Relief for Community Banks in the Competition for Deposits

Relief for Community Banks in the Competition for Deposits

An important reform of the rules governing reciprocal deposits will make it easier for community banks to compete for the business of large depositors.

By: Steve Davis, Regional Director at Promontory Interfinancial Network, LLC

The recent bank reform bill made a lot of news, but what may surprise you is the specific provision of the Economic Growth, Regulatory Relief, and Consumer Protection Act that community bankers believe will have the biggest impact on their daily business.

Before the bill became law, a lot of attention was placed on the provision raising the systemically important financial institutions, or SIFI, threshold from $50 billion to $250 billion in assets, above which banks must contend with a heavier compliance burden.

Yet, the provision involving SIFIs directly impacts only a small number of commercial banks based in the United States—the dozen-plus with between $50 billion and $250 billion in assets.

Perhaps that’s why when Promontory Interfinancial Network queried bankers for its second-quarter Executive Business Outlook Survey, executives from the 390 banks that responded pointed elsewhere when asked to identify the law’s most impactful provision.

Thirty-seven percent of respondents said the law’s provision that allows most reciprocal deposits to be treated as nonbrokered deposits ranked highest on a scale of one to five, placing it first among the seven other provisions tested.

It was up against stiff competition. The other provisions included those that eased the qualified mortgage rule, extended the regulatory exam cycle and simplified capital rules for community banks, among others.

“We think the change to reciprocal deposits is great,” says Christopher Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “It clarifies the status of reciprocal deposits and alleviates the concerns many community banks had about using them.”

Similarly, the American Bankers Association noted that, “the definition of brokered deposits needs to be modernized and we appreciate that Congress took a first step by recognizing reciprocal deposits are a stable source of funding for many community banks.”

The change in the law makes sense, says Neil Stanley, president of community banking at TS Banking Group, which owns three banks, including Treynor State Bank, a $400 million bank based in Treynor, Iowa: “This is one of those areas that reflects what bankers always thought was true—when a large, local depositor does business with us, any deposits above the $250,000 FDIC insurance threshold shouldn’t be considered brokered or highly volatile just because we place them with other institutions on a reciprocal basis.”

Underscoring the significance of the change, 58 percent of respondents to Promontory Interfinancial Network’s survey said they plan to start using, or expanding their use of, reciprocal deposits immediately or very soon because of the new law. An additional 29 percent said they would consider doing so in the future.

To put this in perspective, according to the same bank leaders, the next most impactful provision included in the new law relates to the easing of rules surrounding commercial real estate loans, followed by the provision that shortened call reports and then by the provision that provided qualified mortgage relief.

The change in reciprocal deposits may seem like a peripheral issue, but it addresses a fundamental inequity in banking. It does so by helping to level the playing field between the handful of large, money center banks headquartered in places like New York City and the thousands of smaller banks spread across the country that serve as economic lifelines in their communities.

Institutional investors have often favored big banks because of the belief they are “too big to fail.” And since they have more resources to invest in mobile and online banking technology, big banks have become magnets for deposits from the new generation of digitally savvy consumers. These banks no longer need to rely as heavily on building branches in rural communities to compete with community banks for funding; they can now reach small-town customers through their smartphones.

As such, many of the nation’s biggest banks are reporting organic increases in deposits. And the competition on the funding side of the balance sheet will only intensify as interest rates climb. The Federal Reserve’s Open Market Committee has raised the fed funds rate multiple times this year and is expected to continue doing so.

By making it easier for community banks to use reciprocal deposits, in turn, the new law strengthens their ability to grow relationships and deposits from a local customer base without losing either one to bigger banks with deeper pockets.

“This is a step in the right direction,” says Bert Ely, a principal of Ely & Company, where he monitors conditions in the banking industry. “It makes it easier for community banks to accommodate large depositors.”

Given all this interest, it seems likely that the use of reciprocal deposits will increase in the coming months and years. Banks not currently familiar with them would thereby be wise to familiarize themselves with how reciprocal deposits work and their benefits.

To learn more about reciprocal deposits and the impact of the new law, contact Steve Davis at sdavis@promnetwork.com.

FDIC Deposit Insurance Coverage and Related Matters – Free Webinar

FDIC Deposit Insurance Coverage and Related Matters – Free Webinar

Provided complimentary as a member service by the Idaho Bankers Association and Promontory Interfinancial Network, LLC.

Click here to register – May 7, 2019 – 10:00–11:00 AM CT
Click here to register – May 9, 2019 – 2:00-3:00 PM CT

Now is a great time for bankers to refresh their knowledge on FDIC insurance regulations as the FDIC continues to examine bankers’ understanding of deposit insurance rules that apply to third-party agency accounts.

FDIC insurance eligibility is a key benefit banks provide to depositors. It can be an important selling point in maintaining key customer relationships and obtaining bank funding.

This 45-minute educational webinar is designed for all levels of bank employees and executives and will include a Q&A segment to address your specific concerns. The webinar will be presented
by Joe DiNuzzo, a former attorney with the FDIC and an expert in FDIC insurance regulations.

A certificate of completion will be available for all attendees.

For additional information, please email contactus@promnetwork.com.

Statewide Industry Earnings up 54 Percent in First Half of Year

The 13 banks based in Idaho earned $40 million in the first six months of 2018, according to data released by the FDIC Thursday. Net income for the period was up 54 percent over the same time in 2017. Loans grew by 11.3 percent to $4.29 billion, and deposits increased by 6.9 percent to $5.36 billion during the first half of the year. Net interest margin also improved to 4.37 percent, which is above the national average. For the quarter, the state’s banks earned $21 million, an increase of 58 percent over the second quarter 2017. “The performance numbers validate what we’re hearing from members that the economic conditions in general remain strong around the state, and that, in turn, leads to improved industrywide bank results,” said Trent Wright, IBA President and CEO. Family and business finances remain relatively stable as well, with the amount of noncurrent loans and loans charged off declining. Nine of 10 loans are being paid on time. Nationally, increased operating revenues and a lower effective tax rate helped industrywide earnings increase 25.1 percent for the quarter.

 See the FDIC Quarterly Banking Profile here.

Good News for Banks: Congress Makes Way for Reciprocal Deposits.

Glenn Martin, Regional Director
Promontory Interfinancial Network, LLC
Arlington, VA

A lesser-known provision of a new law just changed the market for deposits, and it could not have come at a better time for banks, especially community banks. The provision, which is part of the regulatory relief package for banks just signed by President Trump, provides that most reciprocal deposits are no longer treated as brokered. As a result, well-capitalized banks can now attract more large-dollar, local relationships and, in turn, have more cost-effective funding on hand to finance lending in their communities.

In recent months, U.S. banks have been bracing for increased competition for customer deposits. According to the Bank Executive Business Outlook Survey (2018, Q1) a record number of bank respondents (76 percent) reported facing more competition for deposits over the past year and almost 90 percent believe it is only going to get tougher.[1]

Source: Bank Executive Business Outlook Survey 1st Quarter, 2018

In fact, the combination of rate hikes (more are expected later this year) and the Federal Reserve’s $1.5 trillion reduction of its balance sheet should continue to push deposit costs upward. With the Fed not reinvesting the principal proceeds from maturing securities, liquidity will be pulled from the markets and banking system, reversing the impact of the first and second Quantitative Easing. And banks are bracing themselves for more competition from the nation’s largest banks, as well as from non-traditional players that include the likes of fintech companies, Goldman Sachs’s Marcus, and the potential entry of Amazon.

Reciprocal Deposits

Fortunately, the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act should offer banks some relief. This important new law provides that most reciprocal deposits are no longer considered brokered deposits.

Reciprocal deposits are deposits that a bank receives through a deposit placement network in return for placing a matching amount of deposits at other network banks. Although there are a number of providers, the leading reciprocal deposit placement network in the United States is operated by Promontory Interfinancial Network, LLC, which invented reciprocal deposits and offers two of the nation’s largest reciprocal deposit placement services: Insured Cash Sweep®, or ICS®, and CDARS®.

The Economic Growth, Regulatory Relief, and Consumer Protection Act

This new law recognizes something that many in the banking sector have long understood –reciprocal deposits behave as core deposits in that they are “sticky” (CDARS deposits reinvest at a rate of approximately 80%, for example), and that the institution accepting the deposit maintains the relationship with the depositor.[2]

Specifically, the law amends section 29 of the Federal Deposit Insurance Act so that, subject to the definitions, terms, and conditions of the Act as amended:

  • If a bank is well capitalized and has a composite condition of outstanding or good (CAMELS 1 or 2), its reciprocal deposits up to the lesser of $5 billion or 20% of the bank’s total liabilities are no longer considered brokered. Reciprocal deposits over these amounts are allowed, but the incremental amount (overage) is treated as brokered.
  • If a bank drops below well capitalized, the bank no longer requires a waiver from the FDIC to continue accepting reciprocal deposits, so long as the bank does not receive an amount of reciprocal deposits that causes its total reciprocal deposits to exceed a specified previous average. As before, interest rate restrictions apply while the bank is less than well capitalized.

Banks now have a much larger, approved source of stable deposits that can be tapped. This means banks can help even more customers—including businesses (large and small), nonprofits, municipal governments, financial advisers, and even individuals—to safeguard their funds, potentially at even higher levels. All at the same time attracting locally priced, large-dollar deposits, which can be used to reinvest in the bank’s community.

Furthermore, banks can use reciprocal deposits to replace more expensive deposits, like routinely collateralized deposits that come with tracking burdens, and those from listing services (generally associated with wholesale pricing and no loyal or local customer relationship).

Making the Most of This New Opportunity

Now is the time to act by taking advantage of this important change in banking law. Read more about the new law and about the nation’s largest, most well-known reciprocal deposit services by visiting promnetwork.com. For more information, contact Glenn Martin at gmartin@promnetwork.com.

Economic Outlook by Alan Blinder

March 2018Alan Blinder Bio Photo
Alan S. Blinder

Vice Chairman and Co-Founder, Promontory Interfinancial Network
Professor of Economics and Public Affairs, Princeton University

Jay came, Jay saw, Jay conquered.

Well, maybe it wasn’t that hard a conquest, but Jerome (“Jay”) Powell’s first Federal Open Market Committee (FOMC) meeting as Chairman of the Federal Reserve has to be scored a success. He delivered the widely expected, 25 basis-point increase in the federal funds rate on a unanimous vote. Yes, it’s true that the FOMC is smaller (only eight voting members these days) and a lot less fractious than it used to be. The Committee’s hawks and doves are no longer very far apart. But still…

He and his fellow Committee members nudged the so-called “dot plot” up a bit, apparently without upsetting markets. The 15-member committee is now about evenly split between expecting (or is it favoring?) two or three more rate hikes of 25 basis points each this year, and a total of about six (150 bps) in 2018 and 2019 together. If that comes true, the funds rate will be in the 2.75-3.00 percent range by the end of next year, just about where the Committee sees the long-run “neutral” funds rate to be. But consistent with a belief that they’ll have some mild overshooting to combat, the FOMC also penciled in another 50 basis points of tightening in 2020.

The Committee bumped up its real GDP estimates for 2018 and 2019 by amounts that are broadly consistent with what the economic consensus—but not the Trump administration—says the new fiscal policies will do to growth. Perhaps more notably, members now project a considerable overshoot of full employment—with the unemployment rate trailing down to 3.6 percent against an estimated NAIRU of 4.5 percent. Yet they barely touched their inflation forecast. That’s a pretty flat Phillips curve.

Last, but certainly not least, Powell’s answers to questions at his first press conference were taciturn, and his words sufficiently well-chosen, that he didn’t make news—which is what Fed chairs generally want to do.

Congratulations, Jay.

TIME TO REGISTER IS RUNNING OUT – 2018 ABA Government Relations Summit & Forums

Register Now for the 2018 ABA Government Relations Summit and Bring Your Bank’s Emerging Leaders!

We’re looking forward to seeing you April 23-25 for the 2018 ABA Government Relations Summit in Washington, DC. The Summit presents a great opportunity for Idaho bankers to meet with our Congressional Delegation and representatives from the regulatory agencies to ensure they understand the principles that guide our industry, and incorporate them into policy. Idaho Bankers play a hugely important role in that Senator Crapo is the Senate Banking Chairman.  The Idaho Community Bankers Association (ICBA) is pleased to provide at least two travel scholarships up to $750.  Scholarships are redeemed through the ICBA following the GR Summit for travel-related expenses.

CLICK HERE TO REGISTER for the Summit and all ancillary events including the 4th annual Emerging Leaders Forum.

2018 Emerging Leaders Forum

The Emerging Leaders Forum is scheduled for Monday, April 23rd from 10:00 a.m. – 4:00 p.m. and will include lunch. It will continue to center on professional and leadership development and the importance of advocacy. Idaho attendees will have an opportunity to share their leadership challenges and network with peers from across the country at a reception following the Forum. There will also be additional events for attendees. Please continue to check the website for additional program elements and event details. In addition to the ICBA scholarship above, the ABA is pleased to provide at least two $750 Emerging Leader Forum scholarships for Idaho. Scholarships are redeemed through the ABA following the Emerging Leaders Forum/GR Summit for travel-related expenses.

2018 Women’s Leadership Forum

The Women’s Leadership Forum is scheduled for Wednesday, April 25th from 11:15 a.m. – 1:00 p.m. and will include lunch with the keynote speaker, Kristi Hedges, author and leadership coach. There will be an opening reception on Monday, April 23rd from 5:30 p.m. – 6:30 p.m.

Hotel Reservation Information
The Marriott Marquis Washington, DC is the conference hotel for the 2018 Government Relations Summit and Forums. ABA does not endorse other sources for making hotel reservations.  Registration and Travel: Registration is still open and although the hotel cutoff is April 9th, the hotel is filling up quickly. Please make your reservations as soon as possible.  The Marriott Marquis is sold out on Saturday and Sunday night, but there is still  rooms available at the Renaissance Hotel, just across the street.

Reimbursements can be to either the bank or to your personally and are post event reimbursements.  Hotel and flight costs should come in around $1800/$1900 depending our your flight options.  Registration for the event itself is free and most meals are covered by the event or IBA.

What’s New With Director Compensation?

The world of community and regional bank directors has certainly evolved over the last five years.  While the economic downturn in 2009 triggered some changes, a good number of these were already underway.  The role of bank directors has been evolving for years, but changes in the compensation structure for directors has shifted more gradually.

Setting the Stage

The first big shift for bank directors was focused around the level of engagement required.  The days where a bank director simply showed up for a monthly meeting, listened to management, collected their fees, and vanished until the next meeting are long gone.  Like many businesses, tough times required extra work and banking was not immune.  Directors suddenly had to deal with things like TARP, poor company performance, management changes, etc.  An increased understanding of banking, credits, regulation, and director liability became high priorities.  Director expectations increased significantly and you were either up for the challenge or chose to end your tenure on the board.  Unfortunately, what we didn’t see at this time was an increase in director compensation.  Poor bank performance seemed to influence a general “flat line” in director compensation from 2009 – 2012.  Therefore, directors were working harder and longer, but the resulting pay was not increasing.

The Shift Begins                            

We finally saw an increase in director compensation levels around 2012 and this trend has continued.  Blanchard Consulting Group’s director compensation survey of 107 community banks (completed in early 2017) showed that 32% of banks increased director compensation in 2016 and 31% planned to increase director compensation in 2017.  The median increase in total director compensation for 2016 was 16%, up from 10% in 2014.  This clearly shows that director compensation has started to catch up to the increase in work-load and expertise required.  In fact, 90% of our survey participants feel that they were fairly compensated for the time they spend on board activities.

The biggest movement in director compensation has come in the form of increased retainers and fees for committees and chair positions.  An average community bank director’s total compensation levels now range from approximately $15,000 to $55,000 or more depending on the asset size and classification (public vs. private).  The general philosophy surrounding director compensation focuses on paying directors appropriately for the time and expertise provided.  Basing director compensation on bank performance is discouraged, because directors need to be focused on making the correct long-term decisions for the bank and shareholders.  Short-sighted decisions focused on short-term performance are discouraged.

Why an Increased Emphasis on Retainers?

The shift in the type of director required to serve on the board has created a shift in the format of pay for directors.  Instead of focusing on per meeting fees and requiring attendance to receive the fee, many boards have moved to paying a large portion of director compensation through retainers.  The per meeting fees still exist, but the amounts generally range from $500 to $1,000 depending on the size of institution and other variables.  Today, directors are expected to be engaged, put time in reviewing materials, receive outside education, and provide their insights even if they miss a meeting.  As such, the emphasis has moved to paying an appropriate amount for board service as a whole.  If you have the right directors, attendance/participation will not be an issue and each director will clearly “earn their keep”.  Paying a retainer is much easier to administer and provides a clear link between the amount of pay that is provided for director service.  Retainers are frequently provided in cash, but are also a great way to provide equity to directors.  Equity grants (if used) are typically provided in the form of full-value shares (not stock options) with very short or immediate vesting provisions.

Committee and Chair Fees

The other big change in director compensation surrounds increased fees for service on committees and for chair positions.  Once again, the reasoning for such changes is simple.  Serving on the committee requires additional time and expertise and these directors deserve to be paid appropriately for this additional work.  Chair positions add an extra expectation and expertise, so they should receive a “bump up” in pay as well.  The Blanchard Consulting survey found that committee fees range from $200 to $600 per meeting depending on size of institution and the type of committee.  The additional chair fees vary by asset size and type of committee, but generally fall in the range of $2,000 to $3,000.

Summary and What’s Next?

Bank director compensation is far from rocket science.  At the end of the day, a bank needs to determine a fair total compensation level for directors and structure the pay program accordingly.  Whether you pay via retainers, equity grants, per meeting fees, chair fees, etc. doesn’t matter.  Just be sure you model out projections (per director and in total) and differentiate each director’s compensation based on work-load and expertise required.  Market data is available via the Blanchard Consulting Group (BCG) Director Compensation survey and other industry sources.  Our firm can help your bank analyze the data and determine where to position the board of directors’ compensation package in order to meet the goals of the bank and shareholders.

By Kristen Kostner, Senior Compensation Consultant, Blanchard Consulting GroupKristen can be reached at (314) 394-3374 or kristen@blanchardc.com.

 

About the Firm:  Blanchard Consulting Group is a national compensation consulting firm with offices in Atlanta, GA; Minneapolis, MN, and St. Louis MO.  Our mission is to deliver independent compensation guidance to community and regional banks to help them attract, motivate, and retain key employees and directors.  With an exclusive focus on the banking marketplace since 2000, our lead consultants have a unique industry perspective and expertise to offer our clients.  We work directly with Board of Directors, Executive Management, and Human Resource departments on all facets of director, executive, and staff compensation programs.  More information can be found at www.blanchardc.com.

New Associate Member – Redhawk Network Security

We, at Redhawk Network Security, are excited to be part of this thriving organization!

Based in Bend, Oregon, we are an information security, network infrastructure, and managed security services provider. What does this mean? When it comes to cybersecurity, we integrate, assess, build, manage, discover, design, deploy, detect, and respond. But mostly, we care. We care about your security needs. We want to help you.

We are trusted experts in information security, threat detection, and regulatory issues facing financial organizations. For more than 15 years, we have been working hand-in-hand with banks and credit unions of all sizes to develop their security infrastructures and programs to secure their assets, brands, and reputation.

Let’s face it. In our evolving threat landscape, a strong security foundation is critical. The banking industry is under attack. Security threats—malware, phishing, ransomware, even lost laptops and aging computers—can put your organization and your customers’ sensitive information at risk for being breached.

Security has grown up. It’s no longer simply installing anti-virus software and hiding your network behind a firewall. Consider this. You may not have the security expertise on staff and may need help. You need a partner you can trust—an extension of your team—with extensive security expertise, best-of-breed tools, and industry certifications. You need a partner who can see your blind spots and security holes, a partner that will work to ensure that security is interwoven throughout your entire organization. We not only have backgrounds in security and engineering, but several of us are former bankers. We know regulated industries inside and out.

At Redhawk Network Security, we offer risk assessments, managed security services, including managed threat detection and response services, security training, and network infrastructure services. We can help you with a project or we can conduct full-service, around-the-clock management of your network activity. We can build and upgrade your network and ensure that it’s monitored continuously for threats including Security Information and Event Management (SIEM) managed services. We are available and on alert 24x7x365.

For more information, please contact our Senior Relationship Manager, Cynthia Aceves at CAceves@redhawksecurity.com, 541-382-4360 ext. 2007, and/or visit www.redhawksecurity.com.

We look forward to chatting.

Thank you,

Kerri Fry, president, Redhawk Network Security

 

Early Bird Registration & Hotel Room Discount End TODAY!

Early Bird Registration & Hotel Room Discount End TODAY!

____________________

Idaho Community Bankers Association

MANAGEMENT & DIRECTORS’ LEADERSHIP CONFERENCE

The ICBA Management & Directors’ Leadership Conference is scheduled to be held on January 29-30, 2018 at the Grove  Hotel in Boise, Idaho. This event is tailored to bank management and directors, as well as emerging bank leaders. We encourage you to forward this announcement to your directors! In addition to great speakers presenting on the latest community banking hot topics, the conference will provide the opportunity to attend the popular Legislative Reception and Dinner which will offer outstanding entertainment and a chance to visit with your legislative representatives.

Register Here

www.idahobankers.org/icba

Idaho Community Bankers Association

208-342-8282

$2.1 million in Housing Grants to Benefit Idaho Families

250 families and individuals will benefit from the funds

 (Des Moines, Iowa) – This holiday season, 250 Idaho families will receive the gift of affordable housing, thanks to a collaborative effort between community housing providers, financial institutions and the Federal Home Loan Bank of Des Moines (FHLB Des Moines or the Bank).

FHLB Des Moines recently awarded $1 million in grants from its Competitive Affordable Housing Program to provide housing for low-income families, seniors, persons with disabilities, homeless and at-risk youth in the state of Idaho. The Bank also contributed over $1.1 million throughout the year to assist Idaho families with down payment and closing cost expenses.

“FHLB Des Moines is honored to provide the opportunity for families in the state of Idaho to have a home,” said Mike Wilson, President and CEO of FHLB Des Moines. “We believe each and every individual should have access to safe and affordable housing. These projects inspire us every day to continue our mission of providing funding to lenders so the needs of communities are met.”

Every year, FHLB Des Moines returns 10 percent of its net income throughout communities in its district, consisting of 13 states and three U.S. Pacific territories.

The Competitive Affordable Housing Program encourages partnerships between FHLB Des Moines member institutions and local housing providers to construct new and restore existing homes to ensure housing for the community. Beyond housing, the program works to generate jobs by employing local businesses to complete projects. In 2017, the Bank awarded $44.5 million in Competitive Affordable Housing Program grants to fund housing for 2,636 families across the district.

FHLB Des Moines also offers down payment and closing cost assistance through its Home$tart®, Home$tart Plus and Native American Homeownership Initiative programs to help families realize their dream of homeownership. The Bank distributed $15.2 million in down payment funding in 2017 to support 2,100 families with the purchase of a home.

For a complete listing of 2017 Competitive Affordable Housing program grant recipients, please visit the FHLB Des Moines website. For more information, contact the Bank’s Community Investment Department by calling 800.544.3452, ext. 1173.

# # #

The Federal Home Loan Bank of Des Moines is a member-owned cooperative that provides funding solutions and liquidity to nearly 1,500 financial institutions to support mortgage lending, economic development and affordable housing in their communities. Serving 13 states and three U.S. Pacific territories, FHLB Des Moines is one of 11 regional Banks that make up the Federal Home Loan Bank System. Members include community and commercial banks, credit unions, insurance companies, thrifts and community development financial institutions. The Des Moines Bank is wholly owned by its members and receives no taxpayer funding. For additional information about FHLB Des Moines, please visit www.fhlbdm.com.

Mitch Fastenau
Marketing Communications Strategist