.
Cruise Lake Okoboji during the Eleventh AnnualCatch and Release Fishing Tournament.
Check out the great swag up for bids in theSilent & Live Auctions to benefit CBI’s PAC.
Gather on the greens at the 44th Annual Convention’sMixed-Pair and Bankers’ Golf Tournaments.
Not sure if you’ll attendCBI’s 44th Annual Convention?
Here’s why you should!
The fun you’ll have andthe places you’ll go....
8 COMMUNITY BANKER UPDATE | JUNE 2015
CBI Hosts First-Ever Peer Connection Forum:40+ Community Bank Staffers Gather to Discuss TrendsCBI’snewCommunity Banking Peer Connection ForumwasheldMay28atPrairieMeadowsConferenceCenterinAltoona,IA.Gatheringtohearmotivationalandeducationalspeakerswereover40communitybankstaffinMarketing,HumanResources,Operations,IT,Compliance,Lending,andDirectorfunctionalgroups.ThePeerConnectionForumeventtakestheplaceoftheStateFairConference,whichisheldonlyontheelectionyearcycle.
Coach Kevin Kushkickedofftheeventwithapresentationbasedonhisnewbook“APieceofthePuzzle:EightTraitsofaQualityTeammate”.Kush,afootballcoachinOmaha’sBoysTown,dicussedtraitsneededtobeacontributingmemberofateam:believingintheteamconcept,exhibitingselflessbehavior,respectforothers,handlingadversity,adaptingtochange,acceptingfeedback,demonstratinghighenergy,andbeingaccountable.
BreakoutsessiontopicsandspeakersintheinauguralPeerConnectionForumincluded:• HowtoSurviveaStateExam-TracyBergmann,Examiner,IA
DivisionofBanking• VendorManagement-KevinEdwards,VantagePoint
Solutions• BranchMaintenanceOptimization-AdamYork,Equips• SuccessionPlanning-PatMarget,ExecutiveBenefits
Network• TrendsinDataBreachResponse-DanKramer,SHAZAM• SocialMediaintheWorkplace-BryanMartin,Merit
Resources• UnderstandingYourRoleasaBankDirector-JeffAndersen,
DickinsonLaw• Truth&FairLending,andNewMortgageRules-BillElliott,
Young&Associates
Afterlunch,SHAZAM’sEVP&CIOTerry DooleybrokedownthelatestinEMVchipcardsandhowtodevelopeffectiveapproachesduringmigrationtochiptechnology.Dooleywentontooutlinethefundamentalsoftokenization,thetechnologybehindnewpaymentssystemslikeApplePay.
Thefirst-everPeerConnectionForumclosedwithattendeesineachfunctionalgroupmeetinginroundtableforumstocomparenotesoncurrentbankingindustrytrendsandpractices.ThesediscussiongroupsessionsaretheuniquefeatureofthePeerConnectionForum,intendedasaneducationalandnetworkingoutletforcommunitybankstaffbelowtheCEO/Presidentlevel.
TheForumisco-sponsoredbyCBI’sLeadersofTomorrowGroup
(LOT).FormoreinformationonLOTandhowyoucanbecomeamember,seetheadbeloworvisitwww.cbiaonline.organdcheckoutthe“LeadersofTomorrow”pageundertheProgramsheader.
ThankyoutoSHAZAM,2015PeerConnectionForumsponsor!
Community bank staff from all over Iowa witness keynote speakerKevin Kush’s presentation at the first-ever Peer Connection Forum
COMMUNITY BANKER UPDATE | JUNE 2015 9
Mortgage-backedsecurities(MBSs)canseemtocommunitybankportfoliomanagerstobeneedy
sorts.Theycanrequirefeedingandwateringthatothersecuritiesdonot.Theygenerallyhavelongstatedmaturitiesofupto20or30years.Virtuallyallofthemhavepurchasepriceswellabovepar.Andthenthere’stheuncertaintyofwhenyougetyourprincipalback.
Still,somethingaboutthemmakesMBSsattractivetocommunitybanks.Theyarethesinglebiggestline-iteminatypicalcommunitybankinvestmentportfolio.Betweenthemandtheirclosecousincollateralizedmortgageobligations(CMOs),theyconstituteabout40percentofthetotalbondportfolioofbanksnationally.Whydootherwiserationalcommunitybankersspendsomuchoftheirmoney,nottomentiontime,onhigh-maintenancesecurities?
Cash on tapTheadvantagesoutweighthenegatives,obviously.Thesecurities
thatcommunitybanksownareveryhighqualityandveryliquid.(MBSsinthisspaceareeither20percentoreven0percentrisk-weighted.)Sincetheprincipalamortizesmonthly,theyactlikeloans,andareviewedasloansurrogatestoaugmentthebalancesheet.Communitybankerscanchooseveryconservativeversions,suchasthosewith10-yearstatedfinalsorhighlyprioritizedprincipal“windows.”
Buttherealreasonfortheirpopularityisthattheybeginpayingbacktheirprincipalimmediately.Thiscashflowisnotjustagreatequalizer;itmakesMBSssuperiorinsomewaystonon-amortizingsecurities.Themonthlyreturnofinvestmentprovidesaliquiditycushion,sourceofloanfunding,orprotectionagainstunexpecteddepositrunoff.
Then,too,arethebondmechanics.Theperiodicpaybackshortensthedurationofthesecurities,andyouwillrecallthatdurationisameasureofpricerisk.Thedeclining“currentface”ofamortgagesecurityalsoleaveslessonthebooksthatcanfallinprice,givenrisingrates.(I’massumingyou,asacommunitybanker,areaversetorisk.)
(Fuel in the Tank continued on page 21)
Fuel in the Tank?MBS Aging Can Affect Your Bank’s Cash FlowWritten By: Jim Reber, President & CEO - ICBA Securities
IowaTIB Ad1/2 pg.April 2015
10 COMMUNITY BANKER UPDATE | JUNE 2015
Thisarticleexploreshowlendingactivitiescanbeadministeredandcontrolledthroughappropriateandsoundunderwritingcriteriaandpracticesthataregovernedbyasoundloanpolicy.1Aloanpolicymustestablishwhoisresponsibleforensuringthattheunderwritingcriteria(financialcapacity,collateral,pricing,andterms)areappropriatelystructured,analyzed,andmonitored.Thisarticlealsotouchesupontheincorporationofdocumentationrequirementsandtheongoingmaintenanceofthecreditfiles.
Underwriting CriteriaAloanpolicymustaddresskeycreditdecisioncriteriaandunderwritingfactorssuchasthepurposeoftheloan,requiredfinancialinformation,collateral,riskratings(borrowerandfacility),pricing,andpolicyexceptions.Itmayincludemetricsthatmakeaparticularborrower,industry,orloantypeacceptable;forexample,thepolicymaynotedebt-to-incomeorspecificdebtservicecoverage(DSC)ratios,interestcoverageratios,loan-to-valuerequirements,orappropriateamortizationperiods.Thepolicyshouldalsoaddresspost-originationactivities,suchasongoingmonitoringandcreditadministration,includingpost-originationmonitoringofloancovenants,obtainingfinancialinformation,andassessingtheborrower’songoingabilitytoservicethedebtandultimatelyrepaytheloan.
Initssimplestform,theunderwritingcriteriaandloanapprovalprocesswilldrivethebank’sassessmentanddeterminationofaborrower’screditworthiness.Whenunderwritingcriteriaarestrong,theloanportfolioshouldperformbetterandcreditlossesshouldbeminimized.Itisnotuncommon,especiallyinlargerormorecomplexbanks,tohaveseparatepolicies,guidelines,anddocumentationrequirementsthatcorrespondtodifferentloantypes(suchascommercialrealestate,landacquisitionanddevelopment,residentialtractdevelopment,asset-basedloans,andcommercialandindustrial).
Smallerbanksorbanksofferingfewerloanproductsmaywishtoincludekeytype-specificunderwritingcriteriaorstandardswithinthegeneralloanpolicy.Nomatterwherepolicyunderwritingcriteriaareincluded,theanalysisofanyborrowingrequestshouldaddressthebasicsofextendingcredit,includingcharacter(integrity),capacity(sufficientcashflowtoservicetheobligation),capital(networth),collateral(assetstosecurethedebt),andconditions(borrowerandtheoveralleconomy).
Financial InformationThedecisiontolendshouldbebasedonaborrower’sabilitytorepayanobligation.Obtainingandreviewingloanapplicationsalongwiththeappropriateborrowerinformation,bothfinancialandcollateral-related,areavitalpartofdeterminingcreditworthiness.Forlenderstoappropriatelyanalyzeborrowerinformationandsupporttheloanapproval,theinformationmustbeaccurateandobtainedinatimelymanner.
Theloanpolicymustestablishwhatfinancialinformationisrequiredfromaborrowerand/oranyguarantorsbothduringtheapplicationprocessandwhilethecreditremainsoutstanding.Thefrequency(monthly,quarterly,orannually)withwhichtheinformationwillbecollectedmustbeestablished,andthepersonnelresponsibleforobtainingtheinformationshouldbeidentified.
Theinformationrequiredtomakeasoundlendingdecisionwillbedependentuponwhattypeofcreditextensionisrequestedandwhotheborrowingentityis(forexample,acorporationoranindividual).Acorporateborrowerwilltypicallyberequiredtosupplymoreinformationthananindividualborrowerapplyingforapersonalloan.Keysourcesoffinancialinformationforeitherpartyincludetaxreturns,financialstatements,and/orcashflowstatements.Forcorporateborrowers,financialdocumentsshouldtypicallybepreparedbyanaccountant.Forindividualborrowers,personalfinancialstatementsshouldbeascompleteandthoroughaspossible.Thebankmayalsorequireadditionalormoredetailedinformationtoassesstheborrower’sfinancialcondition.Anyadditionalorspecialreportingrequirementsshouldalsobearticulatedintheloanpolicy.Thepolicyshouldspecificallyaddressthefrequencyofobtainingandrefreshingborrowercreditreportsfromcreditreportingagencies.Theloanpolicyshouldalsooutlinewhattypeoffinancialinformationisrequiredforeachtypeofborrowerandextensionofcredit.
CollateralWhenextendingcreditonasecuredbasis,lendersneedtoensurethatappropriatecollateralvaluationsareobtained.Whencollateralistakentoenhanceacreditand/orsecuretheultimaterepaymentsourceofaloan,lendersmustensurethatanappropriatelienisfiled(perfected)andthatthevalue
(Loan Policy, Pt 2 continued on next page)
by James L. Adams, Supervising ExaminerFederal Reserve Bank of Philadelphia
EFFECTIVE LOAN POLICY - Pt. 2*Development and Maintenance of an
Reprinted with permission of Community Banking Connections®
Copyright 2015 Federal Reserve System.
Watch future issues of Community BankerUpdate for Part 3 of this article.
COMMUNITY BANKER UPDATE | JUNE 2015 11
(Loan Policy, Pt 2 continued from previous page)
ofthecollateralissufficienttocovertheoutstandingbalanceoftheloan.Collateralvaluationisrequiredatoriginationandshouldberepeatedonanongoingbasistoensurethattheassetsmaintaintheirvalue.Appropriatelytrainedstaffmustbeavailabletoperformongoingcollateralmonitoring.Theloanpolicyshoulddiscussthetypesofcollateralthatareacceptableandunacceptableforeachloantype.Thepolicyshouldalsodiscussdocumentationrequirementsforvarioustypesofcollateralthatmaysupportthelender’sabilitytoexerciseperfectedliens.
Real Estate CollateralAcommonformofcollateralformanyloansissomeformofrealestate.Therearefederalregulationsandspecificsupervisoryguidancethatsetstandardsforrealestatelendingandthevaluationofrealestatecollateral.2Themostimportantelementofmanagingrealestatecollateralisobtainingacredibleappraisaloftheunderlyingproperty.TheFederalReserve’sappraisalregulationrequiresinstitutionstoobtainanappraisalforfederallyrelatedtransactionsinexcessof$250,000.3Anevaluationisallowedfortransactionsoflessthan$250,000.Theregulationfurtherestablisheswhenappraisalsarerequired,givesminimumstandardsforacceptableappraisals,andoutlinestherequirementsforappraiserindependence.Managementmustensurethattheregulatoryrequirementsforrealestatelendingandappraisalsareincorporatedintotheirbanks’lendingpolicies.Regulatoryagencieshavealsoprovidedcomprehensivesupervisoryguidancewithadditionaldetailformanagingrealestatecollateral.The“InteragencyAppraisalandEvaluationGuidelines”wereissuedinDecember2010toassistinstitutionsinestablishingsafeandsoundappraisalprograms.4
Other Collateral TypesOthercommontypesofcollateralthatoftensecureborrowingsinclude:accountsreceivable,inventory,equipment,andinvestmentsecurities.Insomecases,theloanpolicymayallowtheapprovalofless-commoncollateralsuchasspecialtyvehicles,boats,orpreciousmetals.Regardlessofthetypeofcollateral,theloanpolicyshouldoutlineacceptableproceduresforvaluingandmonitoringthecollateral.Itshouldalsorequirethatthevaluationsbeperformedbyindividualswiththeappropriateskillsetsandcredentials.Aswithallcollateralizedfinancing,theunderlyingcollateralvalueservesasthebasisfordetermininghowmuchmoneyshouldbeadvanced;therefore,thecontrolsoverthepreservationandmaintenanceofthecollateralshouldbeoutlinedwithinthepolicy.Lendersshoulddeterminethecollateralvalueatthetimetheloanisoriginatedandthenperformperiodicinspectionstodeterminethecollateralconditionandlocation,aswellaswhetheranycurtailments(reductionorpaydownofoutstandingadvances)areneededtokeeptheloanbalanceinlinewithcollateralvalues.5Thepolicyshouldalsorequirethatborrowersregularlyreportinformationaboutanycollateralthatissecuringaloan(forexample,thecompositionofthecollateralaswellasitsdollarvalue,location,andcompliancewithestablishedadvancerates).Loandocumentsshouldalsoensurethatbanksareabletogainaccesstocollateralattheirdiscretion.
Thepolicyshouldclearlydescribehowfrequentlycollateralvaluationswillbeperformed.Typically,thefrequencyofvaluationsdependsonthesizeoftheexposure,thetypeofcollateral,thelocation,andtheestablishedcontrolsoverthecollateral.Theborrower’soverallfinancialconditioncanalsobeakeyfactorinthetimingofacollateralvaluation.Whenaborrower’sfinancialconditiondeteriorates,theborrowermaynotbeadequately
maintainingthecollateral,orabankmayfindthatcollateralhasbeensold.Thiscanhaveanegativeimpactonthebank’sabilitytorelyonthecollateralforrepayment.
Perfection of CollateralWhencollateralotherthanrealestateistakentosecurealoan,alienonthecollateralisfiledwiththeappropriatelocalorstateauthority.MosttransactionssecuredbypersonalpropertyandfixturesaregovernedbyArticle9oftheUniformCommercialCode.6Theloanpolicyandproceduresshouldclearlyspecifythefilingrequirements,sincetimingdifferencesandfilinglocationsvaryfromstatetostate.Failuretofileafinancingstatementinatimelymannerand/orintheproperfilinglocationcancompromisethesecurityinterestinthecollateral.
Unlessthecollateralisinthepossessionofthesecuredparty,theremustbeawrittensecurityagreementthatdescribesthecollateral,andtheagreementmustbesignedbythedebtor.Institutionsshouldregularlymonitorlienfilingstoensurethatlienpositionsaremaintainedorthattheperfectedsecurityinterestinthecollateralremainsintact.
Risk RatingsManagementshouldestablishanaccurateandreliableriskratingsystemtohelplendersmakeappropriatelendingdecisionsandalsoestablishsoundmonitoringcriteriaoftheborrower’sfinancialandmanagerialcondition.Riskratingsshouldsignificantlyinfluencetheultimatelendingdecisionandhelpmanagementdetermineifadditionalcovenantsand/orcontrolsshouldbeimplemented.Riskratingdefinitionsandscaleswillvaryamongbanks,buttheriskratingframeworkshouldbesufficientlygranulartoassistlendersindeterminingpricing,fees,covenants,provisioning,andspecificcapitalallocation.Riskratingsshouldalsoplayavitalroleindeterminingoverallportfolioadministration.
Riskratingsystemshaveevolvedsignificantlyoverthepastfewyears,includingtheimplementationofdualriskratings(separateborrowerandfacilityratings)andthesignificantincreaseinthegranularityofthepassratingscale.Whilethedetailssurroundingriskratingsmayvarysignificantlyamonginstitutions,theriskratingprocessandphilosophyshouldbeclearlydefinedandincorporatedintotheloanpolicy.
PricingElementsoftheloanpolicymayalsoinfluencepricing.Finalpricingdecisionscanbecomplicatedbycompetitionfromotherlendersandthedeterminationofappropriatepremiumsfordefaultrisk.Usingasimplecost-plusloanpricingmodelrequiresthatallrelatedcostsassociatedwithextendingcreditareknownbeforeestablishinginterestratesandfees.Atypicalcost-plusmodelwillconsiderthefollowingfourcomponents:7
• Thecostofthefunds• Operatingcostsassociatedwithservicingtheloan(s)• Riskpremiumfordefaultrisk(consideringtheborrowerrisk
ratingandfacilityriskrating)• Areasonableprofitmarginoncapital• Managementshouldbeabletoestablishapricingbaseline
usingsuchamodelbutwillberequiredtomaketheappropriateadjustmentstobecompetitiveandtoreceiveanappropriatereturn.
(Loan Policy, Pt 2 continued on next page)
LegalDisclaimer:TheanalysesandconclusionssetforthinthispublicationarethoseoftheauthorsanddonotnecessarilyindicateconcurrencebytheBoardofGovernors,theFederalReserveBanks,orthemembersoftheirstaffs.Althoughwestrivetomaketheinformationinthispublicationasaccurateaspossible,itismadeavailableforeducationalandinformationalpurposesonly.Accordingly,forpurposesofdeterminingcompliancewithanylegalrequirement,thestatementsandviewsexpressedinthispublicationdonotconstituteaninterpretationofanylaw,rule,orregulationbytheBoardorbytheofficialsoremployeesoftheFederalReserveSystem.
12 COMMUNITY BANKER UPDATE | JUNE 2015
(Loan Policy, Pt 2 continued from previous page)
Numerousothervariablesbeyondthosepreviouslydiscussedaffectpricingdecisions,includingloantype,paymentstructure,andborrowinganddepositrelationships.Thisarticledoesnotdiscussdifferentpricingstrategiesbutstressesthatmanagementmustensurethatanappropriatepricingstructureisestablishedandimplementedforeachtypeofloanproductoffered.Managementshouldcontinuouslyevaluateandadjustratesinresponsetochangesincosts,competitivefactors,orrisksofaparticularproducttype.8
Policy ExceptionsExceptionstopoliciesandproceduresshouldreceivetheappropriatelevelofapprovalandshouldbedocumentedinwriting.9Evenfundamentallysoundcreditsmaycontainpolicyexceptions;suchcreditsmaynotalwaysconformtoallaspectsoftheloanpolicy,buttheremaybemitigatingcircumstancesthatwouldjustifytheloan’sapproval.Theloanpolicyshouldestablishprocessesandproceduresforpresentingnonconformingorexceptionloanrequestsreceivedfromcreditworthyborrowers.Aftercarefulanalysis,theexceptionsthatwouldgivethelendercomforttoapprovetherequestmaybeapprovedoralternativestructuresmaybepresented.
Toensurecompliancewithregulatoryguidance,10thepolicyneedstoestablishreviewandapprovalproceduresforexceptionloans,includingloanswithloan-to-valuepercentagesinexcessofsupervisorylimits.Policyexceptionsandanymitigatingcircumstancesshouldbewelldocumentedandpresentedtothedesignatedcommitteeforapproval.Allapprovedexceptionsshouldbeappropriatelytrackedandmonitoredonanindividualandcollectivebasis.
Frequentpolicyexceptionsmayindicatealooseningofcreditunderwritingcriteriaand/orapolicythatistoorestrictive.Theunderlyingreasonsbehindfrequentlygrantedexceptionsshouldbeassessedandappropriateactionsshouldbetakentoensurethepolicyisappropriatelyconveyingthedesiredriskprofile.
Loan CommitmentsLoanapprovalsshouldbemadeinaccordancewithestablishedunderwritingguidelinesandshouldbeconveyedtotheborrowerinaformalcommitmentletter.Whileacommitmentletterisnotapromissorynote,itisthedocumentthatcontainsthetermsandconditionsunderwhichabankwillagreetoextendcredit.Thecommitmentlettershouldbebasedontheapprovedtermsoftheloanandshouldbesignedbybothparties.Italsoshouldinclude,ataminimum:
• Borrower(s)• Guarantor(s)• Amountofcreditfacility• Interestrateandmethodologyusedtocalculatetheinterest
rate• Termortenor• Securityorcollateral• Distributionofproceeds• Borrowerwarranties Financialstatements Appraisals Inspections• Covenants• Expirationorterminationofcommitment• Acceptanceandclosing
Loan Approval and ClosingOncethecommitmentletterisreturnedwiththeborrower’ssignatureandallthenecessarynegotiationshavebeencompleted,
formalloandocumentscanbegenerated.Borrowersshouldsignanewcommitmentletterifanychangesthatdifferfromtheoriginalapprovalarenegotiated.
Theapprovalmayalsorequiretheborrowerandguarantorstosubmit(atleastannually)financialinformationduringthetermoftheloan.Thiswillassistintheongoingmonitoringandreviewoftheborrower’sfinancialconditionandindeterminingthecontinuedappropriatenessofthecreditandwhethertograntrenewalsorextensions.
Oncesigned,aloanapprovalorcommitmentlettercanberoutedtoeitherthebank’sinternalloandocumentationteamortoanoutsideattorneyforthepreparationoftheformalloandocuments.Aftertheloandocumentsarepreparedandtheborrower(ortheborrower’sattorney)hasreviewedthem,thebankandtheborrowerwillmeetforaformalloanclosingduringwhichalldocumentsaresignedandproceedsareadvanced.Institutionsshouldalsohavepoliciesthatgoverntheproperproceduresforthedisbursementofloanproceeds.
Maintaining Appropriate Credit Files and DocumentationThecreditfileistherepositoryforallinformation(financialandcollateral)pertinenttothecreditextensionfortheentireperiodthatthecreditextensionremainsoutstanding.
Withinthecreditfile,lendersshouldappropriatelydocumenttheentirecreditrelationshipandprovideinternalandexternalreviewerswithallinformationnecessarytoanalyzethecreditduringitslife.Thepolicyshouldidentifywhoisresponsibleforcollectingandmaintainingalltherequiredinformationduringthelifeoftheloanandspecifywhoisresponsibleforreviewingtheadequacyoftheloandocumentation.Thepolicyshouldalsocontainproceduresforidentifying,citing,andcorrectingdocumentationexceptionsandthepartiesresponsibleforcarryingoutthesetasks.
Thecreditfileshouldadequatelydocumentandconfirmeveryaspectoftheestablishedunderwritingcriteria.Forexample,creditfilesshouldincludeallfinancialstatements,creditreports,collateralinspectiondocuments,pastloanapplications,memoranda,correspondence,andappraisals.Documentationrequirementswillvaryaccordingtothetypeofloan,borrower,andcollateral.11
ConclusionCommunitybanksareexpectedtohaveandmaintainpoliciesandproceduresthatprovideaneffectiveframeworktocontrolcreditriskthroughsoundunderwritingcriteria,appropriatecreditfilemanagement,andsounddocumentation.Whilenumerousloanpolicytopicsandexampleshavebeenpresentedinthisarticleandthepreviousone,theimportanceoftailoringthepolicytobanks’activitiescannotbeoverstressed.Theunderwritingcriteriaalongwiththecreditfilemaintenanceanddocumentationrecommendationspresentedwithinthisarticlearebynomeansall-inclusive.
Notes*Thisarticleisthesecondofathree-partseries.Thefirstarticle,whichistitled“DevelopmentandMaintenanceofanEffectiveLoanPolicy:Part1,”appearedintheThird/FourthQuarter2014issueofCommunityBankingConnectionsandisavailableatwww.cbcfrs.org/articles/2014/q3-q4/development-and-maintenance-of-an-effective-loan-policy.Thearticlediscussedwhyitisimportantforaloanpolicytodefinewhatispermissibleandwhohasresponsibilityforensuringlendingactivitiesareconductedinasafeandsoundmanner.Thearticlecoveredloanpolicydevelopment,policyobjectives,permissibleandimpermissibleloans,participations,portfoliomixandlimits,lendingdepartmentstructure,andlendingauthority.Italsodiscussedhoweachofthesepolicyelementscanvarydependingontheactivitiesandmissionofabankingorganization.
Thefinalarticleintheseries,whichwillappearinafutureissue,willdiscussseveral
(Loan Policy, Pt 2 continued on next page)
COMMUNITY BANKER UPDATE | JUNE 2015 13
(Loan Policy, Pt 2 continued from previous page) aspectsofongoingcreditmonitoringandcreditfilemaintenancethatneedtobeincludedintheloanpolicy.Itwillalsoaddressmanagementinformationsystemsandreporting,loanreview,loanworkout,andtheallowanceforloanandleaselosses.
1SeeBoardofGovernorsoftheFederalReserveSystem,CommercialBankExaminationManual(CBEM),section2040.1,“LoanPortfolioManagement,”availableatwww.federalreserve.gov/boarddocs/supmanual/cbem/2000.pdf.
2TheFederalReserveBoard’srealestateappraisalstandardsarefoundinRegulationH,subpartE,12CFR208.50–51forstatememberbanks.Forbankholdingcompanies,theappraisalstandardscanbefoundinRegulationY,subpartG,12CFR225.61–67.
3TheInteragencyAppraisalandEvaluationGuidelineswerepublishedonDecember2,2010,andexplainrealestatetransactionsthatrequireappraisalsand/orevaluations.Theguidanceprovidesfederallyregulatedinstitutions’andexaminers’clarificationontheagencies’expectationsforprudentappraisalandevaluationpolicies,procedures,andpractices.Appraisal—Asdefinedintheagencies’appraisalregulations,awrittenstatementindependentlyandimpartiallypreparedbyaqualifiedappraiser(statelicensedorcertified)settingforthanopinionastothemarketvalueofanadequatelydescribedpropertyasofaspecificdate(s),supportedbythepresentationandanalysisofrelevantmarketinformation.Evaluation—Avaluationpermittedbytheagencies’appraisalregulationsfortransactionsthatqualifyfortheappraisalthresholdexemption,businessloanexemption,orsubsequenttransactionexemption.
4SeeSupervisionandRegulationletter10-16,“InteragencyAppraisalandEvaluationGuidelines,”availableatwww.federalreserve.gov/boarddocs/srletters/2010/sr1016.htm.
5SeeCBEM,section2160,“Asset-BasedLending.”
6SeeCBEM,section2080,“CommercialandIndustrialLoans.”
7SeeMatthewD.Diette,“HowDoLendersSetInterestRatesonLoans?”FederalReserveBankofMinneapolis,November1,2000,availableatwww.minneapolisfed.org/publications_papers/pub_display.cfm?id=3030&.
8SeeCBEM,section2040,“LoanPortfolioManagement.”
9SeeCBEM,section2040,“LoanPortfolioManagement.”
10SeeRegulationH,AppendixCtoPart208—InteragencyGuidelinesforRealEstateLendingPolicies,availableatwww.gpo.gov/fdsys/granule/CFR-2012-title12-vol2/CFR-2012-title12-vol2-part208-appC/content-detail.html.
11SeeCBEM,section2040.1,“LoanPortfolioManagement.”
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14 COMMUNITY BANKER UPDATE | JUNE 2015
Telling Our StoryWritten By: Jack Hartings, Chairman of ICBA
Takingadvocacytothenextlevel—that’swhatcommunitybankersdidlastmonthatICBA’sWashingtonPolicySummit,andtheyhavetheresultstoproveit.Withnearly1,000communitybankersandindustryadvocatesswarmingthenation’scapitaltoadvocatepositivereformforourindustry,communitybankerssteppedupandparticipatedinmorethan300meetingswithpolicymakers.
Nevershyaboutwhoyouareandwhatyoustandfor,communitybankersachievedtangibleresultsatthisyear’ssummitthatarehelpingtodrivethemeaningfulchangeweneed.Becauseofyou,theCLEARReliefActintheHouse(H.R.1233)added22bipartisancosponsorsinjustoneweekafterthemeetingstobringitstotalto40.Notonlythat,theCLEARReliefActintheSenate(S.812)hastackedoneightfor29totalbipartisancosponsors.
That’sresults,communitybankers!Youshouldbecommendedforyourefforts.Youstoodupandspokeout—manyofyouwithreal-lifestoriesandtestimonialsabouthowregulatoryburdenisimpactingyourcustomersandcommunity.That’swhatourrepresentativesontheHillandregulatorsneedtohear.TheyhearditloudandclearduringICBA’sWashingtonPolicySummit,thankstoallofthevocalcommunitybankerswhoattended.Butwecan’tstophere.Therearemorestoriesthatneedtobetoldtoillustratethenegativeimpactthatexcessiveregulatoryburdenishavingonrealpeopleandrealcommunities—bothofwhichdependontheircommunitybanksasalocalsourceoffunding.
Storytimeisn’tover.InthepursuittoenactmeaningfulregulatoryreliefforcommunitybanksthisCongress,theHouseFinancialServices
Committeeleadershipisseekingspecificexamplesofhowcurrentregulatoryrequirementshavehinderedlendingandultimatelyharmedconsumers.Thecommitteeisnotlookingforexamplesofhowregulationshaveharmedbankprofitability,buthowtheyadverselyaffectyourcustomers.
ICBAistakingtheleadtogetyourspecificcommunitybankerstoriestoCongress.Tothatend,pleaseshareyourspecificexampleswithICBA(seeinsetbelow).Thecommitteeislookingforexamplesoftheloansthatyourbankwouldtraditionallymakebutnowcannotduetothecurrentregulatoryenvironment.
Nodetailshouldbesparedinsharingstoriesofcustomerimpact.Areastocovercouldinclude,butarenotlimitedto,consumer,residentialmortgageandsmall-businesslending.Examplesshouldbeasspecificaspossible.AndknowthatthestaffatICBAwillredactsensitivecustomerinformationbeforeyourcommentsarepassedontothecommittee.
Sogoaheadandtellyourstory,yourcustomers’stories,andyourcommunity’sstory.ThebottomlineisthateveryoneonMainStreetisimpactedbycripplingregulatoryburden—notjustthecommunitybank.ThesoonerCongressknowsjusthowmuchitsactionsaffecteverydayAmericans,thebetter.Andwhobettertoillustratethatthanthepeoplewhoknowtheircustomersandcommunitybest—ournation’scommunitybankers?
JackHastingsisChairmanofICBA,andPresidentandCEOofThePeople’sBankinColdwater,Ohio.
“The bottom line is that everyoneon Main Street is impacted by crippling regulatory burden.”
TOPFrom the
ICBA is making the case to Congress for community bank regulatory relief.
Please share how regulations have negatively impacted your bank’s
consumers by visiting:www.icba.org/beheard
COMMUNITY BANKER UPDATE | JUNE 2015 15
Everybaseballplayerdreamsaboutsmashinganextra-inningwalk-offhomeruntowintheWorldSeries.Overandoveragaintheycanimaginethatmoment—thatspectacularswingundertheklieglightsbeforearoaringstadiumcrowd.Whattheirimaginationstooeasilyomit,however,arethemonthsorevenyearsofarduous,unglamorousworkthatisnecessarytoputanyoneoranyteaminapositiontoclinchaseason-cappingchampionshipinthefirstplace.
Suddenanddramaticvictories,inbaseballasinlife,arerare.Successinanyendeavoralmostalwaysresultsfromasteadyaccumulationofhard-wonsinglesearnedoveranentireseasonthat,ultimately,leadtothelastat-batinafinalchampionshipgame.Thisspring,afteryearsofsteadybase-hitadvocacysuccessesbyICBA,thefederalPatentTrialandAppealBoardinvalidatedtwodubiousandabusivecheck-imagingpatentsthat,whenasserted,haveseriouslyharassedfartoomanyinnocentcommunitybanksforfartoolong.Clearlyajustandoverduevictory,thePTABdeclareduncalledfortheDataTreasuryCorp.’sflimsypatentsthatresultedin$350millioninsettlementclaimsfromthefinancialservicessector,includingcommunitybanks.
Butthisvictory,whichgoesalongwaytopreventcostlyandwillfullybaselesspatent-infringementclaimsinthefuture,wasneithersuddennoraccidental.ItresultedfromyearsofICBAadvocacy,includingourcoordinatedworkwithallies.ThePTAB,infact,wasitselfestablishedthreeyearsagobyCongressthroughlegislationICBAvigorouslyadvocatedtoshutdownso-calledpatenttrollssuchasDataTreasury.
Sincethen,justasimportantly,numerousstatelegislatureshavealsoenactedmuchstricterlegalprotectionsagainstpatenttrolling.LastyeartheU.S.SupremeCourtalsoissuedtwodecisivedefeatsforpatent-trollclaims.Allofthishascreatedabadbusinessclimateforpatenttrolls,causinganotoriousone,AutomatedTransactionsLLC,toabandonlitigationagainstanumberofcommunitybanks.
Evenwiththesetremendousadministrative,legislativeandjudicialvictories,theendgameagainstpatenttrollingisn’tover.Tofurtherprotectcommunitybanks,ICBAiscontinuingtocallonCongresstoadvancelegislationthatwould:• makepermanentPTABcoveredbusiness
methodreviewofthese“businessmethod”patent-infringementclaims;
• requirethoseassertingthesekindsofpatentinfringementstoprovideclearanddetailedinformationup-front,and;
• ensurecommunitybanksreceivesufficientlegalprotectionagainstclaimsfromthird-partyproducts,servicesandsystems.
ThesemeasuresareimportantbecauseDataTreasury’sclaimshavebeenjustthetipofanicebergofget-rich-quicklegalschemespatenttrollshaveattempted.OneBostonUniversitystudyestimatedthatcorporationspaidatleast$29billioninvariouspatent-trollcostsin2011alone.
Asalifelong,diehardSt.LouisCardinalsfan,Iadmiretheteam’sstoriedabilitytoedgeoutcrucialwinsfromsheerhustleanddetermination.TheteamhastaughtmethatpostingtheW—nothowyouarriveatawinningscore—iswhatcounts.Sorestassured,ICBAwon’tstopworkinguntilweachievewhateverisnecessarytoprotectcommunitybanksandtheircustomers.We’lldowhateverittakes—homeruns,basehitsorevenbuntsifnecessary—forhoweverlongittakes.
Praise for Small BallWrittenBy:CamdenFine,PresidentandCEOofICBA
“Even with tremendous administrative, legislative and judicial victories, the endgame
against patent trolling isn’t over.”
Following Mr. FineMore than 1,000 people are following Camden Fine’s tweets @Cam_Fine— are you? Visit www.twitter.com/cam_fine.
FINEPOINTS
16 COMMUNITY BANKER UPDATE | JUNE 2015
May Survey Results at a Glance:• TheRuralMainstreetIndeximproved,butremainedbelow
growthneutralforMaysignalingslightpullbacksineconomicactivity.
• Farmlandpricesdeclinedforthe18thstraightmonth,butwithwidevariationsacrosstheregion.
• Almostoneinfivebankersreportednegativefalloutfromtheavianfluoutbreak.
• Agricultureequipment-salesindexdroppedtoarecordlowlevel.
• Bankersidentifiedrisingregulatorycostsasthetopeconomicchallengetobankprofitabilityforthenextfiveyears.
OMAHA,Neb.–TheCreightonUniversityRuralMainstreetIndexforMayroseslightlyfromApril’sweakreading,accordingtothemonthlysurveyofbankCEOsinruralareasina10-stateregiondependentonagricultureand/orenergy.
Overall:TheRuralMainstreetIndex(RMI),whichrangesbetween0and100,climbedto49.0from46.0inApril.
“ThestrongerU.S.dollarcontinuestobeadragontheRuralMainstreeteconomy.ThestrongU.S.dollarhasmadeU.S.goods,especiallyagricultureandenergyproducts,lesscompetitivelypricedabroad.ThishasdampenedfarmincomeandtheRuralMainstreeteconomy,”saidErnieGoss,JackA.MacAllisterChairinRegionalEconomicsatCreightonUniversity’sHeiderCollegeofBusiness.
Farming and Ranching:Thefarmlandandranchland-priceindexforMayclimbedto39.7fromApril’s33.4.“However,thisisthe18thstraightmonththeindexhasmovedbelowgrowthneutral.Butaccordingtobankercomments,thereisgreatdealofvariationacrosstheregionwithmanyareascontinuingtoexperiencestrongdemandforfarmlandwithlittledeteriorationinfarmlandprices,”saidGoss.
JeffBonnett,presidentofHavanaNationalBankinHavana,Ill.,said,“Althoughitisverytruethatcommoditypricesaretoolowtosupportcurrentyearfarmoperations,theideaofplummetingfarmlandvalueshasnomeritinourarea.Wehavearecentexampleofa240acreirrigatedpieceinthesouthernpartofourcountythatsoldfor$9,450anacre.”
TheMayfarmequipment-salesindexfelltoarecordlowof12.5from15.6inApril.Theindexhasbeenbelowgrowthneutralfor22straightmonths.“Withfarmincomeexpectedtodeclinefora
secondstraightyear,farmersremainverycautiousregardingthepurchaseofagriculturalequipment,”saidGoss.
Banking:TheMayloan-volumeindexsoaredto79.6from69.0inApril.Thechecking-depositindexsankto43.8fromApril’s50.1,whiletheindexforcertificatesofdepositandothersavingsinstrumentsincreasedto39.7fromApril’s38.0.
Thismonth,bankCEOswereaskedtoidentifythegreatesteconomicchallengetobankingoperationsoverthenextfiveyears.Approximately,45.8percentofthebankCEOsnamedrisingregulatorycostsasthetopthreattotheirbank’sprofitability.Morethanoneinfive,or20.8percent,indicatedgrowingcompetitionfromFarmCreditandcreditunionsrepresentedthegreatestthreatoverthenextfiveyears.
Approximately10.4percentand8.3percentidentifiedslowgrowthandfarmforeclosures,respectively,asthenumberonechallengetotheirbank’sprofitabilityoverthenextfiveyears.Theremaining14.9percentnamedotherfactorschallengingtheiroperatingincomeoverthenextfiveyears.
Hiring:Despiteweakercroppricesandpullbacksfrombusinesseswithclosetiestoagricultureandenergy,RuralMainstreetbusinessescontinuetoaddworkerstotheirpayrolls.TheMayhiringindexrocketedto61.5fromApril’smuchlower,butsolid54.2.“RuralMainstreetbusinessescontinuetohireadditionalworkers.Whiletherateofnewhiringishealthierinurbanareasofeachstate,RuralMainstreetcommunitiesaregrowingjobsatasolid,butslowerpace,”saidGoss.
Confidence:Theconfidenceindex,whichreflectsexpectationsfortheeconomysixmonthsout,sankto41.5from47.0inApril.“Theimpactoftheavianfluhadaclearandnegativeimpactontheoutlookofbankersintheregion,”saidGoss.
“Weaskedbankersaboutthefalloutfromtheavianfluoutbreak.Almostoneinfiveofthebankers,or18.7percent,reportednegativeimpactsfromtheoutbreak.However,almostone-half,or48.9,expectnegativeimpactsfromthebirdfluifitshouldspreadtotheirarea,”saidGoss.
Home and Retail Sales:TheMayhome-salesindexjumpedto66.0fromApril’s58.2.TheMayretail-salesindexincreasedtoaweak49.0from44.0inApril.“Wehaveyettomeasureanyupturn
(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 Economy Slows:Almost One in Five Bankers Reported Negative Impacts from Bird Flu
Ernie Goss
COMMUNITY BANKER UPDATE | JUNE 2015 17
(Rural Mainstreet continued from previous page)
inretailsalesstemmingfromthedownturninfuelprices,”saidGoss.Eachmonth,communitybankpresidentsandCEOsinnonurban,agriculturallyandenergy-dependentportionsofa10-stateareaaresurveyedregardingcurrenteconomicconditionsintheircommunitiesandtheirprojectedeconomicoutlookssixmonthsdowntheroad.BankersfromColorado,Illinois,Iowa,Kansas,Minnesota,Missouri,Nebraska,NorthDakota,SouthDakotaandWyomingareincluded.ThesurveyissupportedbyagrantfromSecurityStateBankinAnsley,Neb.
Thissurveyrepresentsanearlysnapshotoftheeconomyofrural,agriculturallyandenergy-dependentportionsofthenation.TheRuralMainstreetIndex(RMI)isauniqueindexcovering10regionalstates,focusingonapproximately200ruralcommunitieswithanaveragepopulationof1,300.Itgivesthemostcurrentreal-timeanalysisoftheruraleconomy.GossandBillMcQuillan,formerchairmanoftheIndependentCommunityBankersof
America,createdthemonthlyeconomicsurveyin2005.
Colorado:Afterrisingabovegrowthneutralfor11straightmonths,Colorado’sRuralMainstreetIndex(RMI)hasdeclinedbelowthe50.0thresholdforthelastfourmonths.TheRMIimprovedto47.7fromApril’s43.0.Thefarmlandandranchland-priceindexadvancedto50.9fromApril’s35.6.Colorado’shiringindexforMayadvancedto62.4,from50.5inApril.DaleLeighty,CEOofFirstNationalBankofLasAnimasreported,“Recentrainshavechangedouroutlookforthebetter.”
Illinois:TheRMIforIllinoisroseto49.2from45.6inApril.TheIllinoisfarmland-priceindexincreasedto42.9fromApril’s39.2.Thestate’snew-hiringindexexpandedto59.2from53.3inApril.
Iowa:TheMayRMIforIowaadvancedto52.1fromApril’s45.4.Iowa’sfarmland-priceindexforMayclimbedto52.3fromApril’s42.1.Iowa’snew-hiringindexforMayjumpedto62.9fromApril’s55.7.
(Rural Mainstreet continued on next page)
Tables 1 and 2 summarize survey findingsNext month’s survey results will be released on the third Thursday of the month, June 18.
Table 1: Rural Mainstreet Economy One Year Ago and Last Two Months: (index > 50 indicates expansion)
May2014
April2015
May2015
Area economic index 55.6 46.0 49.0
Loan volume 75.4 69.0 79.6Checking deposits 54.8 50.1 43.8
Certificates of deposit and savings instruments 40.3 38.0 39.7Farmland prices 46.7 39.4 39.4Farm equipment sales 33.6 15.6 12.5Home sales 63.9 58.2 66.0Hiring 64.0 54.2 61.5Retail business 51.7 44.0 49.0Confidence index (area economy six months out) 51.6 47.0 41.5
Table 2: The Rural Mainstreet Economy, May 2015Percentage of bankers reporting
SignificantCosts
Cost but not significant Little or no cost A positive from higher
livestock pricesRegardingthecurrentavianorbirdfluoutbreak,whathasbeentheimpactthusfartoyourareaeconomy? 4.1% 14.6% 79.2% 2.1%
SignificantCosts
Cost but not significant Little or no cost A positive from higher
livestock pricesIfthebirdfluspreadstoyourarea,orinyourarea,whatimpactdoyouexpectittohaveontheareaeconomy?
12.7% 36.2% 46.8% 4.3%
Rising Regulatory costs
Increasing competition from Credit Unions &
Farm Credit
Slow or negative economic growth
Farm foreclosures Other
Forafive-yeartimehorizon,whichofthefollowingrepresentsthebiggesteconomicchallengetoyourbankingoperationsand/orprofitability?
45.6% 20.8% 10.4% 8.3% 14.9%
Follow Ernie Goss on Twitter: www.twitter.com/erniegossFor historical data and forecasts, visit: www2.creighton.edu/business/economicoutlook/
18 COMMUNITY BANKER UPDATE | JUNE 2015
(Rural Mainstreet continued from previous page)
Kansas:TheKansasRMIforMaydippedto47.5fromApril’s49.2.Thestate’sfarmland-priceindexforMayfellto33.9fromApril’s57.1.Thenew-hiringindexforKansasdeclinedto55.6from67.7inApril.AccordingtoMichaelJohnson,CEOoftheSwedishAmericanBankinCourtland,“20tornadoesinonenight.Devastatingbutnoliveslost.(Itis)amazingtoseehowourcommunitiespulltogethertohelptheirneighborswhenallislost.”
Minnesota:TheMayRMIforMinnesotaroseto50.1fromApril’s45.2.Minnesota’sfarmland-priceindexincreasedto42.0from32.4inApril.Thenew-hiringindexforthestateclimbedto58.8fromApril’s47.9.
Missouri:TheMayRMIforMissourigrewto48.0from41.8inApril.Thefarmland-priceindexforMayroseto36.2fromApril’s16.3.Missouri’snew-hiringindexsoaredto56.5fromApril’s35.1.
Nebraska:TheNebraskaRMIforMayincreasedto47.8from45.7inApril.Thestate’sfarmland-priceindexslippedto39.0from39.4inApril.Nebraska’snew-hiringindexgrewto57.6fromApril’s53.1.LarryRogers,executivevice-presidentofFirstBankofUtica,“Becauseofthebenefitsofraisingseedcorn,wearesomewhatinsulatedfromtheeffectsoffallinggrainprices.”
North Dakota:TheNorthDakotaRMIforMayclimbedto53.9fromApril’s47.8.Thefarmland-priceindexjumpedto74.9from39.4inApril.NorthDakota’snew-hiringindexincreasedto72.0fromApril’s63.0.
South Dakota:TheMayRMIforSouthDakotaexpandedto50.5fromApril’s44.1.Thefarmland-priceindexforMayexpandedto44.5fromApril’s32.1.SouthDakota’snew-hiringindexroseto59.8from47.6inApril.
Wyoming:TheMayRMIforWyomingadvancedtoaweak48.2fromlastmonth’s44.3.TheMayfarmlandandranchland-priceindexexpandedto42.3fromApril’s35.8.Wyoming’snew-hiringindexincreasedto59.2fromApril’s49.2.
CBI is searching for a new Membership Development Director, who will be responsible for membership retention and growth as well as services penetration and revenue growth. The incumbent will directly market, promote and sell membership benefits and endorsed services to member and non-member community banks throughout the state of Iowa.
They will also be responsible for attending CBI-sponsored events and conferences, reporting bank trends and needs to the Board of Directors monthly, and coordinating committee and peer group meetings.
The Membership Development Director will be the central contact for CBI membership. Successful candidates must have experience in a relationship-building sales environment, and knowledge of the banking industry is preferred. The position also involves extensive state-wide travel, with the main office in West Des Moines.
To apply, contact Don Hole at [email protected],call 515-453-1495, or see our ad in CareerBuilder.com.
CBI Is Looking for aMembership Development Director
COMMUNITY BANKER UPDATE | JUNE 2015 19
OnMay18,theNACHAmembershipapprovedanewACHRuleonSameDayACH.ThisRulewillbeimplementedinthreephaseswithphase1goinginto
effectSeptember2016,butthereisplentyabankcandonowtoprepareforthisepicchange.
Hereismylistof“Top5ThingsYourBankShouldBeginDoingNow”:1. BecomefamiliarwiththeSameDayACHRule.Thisisa
phasedimplementationapproach.SameDayACHcreditfundsavailabilityrulesarenotdefineduntilPhase3.Therearealotofmythsand‘hear-say’abouttheSameDayACHRule.Makesureyouknowwhatruleactuallysays.ThenewRuleslanguagecanbefoundatwww.nacha.org/rules/same-day-ach-moving-payments-faster.
2. AnticipatethestaffingimpactofSameDayACH.Workwithyourprocessorstoseewhattheyareplanningtoautomateandwhatwillbemanualforyourbank.Sincethisiscompletelynew,youmustalsoexpecttheunexpected.
3. UnderstandthatthisRuleismandatoryforRDFIs.RDFIswillnotbeabletoopt-outofNACHA’sSameDayACHRules.RDFIsmustplantoacceptsamedaycreditsanddebits,and
mustfollowtheACHRulesastheypertaintofundsavailability,postingandexceptionprocessing.
4. BegindiscussionsonwhetheryouwillallowOriginatorstosendsamedayACH.Thisisintendedtobeapremiumservicetoyouroriginators.Thisserviceisperfectforcontingencyonmissedpayrollfiles,butarethereotherusecasesforSameDayACHthatmaygeneraterevenueforyourbank?Doyouhavebusinessclientswhowouldbenefitfromthisservice?JustaswithanyACHoriginationservices,thereisnomandatetoofferSameDayACHoriginationservices.
5. Lookforresources,toolsandeducationfromyourRegionalPaymentAssociation.YourRegionalPaymentsAssociation,throughtheirrelationshipwithNACHA,hasbeenactivelytrackingtheSameDayACHRuleproposal.Iftheyarenotdoingsoalready,theyareplanningtooffertraining,newsletterarticles,toolsandresourcestohelpyouimplementSameDayACH.
Jen Kirk is Director, Industry Relations, for EPCOR – a regional payments trade association devoted to providing timely and relevant payments education and support to over 2,300 financial institutions throughout the Midwest.
Written By: Jen Kirk, AAP, Director, Industry Relations - EPCOR
Top 5 Things to Do in 2015 to Prepare for Same Day ACH
20 COMMUNITY BANKER UPDATE | JUNE 2015
JMFA,theleadingconsultantforbanksandcreditunionsnationwide,receivedtophonorsatthe29thAnnualAmericanMarketingAssociation(AMA)Houston
CrystalAwardsGala.JMFA’sNewOverdraftPrivilegeProgrammarketingendeavorswererecognizedasBestintheBusiness-to-BusinessMarketingCampaignandTwo-DimensionalPrintedDirectMailCampaigncategories.
“WearecertainlyhonoredtoreceivethisrecognitionfromtheAMAfortheeffortsthatwentintoour2014marketinginitiatives,aswellastheresults,”saidJohnM.Floyd,chairmanandCEO.
Inadditiontosurpassinginitialmarketingobjectives,thecampaignspresentedanimportantmessageregardingtheneedforfinancialinstitutionstoprovidefulldisclosuretoaccountholdersabouthowtheirtransactionswillbehandled.“Asalong-timeadvocateoftransparentfinancialservices,wearecommittedtobuildingrelationshipsbyhelpingourclientsimprovetheirprofitabilitywhiletheyprovideproductsandservicesthatarebeneficialtotheiraccountholders,”Floydsaid.
TheCrystalAwardswinnersareselectedbasedontheeffectivenessoftheirmarketingandcommunicationsuccess.Thisyear’sjudgingincludedmorethan360entriesin80categories.
FormoreinformationonCBIEndorsedMemberJMFA,visittheirwebsiteatwww.JMFA.comorcall(800)809-2307.
UBB Reports Strong Earnings for 2014
UnitedBankers’Bancorporation,Inc.,(UBBI)reportedstrongconsolidatedearningsfor2014andannouncedtheelectionofitsBoardmembersat
itsannualshareholdersmeeting.UBBIistheholdingcompanyforUnitedBankers’Bank(UBB).TheannualmeetingwasheldrecentlyatTheWestinMinneapolisinEdina,MN.
WilliamC.Rosacker,PresidentofUnitedBankers’Bancorporation,Inc.,reportedthatUBBIhadaconsolidatednetincomeof$5,132,455in2014andtotalassetsof$788,125,954.“I’mpleasedtoreportthatourperformancein2014wasstrongandcontinuestodemonstrateourstrengthandstabilityforthefuture,”commentedRosacker.
“Theseearningsarereflectiveofthesuccessourcustomerbanksarehavingasthemainstreeteconomycontinuestoimprove,”saidRosacker.“WeareparticularlypleasedwiththegrowthinourloanportfolioasmemberbanksareturningtoUBBforhelpinfundinggrowthtotheircommunities.Aswelooktowardsthefuture,wecontinuetoresearchanddevelopnewandinnovativeproductsandservicesthatwillenablecommunitybanksinbetterservingtheircustomers.”
DickBehl,PresidentofFarmers&MerchantsStateBankofScotland,SouthDakota,willserveaconsecutiveoneyeartermastheUBBIBoardChairman.UBBalsoannouncedthere-electionofGregoryTraxlerofFirstNationalBankLeCenter,LeCenter,Minn.,asUBBIBoardViceChairman,andGregRaymoofFirstStateBankSouthwest,Worthington,Minn.,asanewBoardmember.RetiringfromtheUBBIboardofdirectorswasWayneFinnernofMadelia,Minn.
FormoreinformationonCBIAssociateMemberUBB,visitubb.com.
NewsfromCBIAffiliate&AssociateMembers
JMFA Wins AMA Houston Crystal Awards
Whitfield&Eddy,P.L.C.attorneysTomBurkeandMarkRicewererecognizedbyChambersUSAintheareaofCorporate/MergersandAcquisition,Bankingand
Finance–Iowa.KaraSinnardwasalsorecognizedintheareaofRealEstate–Iowa.Burke,SinnardandRicearemembersofthefirm’sBusinessandBankingpracticegroupandworkwithbanksandfinancialinstitutions.
ChambersIowaisresearchedbyonededicatedresearcherwhospeakstoleadingfirms,clients,andgovernmentofficialstorecommendleadingfirmsandattorneys.ChambersandPartners,basedinLondon,England,publishesguidesin185jurisdictionsthroughouttheworldandhavebeenrankingthebestlawyersandlawfirmssince1990.
Visitwww.whitfieldlaw.comformoreinformationaboutCBIAffiliateMemberWhitfield&Eddy.
Whitfield & Eddy Recognized by Chambers USA
Accepting the AMA Houston Crystal Award for JMFA are: (front row, l to r): John M. Floyd,
chairman/CEO; Cher Floyd, COO; Stefani Soza, marketing director. Back row, Kathy Morales, chief administrator; John Cohron,
EVP, Operations and CIO; and Brooke Stuewe, marketing & strategic sales manager.
COMMUNITY BANKER UPDATE | JUNE 2015 21
(Fuel in the Tank continued from page 9)
Youth is servedPrepayment“speeds”astheyrelatetotheagesofMBSpoolshaveinterestinglychangeddramaticallyinthelastsevenyears.UntiltheGreatRecession,itwastypicalforagivenMBSsecuritytoprepayatgraduallyfasterspeedsuntil,say,fiveyearshadpassed.Bythatpoint,orsothelogicwent,aborrowerthatwasinclinedtorefinanceormovewouldhavealreadydoneso,asequitybuiltupandthebusinesscycleprobablyprovidedaneconomicopportunitytorecastthedebt.Thesubsequentslowdowniscalled“burnout.”
Since2009,somethingstrangehashappened.Inrecentyears,thistrendhasbecomesomewhatdistorted.Thepoolswiththenewestloanshavesometimesprepaidfasterthanseasonedpoolsforborrowerswithmarginalrateincentive.Thisphenomenonistheresultofstricterunderwriting.Newloanshavelowerloan-to-valueratios,lowerdebt-to-incomeratiosandmorecompleteincomeverification.Asaresult,thehomeownerscanrefialmostimmediatelyafterpurchase,givenasufficientdropinmortgagerates.Thisshouldmeanthatthe“burnout”stage(inwhichspeedspermanentlydecline)arrivesearlieranddurationsremainquiteelevatedforlonger.Thecorollarytothisisthatthecashflowonthefrontendisgreater,whichmaybewhataninvestordesires.
Floater fablesAnothersubsetofthemortgagesecuritiesmarketistheadjustable-
ratevariety,orARMs.VirtuallyallARMsthesedayshaveafixed-rateperiodforanywherefromthreeto10yearsbeforetheybegintofloat.Thisperiodhasbeendesignatedtheweighted-averageroll,or“WAR”bybondanalysts,andisagoodindicatorastowhentheloansinthatpoolmayprepay.
ARMborrowershaveaperiodinmindthattheyintendtostayinahouse,andwillfixtheperiodtocorrespondtothistimeframe.Itistypicalforafloating-ratepooltoseehugeprepayincreasesastheWARapproaches.So,ARMinvestorscansimplyhearwhattheborrowersaresayingbypayingattentiontothatvariable.
Fixed-rateMBSsandARMscanstillcommandsomesignificantpremiumprices.Asofthiswriting,15-yearFannieMae2.5percentpoolsarepricedatmorethanfourpointsofpremium.Sincewehaveseenamplythatfastprepaymentswillcompromiseyield(eveniftheyprovideadditionalliquidity),itbehoovestheinvestortoexaminethenuancesembedded.Theage,cohortandWARofapoolaregreatwaystoderivevalueintheMBSmarket.
Jim Reber is president and CEO of ICBA Securities and can be reached at 800-422-6442 or [email protected].
Just16yearsagocommunitybankswereleaningintotheideaofInternetbankingandbillpayment.ManybristledatthethoughtofanyoneintheirrightmindusingtheInternettotransactbankingbusiness,muchlesspaytheirbills.Tenyearsbeforethatwastheargumentaboutwhetherpeoplewoulduseanautomatedtellermachine.Thefactisthatyourcustomers’needsareprettyconsistent,buttheirmeansofaccesshavedefinitelyevolved.
Withaquicklyevolvingcultureandsocietalrelianceonmobiletechnology,communitybanksarequicklyadaptingtonewcustomerdemands.Howeverwhatmaybemissinginthequestforexpandingaccessisrememberingtoaskfortheirbusiness:alltheirbusiness.
Alltoofrequentlyopportunityslipsoutthebackdoorwhentechnologyisreliedupontoreplaceanimportantstepinaprocess.AsconsumersandsmallbusinessesusetheInternettoseekoutinformation,includingthe“bestdeal,”manyunknowinglycomplicatetheirlivesinanattempttosavemoneyortime.Whiletherearedefinitelypriceshoppers,therearejustasmanyconvenienceandvalueshoppers;thosepeoplewhoarewillingtopayalittlemoreforbetterservice.
Whatareyoudoingtocaptureallthebusinessyourcustomershavetooffer?Whatshouldyoubedoingrightnow?
Askyourselfthesethreequestions:
• Ifyoutookagood,hardlookatyourexistingcustomerbase,howmanyadditionalrelationshipopportunitiesexistforyou?Mortgages,creditcards,autoloans,investments,collegefinancing—thelistgoesonandon.
• AsasegmentofyourcustomerbasegrowstorelyonbanktransactionsviatheInternetandmobiletechnology,howareyoucapturingmoreoftheirbusinessremotely?
• Doesyourcommunitybankhaveamarketingculture,whereyourstaffmembersinstinctivelyaskcustomersformoreoftheirbusinessthanthesingleopportunitypresented?
Whensomeonecomesintoyourcommunitybankseekingamortgageloan,whynotpre-approvehimorherforacreditcardandanautoloan?Whenreviewingacreditbureauuponopeninganewaccount,whynotaskwhattherateisonthecustomer’sexistingmortgageorcreditcard,orperhapsaskhowmanymonthsareleftonthatRVloansoyoucanbringthebusinesstoyourbank?
Certainly,forconsumersthereisvalueintheconvenienceofhavingonewebsitetovisit,oneplacetocall,onerelationshiptomanage.But,yes,evenintoday’sfast-paced,mobile-empoweredworld,peoplearestillactuallywillingtopayamarketrateforthevalueofagreatrelationship.
Understandingbudgetsaretightandcompliancerequirementsareeventighter,marketingintraditionalways—likestatementstuffersandadvertisingcampaigns—mightbeoutsidetherealmofpossibilities.However,aconversationwithacurrentcustomerthatendsupaskingformorebusinessisstillfree.
Sowhynotstartone?
Chris Lorence ([email protected]) is ICBA’s executive vice president and chief marketing officer.
ConnectionQuandaryAfter offering all the necessarydigital deliveries, what should I do now?
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22 COMMUNITY BANKER UPDATE | JUNE 2015
Written By: Chris Lorence, EVP & Chief Marketing Officer - ICBA
See Chris at the Bankers’ Roundtable Breakfast and the Social Media Discussion Panel breakout
session at CBI’s 44th Annual Convention,July 15-17, 2015. Visit cbiaonline.org for details.