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INCOMEat Community Banks

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UDAAP TRAPPg. 6

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Liquidity CheckPg. 5

Perception vs. Fact:The Truth behind

Investment ProgramsPg. 17

2 COMMUNITY BaNker UpdaTe | SEPTEMBER 2015

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BOND PORTFOLIO ACCOUNTING & ANALYSIS ASSET/LIABILITY MANAGEMENT

SEPTEMbER 2015 WEbINAR LINE-UP

Sep. 2 StrategicPlanningYears1,3&5:Scope,Techniques&Elementsin DraftingYourWrittenPlan

Sep. 3 AdvancedACHSpecialistSeries:Defining&IdentifyingThird-PartySenders: Risk,Liability&AuditRequirements

Sep. 9 DirectorSeries:UDAAPfortheBoard&SeniorManagement

Sep. 11 MortgageAdvertising:KeepingYourPromotionsCompliant

Sep. 15 Managingthe8CategoriesofRiskAssessment

Sep. 16 LoanUnderwritingBasics:Interviewing,CreditReports,DebtRatios &RegulationB

Sep. 17 ImagedDocuments:WhattoKeep,WhattoDestroy,WhatHoldsupinCourt?

Sep. 22 IRASeries:AuditingIRAsStep-by-Step

Sep. 23 BasicBankingforNewEmployeesPart1:BankingSystem,Deposit Operations,Lending

Sep. 24 RegulatorGuidance&IssuesinATMSecurity

Sep. 29 HRDangerZones:Regulations,Requirements&BestPracticestoKeep YouOutofTrouble

Sep. 30 MandatoryComplianceRegulationsforDepositOperations

COMMUNITY BaNker UpdaTe | SEPTEMBER 2015 3

In This Issue

September2015WebinarLineup....................... 2

FallCommunityBankSummits............................ 4

LiquidityCheck...................................................... 5

SteeringClearoftheUDAAPTrap........................ 6

CommunityBankersforComplianceFallSession........................................................... 7

FromtheTop.......................................................... 8

FinePoints............................................................. 9

LowNetInterestIncome...............................10-12

RuralMainstreetSurvey...............................14-15

TheTruthBehindInvestmentPrograms............17

Community Bankers of Iowa1603 22nd St, Suite 102

West Des Moines, Iowa 50266Phone: [email protected]

Bank Architecture

& ConstructionPre-design

Master PlanningSite Development

ArchitectureProject Management

ConstructionPost-project SupportSecurity & Signage

TrustPersonalityExperienceIntegrityTeamwork

Steph Weiand (L) Suzanne Meyers (C) Jim Christensen (R)

112 W. Park Lane, Waterloo319-232-6554

EVENTS CALENDARCommunity Bankers for ComplianceFall Session......................Sep. 22 & 23

Community Banking SummitsCarroll.........................................Oct. 13Johnston.....................................Oct. 14Algona.........................................Oct. 15

LOT Quarterly Meeting.............Nov. 19

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Having that expertise on our team is very comforting.“— Kyle Swon, Market President – Webster City, WCF Financial Bank

• Budget predictability• Proactive instead of reactive IT• 1 – 3 – 5 year budgeting

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BUSINESS PROFILE:WCF Financial Bank is a community bank with two locations – Webster City and Independence, Iowa.

What matters most to your financial institution?

When security matters – Locknet®’s Keysuite™ fully managed IT services provides:

CBIinvitesIowa’scommunitybankerstotheFallCommunityBank

Summits.Eachmeetingbeginsat3:00p.m.,withadinnerreceptionanddoorprizegiveawaytofollow.Attendtheseafternoonevents

andbuildrelationshipswithyourpeerswhilegainingvaluableeducation.

AppearingateachSummitwillbelegendarywrestlerDan Gable,1972OlympicGoldMedalistandmultiple-timechampionandcoachatthestate,nationalandworldlevels.AstheFallSummitKeynoteSpeaker,Gablewillprovideinspirationandadviceonteambuilding,motivation,andovercomingadversity.

GuestSpeakersincludeBill Northey, IowaSecretaryofAgriculture,presentinganAg EconomyupdateattheCarrollandJohnstonmeetings,andLisa Shimkat,IowaDirectoroftheSmallBusinessDevelopmentCenter(SBDC),who’lleducateattendeesonRural Economic DevelopmentattheAlgonameeting.

TheregistrationfeeforeachSummitisonly $35 for bankers,and$50forCBIEndorsed/Associate/Affiliatemembers!Visitwww.cbiaonline.orgtoregisterfortheFallSummits,ortoviewtheEventBrochure.Stillhavequestions?Callusat515.453.1495orcontactJackie [email protected].

Tuesday, Oct. 13 - CarrollSanta Maria Winery

FALL COMMUNITY BANK SUMMITS COMING IN OCTOBER

Dan Gable, Olympic Wrestler & Coach

Bill Northey, Iowa Sec’y of Agriculture

Lisa Shimkat, Iowa Director, Small Business Development Center

Wednesday, Oct. 14 - JohnstonHilton Garden Inn

Thursday, Oct. 15 - AlgonaAlgona Country Club

Speaker Lineup

THANK YOU SPONSORS: ICBA Securities/Vining Sparks, SHAZAM, Secure Banking Solutions, Bankers’ Bank, Investment Professionals, Inc., United Bankers’ Bank, Deluxe Corp., Bell State Bank & Trust, Storey Kenworthy, and Midwest Independent Bank.


It’sinterestinghowcommunitybanks’balancesheetstravelthroughcycles.Ittakesanimblemanagementteamindeedtoaccountforallthedynamicsofloandemand(orlackthereof),depositfluxes,newregulations,investmentcashflowsandcapitalneeds.Intheolddays(definedhereaspre-2008),atleastthebusinesscyclehadthegoodmannerstoturnroughlyeveryfiveyears.

Now,however,itreally,trulydoeslooklikewe’reintoanexpandingeconomyforthefirsttimeinafulldecade,mutedthoughitmaybe.TheFDIChasreportedthatloandemandforcommunitybanksgrewahealthy8.6percentforallof2014,whichisthehighestratesince2008.

WhiletheFederalReserveponderswhatitsnextmovewillbewithregardtomonetarypolicy,itmaybehightimeforyouandyourmanagementteamtoconsidertheconditionofyourcommunitybank’sliquiditypolicyandprocedures.Ifyourcommunitybankislikemostoftherestintheindustry,ithasn’thadtoputthatpolicytoworkinthebetterpartofadecade.Solet’sreviewthebestpracticesinbriefandmakesomerecommendationstoensureadequatefundsareatyourcommunitybank’sdisposal.

Regulator expectationsThemostrecentregulatoryguidanceisn’trecentatall.It’sprobablybeenassignedtothecredenzawithothermiddle-ageddocuments.TheFFIECissuedaJointPolicyStatementonFundingandLiquidityRiskManagementinMarch2010,anditremainsthecontrollingdocumentforthatparticularrisk.Thejointpolicystatementhastwokeythemes:prudentliquiditymanagementincludestheabilitytomeetexpectedandunexpectedcashflowneeds;andabank’sfinancialconditioncanbecompromisedbyalackofasoundliquiditypolicy.

Theagencies’statementhelpfullyalsoliststhefivemajorcomponentsofeffectiveliquiditymanagement:

• cashflowprojections,• diversifiedfundingsources,• stresstesting,• aformalcontingencyfundingplan,and• acushionofliquidassets.

Need may be growingAsevidencethatacashcrunchmaybecoming,weneedonlytoconsidertwofinancial-servicesmetrics.OneistheabsoluteamountofmortgageloanssecuritizedrecentlybyFannieMae,FreddieMacandGinnieMae.Thosethreeissuedatotalof$981billioninmortgage-backedsecuritiesin2014,whichsoundslikealot.However,thenumbersforthetwoprioryearswere$1.6trillionand$1.7trillion,respectively.Theupshotofthatisprepaymentsonmortgage-backedsecuritieshavealreadysloweddramatically,andtheycouldslowevenmoreifmortgageratesweretobegintorise.Yourbank’sinvestmentportfoliocouldseeafurtherdropincashflowasaresult.

ThesecondmetricofnoteisthevolumeofoutstandingFederalHomeLoanBankadvances.Therehasbeenadequatedocumentationofthecollectiveshrinkageofthebalancesheetsofthevariousregionalbankssince2008.Whatmayhavemissedyournoticeisthatadvanceshaveactuallyincreasedforthreeconsecutiveyears(see chart above),andasofDec.31,2014,wereupafull30percentfrom2011.Whatthisillustratesisanindustry(traditionalbanking)thatisfinancingitselflesswithavailablecashandmorewithborrowings.

Portfolio benchmarksWhatthenshouldacommunitybankerdoaboutallthis?Thefirstmostobvioussuggestionistomakesurethatacomprehensiveliquiditypolicyisinplace.Thepolicyshouldquantifywhatadequateliquiditymeansforyourinstitution,whatitssourcesare,andwhatPlansBandCareif“contingencies”emerge.

Asitrelatestoinvestmentportfoliomanagement,ithaslongbeentherecommendationofViningSparkstobuildaliquidityladderouttoeightquartersinthefuture.Theaggregatecashflowsfromtheinvestmentportfoliointhenexttwoyearsshouldequalabout15percentoftotalassets.Thenumberthatisrightforyourcommunitybankwillbeaffectedbyvariablessuchasseasonalloandemand,stabilityofthedepositbase,growthtrajectory,capitallevelsandoptionalityintheinvestmentportfolio.

Yourasset-liabilitymodelproviderandyourcommunitybank’sbrokersshouldbeabletogiveyousomehandyadviceregardingyourbank’soptimumliquiditylevel.Justasimportant,theycanhelpconstructasolidpolicyforanycurveballthatcomesyourway.Itappearsthebusinesscycleforcommunitybanksislikelytoserveoneup.

Jim Reber ([email protected]) is president and CEO of ICBA Securities/Vining Sparks, ICBA’s institutional fixed-income broker/dealer for community banks and an Endorsed Member of Community Bankers of Iowa.

Written By: Jim Reber, President & CEO - ICBA Securities/Vining Sparks

Liquidity CheckRising loan demand could test cash flow management


7 Steps to Steering Clear of the

Written By: Amber GoodrichCompliance Strategist, CSI Regulatory Compliance.

UDAAP:isthereamoreconfusingacronymincurrentfinancialregulatoryjargon?Thisall-encompassingregulationisrelativelynew,butits

biteisprovingasinjuriousasitsinitialbarkhadforeshadowed.

TheConsumerFinancialProtectionBureau(CFPB)continuestousetheUnfair,Deceptive,andAbusiveActsorPractices(UDAAP)regulationasaprimarytoolforsafeguardingconsumersagainstharmfulpracticessurroundingthecollectionofconsumerdebt.Anditsresultingenforcementactions—whichin2014ledto$2.5billionincivilmoneypenalties—serveasareminderoftheregulation’sseverity.

Unfortunately,theCFPB’sdefinitionofwhatconstitutesaUDAAPremainsvague,bydesign,toencouragefinancialinstitutionstoconsiderconsumerprotectionthroughanenterprisewidelens—leavingmanyofthemchasingtheirtailsinanefforttostaycompliant.

Assomethingofapeaceoffering,theCFPBhasmadepublicitsSupervisionandExaminationManual*tohelpfinancialinstitutionslearnaboutUDAAPandprepforexams.

But,whatelsecanyoudotopreventaccidentalviolations?

Passing Your Next UDAAP ExamRegulatorsexpectfinancialinstitutionstocompleteariskassessmenttoensureeveryproductandservicetakesUDAAPintoaccount.Thiscanbedifficult—becauseyoudon’treallyknowwhatyou’relookingfor—butmakingtheefforttoprotectconfidentialinformationandITassetsgoesalongway.Inaddition,financialinstitutionsshould:

1. Evaluate New Products and Services.Reviewnewsolutions toensureallrelated,properdisclosuresareincluded. Disclosuresshouldbeoverlyclearsothereisnoquestionasto whetherconsumerscanfullyunderstandthem.Thisprocess shouldoccureachtimeanewsolutionisintroduced,aswellas forsuchadd-onoffersasrewardsand“notransferfee” programs.

2. Review Advertising Materials.Asabestpractice,ensureall advertisementsarereviewedbybothyourmarketing departmentandyourcomplianceofficertosafeguardagainst misleadingordeceptiveverbiage.

3. Create a UDAAP Policy.Gobeyondtheriskassessmentto createformalUDAAPpoliciesandprocedures.Andsince there’snoclearpathtodoingso,it’sagoodideatoincorporate UDAAPlanguage—forexample,rulesregardingproper disclosures—intoyourloan,BSA,creditcardandotherpolicies asanextraprecaution.

4. Stay Vigilant on Mortgage Rules.Payextraattentiontothe newmortgagerules,whichhavebeenahotbedofUDAAP violationsandensuingenforcementactions.Violationsofloan originatorcompensationrules,inparticular,arecitedregularly.

5. Make Sure Free Means Free.Ensurethat,whenmarketing freeproductslikedebitorcreditcards,theyaretrulyfreeofany andallfees.Otherwise,thiswillbeconsidereddeceptive.

6. Monitor Customer/Consumer Complaints.Payattentionto complaintsagainstyourinstitutionandothersusingtheCFPB’s publicconsumercomplaintdatabase.Youcansearchthrough thedatabasetogaugewhichtopicsarebuzzing.Andaheads up:whentheCFPBstartsseeinglotsofsimilarcomplaints—for example,onoverdraftprotectionordebtcollection—oddsare they’llputitontheirrulemakingagenda.

7. Evaluate vendor relationships.Financialinstitutionsare increasinglyheldaccountablefortheactionsoftheirthird-party serviceproviders.Sinceyourinstitutionisresponsiblenot onlyforitsownactionsbutalsoforthoseofitsvendors, includingUDAAPcomplianceexpectationsineverythird-party contractmakesforasolidvendormanagementprogram.

AlthoughtheUDAAPdefinitionwilllikelyremainvague,followingthesestepswillhelpyousteerclearofunknowinglycommittingconsumerviolationsaswellastheirresultingenforcementactions.

*Find CFPB’s Supervision and Examination Manual here:www.consumerfinance.gov/guidance/supervision/manual

Amber Goodrich serves as a compliance strategist for CSI Regulatory Compliance, and has more than 10 years of financial industry experience. For more information about CBI Endorsed Member Computer Services, Inc., visit csiweb.com.

UDAAP TRAP


Compliance Officers and Lenders: Attend This Valuable SeminarCBC Program Fall Session Seminar - September 22-23 in Johnston

CBI Members:$350 for each 1-day session

$150 for each additional representative

Non-Members:$550 for each 1-day session

$250 for each additional representative

FALL SEMINAR SESSIONSEPTEMBER 22-23, 2015

Hilton Garden Inn8600 Northpark Drive, Johnston, Iowa

2015 Community Bankersfor Compliance Program

Register Online at www.cbiaonline.org

CBI’sCommunityBankersforComplianceProgram(CBC)FallSeminariscomingupSeptember 22-23 attheHiltonGardenInninJohnston,Iowa.Thistwo-dayLIVEseminarprovidesyouwithup-to-dateinformation,guidanceforstructuringandmaintainingyourbank’scomplianceprogram,andaforumtodiscussissuesandexchangeideaswithothercommunitybankers.

Thissession’sdiscussiontopicsincludeinformationonRegZ,RESPAchangesandAuditingRegBonDay1oftheseminar,andDODRuling,SAFEAct,RegO,Dodd-FrankchangestoRegZ,andARMLendingonDay2.Send your bank’s Compliance Officers and Lenders to get in-depth knowledge on these complex regulations!

ForcurrentmembersoftheCBCProgram,attendanceattheFallSeminarisincludedwithprogramenrollment.CBCmembersandnon-membersmaychoosetoattendjustoneorbothdaysofthisinformativeregulatorypolicyseminar.Themostsuccessfulandlongestrunningcompliancetrainingprograminthecountry,theCBCProgramwasdevelopedandispresentedbyCBIincollaborationwithCBIAffiliateMemberYoung&Associates,Inc.

FormoreinformationandtoregisterfortheFallSeminarorthefullCBCProgram,visittheProgramstabatwww.cbiaonline.orgorcontactPretty [email protected].


Meaningful MembershipWritten By: Jack Hartings, Chairman of ICBA

Ascommunitybankerswebecomemembersofvariouslocalcivicorganizations,clubsandboards—oftenservingonseveralatthesametime.AndasyouandIbothknow,weareleadersnotonlyatourbanks,butinourcommunitiesaswell.Icallitanunofficialpartofthecommunitybanker’sjobdescription.

Whilewearehappytogiveofourtimeandourselvestosuchmeaningfulcommunitycauses,sometimesitmayfeellikevolunteergivingispartofourofficialjobdescription.That’swhy,asanICBAmember,it’snicetohavethetablesturnedabit.Insteadofyoudoingallofthegivingandwork,it’sgoodtoknowthatwehaveanationaltradeassociationdedicatedtohelpingusdoourjobsbetterandtocreatingandpromotinganenvironmentwherecommunitybanksflourish.

ICBAmembershipprovidesyouwithsomanybenefits,includingtop-notchindustryadvocacyforcommunitybanksandonlycommunitybanks,reliableandprofitableproductsandservices,professionalandcareerdevelopment,aswellasaward-winningpublicationsandplentyofcommunicationsresources.

BeingpersonallyinvolvedinICBAformorethan15years,IknowfirsthandthebenefitsthatICBAhasofferedmeandmybankthroughoutmycareer.Infact,mybankhasbeenamemberfor66years.MyfirstventureintoICBAvolunteerterritorycamewhilebeingontheassociation’sLendingCommittee,whichatthattimealsohandledaccountingissues.

Around2000,thecommitteemadeatriptotheFinancialAccountingStandardsBoard’sheadquartersinConnecticut.Irememberthinking,whatamIdoinghere?Ihadbeenalendermyentirecareer,butweweretalkingaboutaccountingissues.Ifeltlikeafishoutofwater,butthatwaswhenIrealizedthatifwecommunitybankersdon’ttellourstorytobringaboutconstructivechange,nobodyelsewill.OneofthemostvaluablecontributionsImadetothecommitteewastellinghowrulesandregulationstrulyaffectedmycommunitybankday-to-day.Itwasmywayofgivingbacktoourindustry,butit’salsohoweverycommunitybankercancontributesubstantiallyaswell,andtherebycreateanevenmoremeaningfulICBAmembership.

WhileIknowyouallhavesomuchonyourplates,IencourageyouandyourstafftogetpersonallyinvolvedinICBA.Whetherit’scontactingyourmembersofCongressthroughanICBAGrassrootsAlert,servingonanICBAcommitteeorboard,orgettinginvolvedwithyourstateassociation,theleadershipopportunitiesarenumerous.

WithICBAmembership,youalwayshaveaplacetocomehomeasacommunitybanker.AtICBA’spremierevents,suchasICBACommunityBankingLive®,theWashingtonPolicySummitandhundredsofeducationaleventsthroughCommunityBankerUniversity®,youcannetworkwithyourindustrypeers,accessanimportantproductorservice,orlearnfromourindustry’stopexperts.

ThebottomlineisthatopportunitiesaremanythroughICBA,soIencourageyoutoexploreyourmembershipandseehowitcanhelpyou,yourstaffandyourcommunitybankthemost.

Jack Hastings is Chairman of ICBA, and President and CEO of The People’s Bank in Coldwater, Ohio.

TOPFrom the

“...if we community bankers don’t tell our story to bring about constructive

change, nobody else will.”


It’sourfrenetic,modern-dayblessing(orcursedependingonyourpointofview).Theworldiscontinuallyevolving,churningandacceleratingwithnewideasandinnovations.Knowledgeismultiplyingexponentially—andsharedrapidlyandwidely.Technologyisconstantlyprovidingnewwaystoworksmarterandleaner,todoandknowmore.It’spartofadynamicimperative.

Consideringtheremarkableproduct,serviceandoperationalchangesyourcommunitybankhasadoptedinthepastfewyears,thisisnosecrettoyou.Butit’snodifferentforICBAeither.Becauseyourcommunitybankisn’tthesameasitwasadecadeago,ICBAisn’tthesamenationalassociationasitwasthen.Andbecauseyourcommunitybankwon’tbethesamefiveyearsfromnow,ICBAwillchangetootokeeppacewithyourneeds.

Certainly,ICBA’sprinciplesandpurposesdon’tchange.SinceitsfoundingduringtheGreatDepression,ICBAhasremainedtheonlynationaltradeassociationthatexclusivelyservesthenation’scommunitybanks.Wewillonlyservefinancialinstitutionsupholdingthephilosophyandvaluesoftruerelationshipbanking—andnoothers.Becauseofthis,ICBAhasnodividedloyaltiestoserve.Wewillneverbeconflictedaboutwhatwesayordo.Wewillalwaysspeakwithaclearanduncompromisingvoice.

Fromfightingcounterproductiveandunnecessaryregulationsandconcentratedfinancialpower,topreservingthevalueoffederaldepositinsuranceandouruniquelydiversifiedfinancialsystem,timeandagainICBA’sdecisiveadvocacyhasmadeapivotaldifference.Infact,ICBA’spositionasthevoiceofcommunitybanksisundisputedinthenation’scapital.Forthepastsevenyears,asjustoneexample,The Hillnewspaper,aCapitol

Hillinsider’spublication,hasidentifiedICBAasoneofthemosteffectiveandinfluentialtradeassociationsoperatinginthenation’scapital.That’sanimpressivetributetoICBA’sgrassrootsmembershipandthepoliticalcloutofcommunitybankers.

ButICBAknowsthatwecan’trestonourpastsuccesses.Recognizingthedynamicworldinwhichweserveourmembersandinwhichourmemberscompete,ICBAwillalwaysbeseekingnewwaystoworksmarteranddelivermore.OurfocusoncontinualeffectivenessisreflectedinICBA’sexpandingdigitalandsocialmediaadvocacyresourcesthathelpcommunitybankerscommunicatequicklyandinformatively—bothindividuallyandcollectively—tomembersofCongress.OurresponsivenessresultedinCommunityBankerUniversity,ICBA’snewcomprehensiveeducationprogramthatisofferingcommunitybanksandtheiremployeesanexpandingrangeofcareerandprofessionaldevelopmentoptions,fromcollege-levelinstructiontothemosttimelyandaccessibleonlinecourses.OurawarenessforinnovationdrivesICBA’smanyproductandserviceprogramstoexpandandevolvecontinuallyinstepwithnewindustrydemands,opportunitiesandinnovations.

Icouldcitemoreexamples.ButmymainmessageisthatwhileICBA’smissionandcoreprincipleswillneverchange,wewillcontinuetoevolvetoserveourmembers.Bylookingtothefuturewhilekeepinganeyeontoday,ICBAwillcontinuetobeyourcommunitybank’sfirst,mosttrustedandmostdynamicresource.Thisistheonlywaytoservethevital,dynamicandessentialindustrythatiscommunitybanking.

IchallengeAmerica’slawmakersandregulatorstodowhat’srightandtoholdWallStreettothesamelawsandregulationsasMainStreet.Onlythenwillwetrulyhaveaneconomicandregulatorysystemthatisbuiltuponlibertyandjusticeforall.

Continual ChangeWrittenBy:CamdenFine,PresidentandCEOofICBA

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

FINEPOINTS

“I challenge America’s lawmakersand regulators[...] to hold Wall Street

to the same laws and regulationsas Main Street.”


Low NetInterest Income

Communitybankprofitabilitydeclinedsharplyduringthe2007–09financialcrisisandrecession.Profitabilityhasimprovedsincethecrisis,primarilyduetodeclinesinloan-lossprovisions.Netinterestincome—thelargestsourceofrevenueforcommunitybanks—hasremainedflat,however,andisbelowprecrisislevels.Accordingtomanyobservers,includingcommunitybankers,thelowinterestrateenvironmenthasmadeitdifficultforfinancialinstitutionstoearnanadequatespreadonloanssincetherecessionended.Inaddition,bankerssayweaklendingopportunitiesandloandemandhavecontributedtoreducedinterestincome.

Thisarticlesummarizesthefindingsofarecentstudythatdiscussesthefactorsthatmostinfluencecommunitybanknetinterestincomeandtheextenttowhichthesefactorsarecontributingtothecurrentlowlevelsofnetinterestincome.1Additionally,thearticleexamineswhethernetinterestincome(sincethecrisisandrecessionbegan)isabnormalrelativetohistoricalexperience.Theresultsofthestudysuggestthelackofrecoveryincommunitybanknetinterestincomesevenyearsafterthestartofthefinancialcrisisandrecessionisnotunusualgiveneconomicandbankingconditions.

Historical BackgroundCommunitybank2netinterestincomehasvariedsignificantlyoverthepast38years.Inordertocomparehownetinterestincomeperformedduringthemostrecentrecoveryrelativetopreviousrecoveries,weconductedananalysisofnetinterestincomestartingin1977.The1973–75and1981–82recessions,along

withthe2007–09recession,werethethreelongestrecessionssincetheGreatDepression.Figure1(lower left)showstheaveragenetinterestincomeoverthestudyperiod.Duringthestudyperiod,averagenetinterestincomeforcommunitybanksvariedfromahighof4.75percentofaverageassetsinthefirsthalfof1981toalowof3.35percentinthefirsthalfof2013.Netinterestincomeforthesecondhalfof2014was3.41percent.3

What Banking and Economic Factors Affect Net Interest Income?Giventhevariabilityofnetinterestincome,itisnotsurprisingthatthebankingandeconomicfactorsexpectedtomostaffectnetinterestincomealsovariedsignificantlyoverthisperiod.From1977to2014,therewerelargevariations,asmeasuredbystandarddeviations,inthe1-yearU.S.Treasurybillrate,theaverageloan-to-assetratio,andtheaveragenonmaturitydeposit-to-liabilityratio(Table 1, below).Understandinghowthesefactorsshouldaffectnetinterestincomeisimportantforunderstandingiftheresultsfromamodelthatestimatestheireffectsmakesense.

Changesinmarketinterestrates—boththeabsoluteandrelativelevels—haveperhapsthemostsignificanteffectonnetinterestincomeintheshortterm.Wheninterestrateschange,thedegree towhichnetinterestincomechangesdependsonabank’sassetandliabilitymaturitystructureandtheextenttowhichabank’sloananddepositratesresetwhenmarketrateschangepriortomaturity.Abankissaidtobeassetsensitiveifitsassetshaveashortermaturityorrepricefasterthanliabilitiesandisliabilitysensitivewhentheconverseistrue.4Theserelativesensitivitiesimplythataparallelincreaseintheyieldcurveincreasesnetinterestincomeforasset-sensitivebanksanddecreasesnetinterestincomeforliability-sensitivebanks.Theserelationshipsareshowninthefirst(1)columnofTable2(below left).

Theeffectsofchangesintheslopeoftheyieldcurveonnetinterestincomenotonlydependonwhetherabankisassetorliability

Reprinted with permission of Community Banking Connections®. Copyright 2015 Federal Reserve System.

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

Written By: Charles S. Morris, Vice President and Economist, Federal Reserve Bank of Kansas City and Kristen Regehr, Assistant Economist, Federal Reserve Bank of Kansas City

At Community Banks?

What Explains


sensitivebutalsoonwhetherthechangeintheslopeisduetoachangeinlong-termorshort-terminterestrates,asshowninthesecond(2)andthird(3)columnsofTable2.Iflong-termratesincreasesothattheyieldcurveissteeper,netinterestincomewillincreaseregardlessofwhetherbanksareassetorliabilitysensitive.Thisisbecausehigherlong-termratesaffectonlynewandmaturinglong-termloansandinvestments,bothofwhichwillearnhigherreturnsandcanbefundedwithshort-termliabilitiesatunchangedrates.

However,whenshort-termratesincrease,whichdecreasestheslopeoftheyieldcurve,theeffectonnetinterestincomedependsonwhetherthebankisassetorliabilitysensitive.Foranasset-sensitivebank,ariseinshort-termrateswillcausenetinterestincometoincreasebecausetheinterestincomefromnewshort-termassetsandcurrentassetsthatrepriceoffshort-termrateswillrisemorethantheinterestexpenseonshort-termdeposits.Incontrast,foraliability-sensitivebank,anincreaseinshort-termrateswilldecreasenetinterestincomebecausetheinterestexpenseonshort-termdepositswillrisemorethantheinterestincomeonnewshort-termandcurrentrepricingassets.

Netinterestincomeisalsoaffectedbythecompositionofassetsandliabilities.Amongabank’sassets,loansgenerallyhaveahigherinterestratethanmarketablesecuritiesdobecauseloanstendtoberiskier.Amongliabilities,non-maturitydepositstendtohavethelowestinterestexpense,partlybecausealargeshareofnon-maturitydepositsgenerallypaylowerinterestratesthancomparabledepositsthatdonotprovidetransactionsservices.Asaresult,netinterestincomeshouldincreaseastheloan-to-assetornon-maturitydeposit-to-liabilityratiosincrease.

What Does Regression Analysis Tell Us About Why Net Interest Income Is So Low?Todeterminewhynetinterestincomehasnotrecoveredinthesixyearssincetheendofthefinancialcrisisandrecession,a“base”regressionmodelisconstructedtoestimatetheinfluenceofvariouseconomicandbankingvariablesonnetinterestincome.Variablesusedinthemodelincludemarketinterestrates(1-and10-yearU.S.Treasuryrates),bankbalancesheetitems(loan-to-assetandnon-maturitydeposit-to-liabilityratiosandinflation-adjustedtotalassets),andmacroeconomicconditions(realGDPgrowthandinflation).

Thebasemodelalsoincludesvariablesthatcapture“interactive”effectsbetweentheinterestrateandbalancesheetvariables.5Theeffectofchangesininterestratesonnetinterestincomemaydependonthesizeofbalancesheetitems.Forexample,if

theloan-to-assetratioisrelativelyhigh,anincreaseininterestratesmaycauseinterestincometorisemorethaniftheloan-to-assetratioislow,becauseloanratesaretypicallyhigherthanthereturnsonotherassets.Thebasemodelassumestherelationshipbetweeneachvariableandnetinterestincomedoesnotchangeovertheentiresampleperiod;thatis,therecentrecessionandexpansionarenotfundamentallydifferentfromanyotherrecessionandexpansioninthesampleperiod.

Resultsfromthebasemodelaresummarizedinthefirst(1)columnofTable3(above right).Thetophalfofthetableshowstheestimatedimmediateeffectsofa100-basis-pointincreaseineachvariableonnetinterestincome,holdingconstantallotherfactorvalues.Becauseachangeinthevariablesgenerallytakestimetofullyaffectnetinterestincome,thetablealsoshowsthecumulativeeffects,whichareshowninthebottomhalfofthetable.Approximately80percentofthecumulativeeffectsoccurwithintwoyearsofachangeinthevalueofafactor,andabout90percentwithinthreeandahalfyears.6

Themainfindingsofthebasemodelindicatethatcommunitybanksareassetsensitiveonaverage.Aparallelincreaseintheyieldcurveandanincreaseinlong-andshort-termratesareestimatedtoincreasenetinterestincome,whichisconsistentwith theasset-sensitivityeffectsinTable2.Forexample,theestimatedimmediateeffectofa100-basis-pointparallelincreaseintheyieldcurveisa5-basis-pointincreaseinnetinterestincome.Asexpected,anincreaseintheloan-to-assetornon-maturitydeposit-to-liabilityratiosincreasesnetinterestincome,whichsupportstheimportanceoflendingandthedepositmixforcommunitybanknetinterestincome.

Thecumulativeeffectsprovideagoodmeasureofthedegreetowhichtheeffectsofthevariablesonnetinterestincomeareeconomicallymeaningful.Ingeneral,wefoundthesizesofthecumulativeeffectstobeeconomicallymeaningful.7Forexample,theestimatedcumulativeeffectofa100-basis-pointpercentage-pointparallelincreaseintheyieldcurveisa14.5-basis-pointincreaseinnetinterestincome,withabout12basispointsoftheincreaseoccurringwithin2years.Thus,thebasemodelresultscombinedwithlowinterestrates,fewerlendingopportunities,and arelativelyflatyieldcurveduringallorsomeoftheyearssincethestartofthefinancialcrisisandrecessionareconsistentwiththepersistentlylownetinterestincomeatcommunitybanks.

Has the Behavior of Net Interest Income Changed Since the Crisis?Toallowforthepossibilitythatthedeclineinnetinterestincome(Low Net Interest Income continued on next page)

Get a closer look at this article’s tables by visiting CBI’s Community Banking News Blog. Find it at cbiaonline.org in the News section.

(Low Net Interest Income continued from previous page)

isoutoftheordinary,asecondmodelisestimated—thefinancialcrisisbreak(FCB)model.TheFCBmodelincludesthesamevariablesasthebasemodelbutallowsforthepossibilitythattheirestimatedeffectsonnetinterestincomechangeafterthestartofthefinancialcrisisinthesecondhalfof2007.

TheFCBmodel’sresultsareshowninthesecond(2)andthird(3)columnsofTable3(previous page, right).Theestimatedeffectsareconsistentwiththebanksbeingassetsensitiveinboththepre-andpost-crisisperiods,andthebalancesheetitemshavetheexpectedpositivesignsinbothperiods.8Thesizesofthecumulativeeffectsgenerallyareeconomicallymeaningfulinbothperiods.

Theestimatedimmediateandcumulativeeffectsappeartohavechangedsomewhatinthepost-crisisperiod.9Someoftheeffectsaresmallerinthepost-crisisperiodandothersarelarger.Thelargestchangesinthecumulativeeffectsarethe1-yearTreasuryrate(+6basispoints)andthe10-yearTreasuryrate(–7.9basispoints).Thus,basedontheseresults,itisunclearwhethertheFCBmodelisbetterthanthebasemodelinexplainingwhycommunitybanknetinterestincomeremainssolow.

OnewaytodetermineiftherelationshipbetweencommunitybanknetinterestincomeandthevariableshaschangedistoseewhetherthebaseorFCBmodelisabetterpredictorofnetinterestincomeinthepost-crisisperiod(Figure 2, top right).10TheFCBmodel(greenline)under-predictscommunitybanknetinterestincomeoverthepost-crisisperiodwitharelativelyconstantgapand,overall,predictsa62-basis-pointdeclinefromthefirsthalfof2007relativetoanactualdeclineof47basispoints.Inotherwords,eventhoughcommunitybanknetinterestincomeisalreadyneara40-yearlow,theFCBmodelpredictsitshouldbe15basispointslower.Althoughthebasemodel(darkredline)generallyover-predictsnetinterestincome,thepredictionsaremorereasonable.Thepredictedvalueofnetinterestincomeinthesecondhalfof2014isjust6basispointsgreaterthantheactualvalue,sotheoveralldeclineinnetinterestincomeoverthepredictionperiodismuchclosertotheactualdeclinethanintheFCBmodel.Asummarymeasureofpredictiveerrorsisthe“root-mean-squareerror”(RMSE).11TheRMSEofthebasemodelis8basispoints,whichismorethan50percentbetterthanthe18basispointsoftheFCBmodel.Thus,thebasemodelappearstoforecastsomewhatbetterthantheFCBmodel,suggestingthebehaviorofnetinterestincomeinthecurrentrecoverymaynotbethatunusualgivenhistoricalexperience.

How Would Net Interest Income Change If Key Variables Return to More Normal Levels?Togetasenseofhowareturntomorenormallevelsofthekeyvariablesmightaffectnetinterestincome,thebasemodelisusedtoestimatewhatnetinterestincomewouldbeifthesevariablesreturnedtotheir2004–06averagelevelsinthefirsthalfof2015andremainedatthoselevelsoverthefollowingtwoyears(Table 4, right).Thetwo-yeartimeframeischosenbecauseapproximately80percentofthecumulativeeffectofchangesinthevariablesonnetinterestincomewouldberealizedbythefirsthalfof2017.Thebasemodelpredictsthatnetinterestincomewouldbe3.79percentinthefirsthalfof2017—a38-basis-pointimprovementfromthecurrent3.41percent—althoughitwouldstillbe19basispointsbelowthe2004–06average.

SummaryThisanalysisshowsthatthelackofrecoveryincommunitybanknetinterestincomeinthesevenyearssincethestartofthefinancialcrisisandrecessionisnotunusualgiveneconomicandbankingconditions.Theregressionresultsfromthebasemodelindicatethatlowinterestrates,fewerlendingopportunities,andarelativelyflatyieldcurveduringallorsomeoftheyearssincethestartofthefinancialcrisis

andrecessionhavecontributedtothecurrentlowlevelsofnetinterestincome.Theseresultsalsosuggest,however,thatlownetinterestincomeisnotthenewnormalforcommunitybanks.Althoughnetinterestincomemaybeunlikelytoreturntothehighlevelsoftheearly1990s,astheeconomyimproves,netinterestincomeislikelytoreboundsignificantly.

NOTES:1SeeCharlesS.MorrisandKristenRegehr,“WhatExplainsLowNetInterestIncomeatCommunityBanks?”EconomicReview,FederalReserveBankofKansasCity,2014SecondQuarter,atwww.kansascityfed.org/~/media/files/publicat/econrev/econrevarchive/2014/2q14morris-regehr.pdfforadescriptionofthedata.2WhiletheFederalReservetypicallydefinescommunitybanksasthosewith$10billionorlessintotalassets,forthepurposeofthisanalysis,communitybanksaredefinedasbankswithtotalassetsof$1billionorlessin2012dollars.3ThedataaresemiannualinsteadofquarterlybecausetheincomeportionoftheConsolidatedReportsofConditionandIncome(commonlyknownastheCallReport)wasfiledonlysemiannuallypriorto1983.4Therepricingeffectshereincludethetotaleffectsthataccountforfactorssuchasfloorsonloanratesandthehistorical“stickiness”ofdepositrateswheninterestratesrise.5Theinteractiveeffectsinthebasemodelaretheinterestratesmultipliedbythelevelsofbalancesheetitems.Thebasemodelalsoincludestwolagsofnetinterestincome,toaccountforthepersistenceinnetinterestincome,andothervariablestocontrolforotherfactorsthataffectnetinterestincome.Forthecompletebasemodelspecificationandestimatedresults,seeMorrisandRegehr(2014).6Table3focusesontheprimaryvariablesofinterestforthisarticle.SeeMorrisandRegehr(2014)foralltheresults.Asnotedinthetext,thebasemodelallowsfortheeffectofinterestratesonnetinterestincometodependonthelevelsofbalancesheetitemsandviceversa.InTable3,theimmediateandcumulativeeffectsofinterestratesandbalancesheetitemsincludeboththedirectandinteractiveeffects.7Formalstatisticaltestsshowthattheestimatedimmediateeffectsofthevariablesaredifferentfromzerowithahighdegreeofconfidence.8Formalstatisticaltestsshowthattheestimatedimmediateeffectsofthevariablesaredifferentfromzerowithahighdegreeofconfidence.ForthecompleteFCBmodelspecificationandestimatedresults,seeMorrisandRegehr(2014).9Itisnotpossibletodetermineifthechangesarestatisticallysignificantfortechnicalreasonsrelatedtotheinteractiveeffectsinthemodel.10Thepredictionsareout-of-samplepredictionsofcommunitybanknetinterestincomefromthesecondhalfof2007tothesecondhalfof2014.Theout-of-samplepredictionsusetheactualvaluesofthevariablesbutthepredictedvaluesoflaggednetinterestincome.11Theroot-mean-squareerrorisdefinedasthesquarerootofthesumofthesquaredpredictionerrors.


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August Survey Results at a Glance:• TheRuralMainstreetIndexsinkstogrowthneutralforAugust.• Farmlandpricesdeclineforthe21ststraightmonth,butcash

rentsremainstrongat$263peracre.• Onaverage,bankersexpectfarmlandpricestodeclineby

another5.8percentoverthenext12months.• Housingsalesexpandatahealthypace.

OMAHA,Neb.–TheCreightonUniversityRuralMainstreetIndexfellforAugustfromJuly’stepidreading,accordingtothemonthlysurveyofbankCEOsinruralareasofa10-stateregiondependentonagricultureand/orenergy.

Overall:TheRuralMainstreetIndex(RMI),whichrangesbetween0and100,sanktogrowthneutral50.0from53.4inJuly.

“ThisisthefirstdeclineintheoverallindexsinceMarchofthisyear.Weakerconditionsamongbusinessestieddirectlytoagricultureandenergyaccountedforthedownturninthereading,”saidErnieGoss,JackA.MacAllisterChairinRegionalEconomicsatCreightonUniversity’sHeiderCollegeofBusiness.

Farming and Ranching:ThefarmlandandranchlandpriceindexforAugustincreasedslightlyto32.7fromJuly’s31.4.“Thisisthe21ststraightmonththeindexhasremainedbelowgrowthneutral.But,asinpreviousmonths,thereisagreatdealofvariationacrosstheregioninthedirectionandmagnitudeoffarmlandprices,”saidGoss.

Thismonththesurveyaskedbankerstoprojecttheexpectedchangeinfarmlandpricesoverthenextyear.Onaverage,bankersreportedanestimateddeclineof5.8percentoverthenextyear.LastAugustwhenthesamequestionwasasked,bankersreportedanexpected4.8percentdecrease.

“BankCEOswerealsoaskedtoestimatecurrentcashrentsfornonpasturecropland.Onaverage,bankersreported$263peracre,whichisupfrom$258reportedlastyearatthistime.

Additionally,bankersreportedanincreaseintheshareoffarmlandfinancedfrom74percentlastAugustto77percentthismonth,”saidGoss.

TheAugustfarmequipment-salesindexsanktoaveryweak14.2fromJuly’s17.9,butwasupfromJune’srecordlow12.5.“Withfarmincomeexpectedtodeclineforasecondstraightyear,farmersremainverycautiousregardingthepurchaseofagriculturalequipment,”saidGoss.

Banking:TheAugustloan-volumeindexclimbedto73.0from72.1inJuly.Thechecking-depositindexroseto55.0fromJuly’s53.4,whiletheindexforcertificatesofdepositandothersavingsinstrumentsdroppedto34.0fromJuly’s38.6.

Hiring:Despiteweakercroppricesandpullbacksfrombusinesseswithclosetiestoagricultureandenergy,RuralMainstreetbusinessescontinuetoaddworkerstotheirpayrolls.TheAugusthiringindexincreasedtoastrong63.3from60.3inJuly.“RuralMainstreetbusinessescontinuetohireadditionalworkers,whileruralMainstreetcommunitiesaregrowingjobsatasolidannualpaceofapproximately1percent,primarilyinbusinessesnotlinkedtoagricultureorenergy,”saidGoss.

Confidence:Theconfidenceindex,whichreflectsexpectationsfortheeconomysixmonthsout,slumpedto42.0from46.6inJuly.“Declinesforagriculturalcommodityandenergypricespushedbankers’economicoutlooklowerforthemonth,”saidGoss.

Home and Retail Sales:TheAugusthome-salesindexdeclinedtoastrong70.4fromJuly’s73.3.TheAugustretail-salesindexdecreasedto50.0from53.4inJuly.“HomesalesonRuralMainstreethavebeenveryhealthyoverthelastseveralmonths,”saidGoss.

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

Thissurveyrepresentsanearlysnapshotoftheeconomyofruralagriculturallyandenergy-dependentportionsofthenation.TheRuralMainstreetIndex(RMI)isauniqueindexcovering10regionalstates,focusingonapproximately200ruralcommunitieswithanaveragepopulationof1,300.Itgivesthemostcurrentreal-timeanalysisoftheruraleconomy.GossandBillMcQuillan,formerchairmanoftheIndependentCommunityBanksofAmerica,createdthemonthlyeconomicsurveyin2005.

Colorado:Colorado’sAugustRuralMainstreetIndex(RMI)dippedto51.5fromJuly’ssomewhatstronger53.2.Thefarmlandandranchlandpriceindexexpandedto38.4from12.7inJuly.Colorado’shiringindexforAugustadvancedtoahealthy65.5fromJuly’s52.9.

Main Street Economic Survey

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

Rural Mainstreet Index Falls to Growth Neutral for August:Cash Rents Expand as Farmland Prices Slump

Ernie Goss


Illinois:TheAugustRMIforIllinoisdeclinedto50.0from53.6inJuly.Thefarmland-priceindexdroppedto29.5fromJuly’s31.6.Thestate’snew-hiringindexincreasedto62.0fromJuly’s60.5.

Iowa:TheAugustRMIforIowadroppedto53.4fromJuly’s56.6.Iowa’sfarmland-priceindexforAugustroseto44.0fromJuly’s43.9.Iowa’snew-hiringindexforAugustjumpedto67.8from65.4inJuly.

Kansas:TheKansasRMIforAugustslidto49.8fromJuly’s52.3.Thestate’sfarmland-priceindexforAugustincreasedto27.8fromJuly’s24.6.Thenew-hiringindexforthestateexpandedto61.3from57.7inJuly.

Minnesota:TheAugustRMIforMinnesotafellto48.4fromJuly’s53.9.Minnesota’sfarmland-priceindexdeclinedto33.7from37.4inJuly.Thenew-hiringindexforthestatedeclinedtoahealthy58.2.

Missouri:TheAugustRMIforMissourideclinedto43.2from47.1inJuly.Thefarmland-priceindexgrewto29.5fromJuly’s13.9.Missouri’snew-hiringindexdecreasedto51.3fromJuly’s53.4.

Nebraska:TheNebraskaRMIforAugustslumpedto48.4from50.1inJuly.Thestate’sfarmland-priceindexfellto19.6fromJuly’s21.4.Nebraska’snew-hiringindexadvancedto58.0from56.4inJuly.AccordingtoJonSchmaderer,CEOofTricountyBankinStuart,“ThehighlevelofmoistureinJuly-Augusthassubstantiallyreducedthecostofirrigationthisseason.”

North Dakota:TheNorthDakotaRMIforAugustdecreasedto47.1from50.6inJuly.Thefarmland-priceindexfellto24.8from36.5inJuly.NorthDakota’snew-hiringindexdeclinedto60.1fromJuly’s62.4.

South Dakota:TheAugustRMIforSouthDakotaslippedto55.1 fromJuly’s56.7.Thefarmland-priceindexroseto47.2from43.0inJuly.SouthDakota’snew-hiringindexclimbedto69.1from65.0inJuly.

Wyoming:TheAugustRMIforWyomingsankto49.2fromlastmonth’s52.5.TheAugustfarmlandandranchland-priceindexexpandedto47.2fromJuly’s27.9.Wyoming’snew-hiringindexclimbedto60.9fromJuly’s59.0.

Tables 1 and 2 summarize survey findingsNext month’s survey results will be released on the third Thursday of the month, September 17.

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

August2014

July2015

August2015

Area economic index 48.3 53.4 50.0

Loan volume 73.4 72.1 73.0Checking deposits 46.7 53.4 55.0

Certificates of deposit and savings instruments 32.5 38.6 34.0Farmland prices 41.4 31.4 32.7Farm equipment sales 25.5 17.9 14.2Home sales 59.5 73.3 70.4Hiring 56.8 60.3 63.3Retail business 47.5 53.4 50.0Confidence index (area economy six months out) 39.9 46.6 42.0

Table 2: The Rural Mainstreet Economy, August 2015Percentage of bankers reporting

Less than 10% 10% - 19% 20% - 32% 33% - 50% 51% - 75%

Whatpercentoffarmlandpurchasesinyourareadoyouestimatearecashsales(notfinanced)? 12.2% 28.6% 38.8% 16.3% 4.1%

Decline morethan 12%

Decline6% - 12%

Decline1% - 5%

NoChange Increase

Overthenextyear,whatchangeinfarmlandpricesdoyouexpectinyourarea? 6.1% 40.8% 38.8% 14.3% 0.0%

Below $100 $100 - $199 $200 - $299 $300 - $400 Above $400

Whatistheaverageannualcashrentperacreforcropland(notpasture)inyourarea? 2.0% 20.8% 47.9% 27.1% 2.2%

Follow Ernie Goss on Twitter: www.twitter.com/erniegossFor historical data and forecasts, visit: www2.creighton.edu/business/economicoutlook


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It’sbeenmorethan30yearssincethefirstbankofferedfinancialproductsandservicestoitscustomersthrougharelationshipwithathirdparty

brokerdealer.Sincethen,regulationshaveevolvedtosimplifythesenetworkingarrangements,andthousandsofbankshavecapitalizedbyofferingtheseservicestotheircustomers.Doingsoaddstothebank’snoninterestincomebyluringtheircustomersbackfromthelargestbanks,brokeragefirms,insuranceagentsandfinancialplannersacrosstheU.S.

Withcontinuedcompressedspreads,thesearchfornoninterestincometopsU.S.communitybankwishliststhisyear.Suchfocusmakessense.Forexample,areviewofTexas-basedcommunitybanksbetween$100millionand$5billioninassetsrevealedthatthosewiththebestperformance–returnonaverageassets(ROAA)exceeding1percent–averagednoninterestincomeasapercentofaverageassetsof1.12percent.Thisiscomparedtoanaverageofonly0.69percentforthosebankswithROAAbelow1percent.1The62percentdifferenceisasignificantperformancedriverandislikelyapplicabletootherstatesandregionsaswell.

Investments Programs Mean All Around SuccessOneofthemostsuccessfulmethodstomeetandexceedincreasednoninterestincomegoalsistoimplementaninvestmentprogram.Notonlydowell-managedprogramsgeneratenoninterestincome,theyalsostrengthenclientrelationships.Infact,studiesshowthatcustomerswithinvestmentaccountsthroughtheirprimaryfinancialinstitutionare:

•58percentmorelikelytohaveacreditcard•122percentmorelikelytohaveafirstmortgage•613percentaremorelikelytohaveasecondmortgagethroughthatinstitutionthanotherhouseholds2

Householdsthatowninvestmentproductspurchasedthroughtheirprimarybankdonotcannibalizebankdeposits.Infact,thesecustomersareamongthebank’smostprofitablerelationshipsoverallbecauseoftheirlargerthanaveragecheckingandsavingsaccountbalancesandtheirincreasedlikelihoodtoutilizecreditproducts.

Investmentaccountownersmaintaina38percentlargeraveragecheckingaccountbalancethanthosehouseholdswithoutaninvestmentrelationship.Averagesavingsaccountbalancesareevenmoretellingwithanaverageof$28,000insavings,or140percentmorethanotherhouseholds.

Then Why Don’t More Bank’s Use Them?Whilemanyfinancialinstitutionsenjoypositiveresultsfromin-houseinvestmentprograms,morethan50percentofthebanksinthestatehavenotyetimplementedtheseofferings.Perceivedregulatoryandcompliancerelatedconcernsstilltopthelistofreasonswhyfinancialservicesarenotmorewidelyadopted.Belowareafewfactstohelpminimizeperceivedregulatoryconcernsincomparisontoreality.

PERCEPTION: We’re a community bank. A broker dealer doesn’t understand our needs. Our institution is very different compared to a big-name bank.

FACT:Manyconcernsareeasilyaddressedthroughagreatrelationshipwithabrokerdealerwellversedandspecializinginthecommunitybankbrokerageindustry.

PERCEPTION: I don’t have the time, resources or internal expertise to supervise an investment program. They’re just too much work and outside of our wheelhouse.

FACT:Brokerdealersareresponsibleforsupervisingallinvestmentrelatedactivitiesonbankpremisesandprovidethebanksupportivesolidindustryexpertise.

PERCEPTION: We’re concerned about the risks involved with a third party financial program and the associated responsibility.

FACT:Brokerdealersmustfinanciallyindemnifythebankforanyactionresultingfromthesaleofnon-depositinvestmentproducts.

PERCEPTION: How do we know the broker isn’t all about the “sell?” How do we know they’re going to do what is best for our customers? As a community bank, our relationships with them are very important to us.

(Investment Programs continued on next page)

Written By:David DoerflingerRegional Director

Investment Professionals, Inc.

Perception vs. Fact: The TruthBehind Investment Programs

Source: Kehrer Bielan Research & Consulting, LLC

Source: Kehrer Bielan Research & Consulting, LLC


Written By: Jim Reber, President & CEO - ICBA Securities

(Investment Programs continued from previous page)

FACT:Likebanks,brokerdealersarehighlyregulatedbytheFinancialIndustryRegulatoryAuthority(FINRA),theSecuritiesandExchangeCommission(SEC)andstatesecuritiesadministrators,withscrutinyfocusedprimarilyuponsuitabilityofinvestmentsbasedonindividualcustomerneeds.Mostbank-focusedbrokerdealershaveexcellentcompliancerecordsandworkhardtomaintaintheirgoodstanding,puttingthemonthesamesideofthetablewiththeirbankpartnerswhenitcomestocomplianceandcaringforthecustomer.

The Right ChoiceSelectinganexperiencedbrokerdealertopartnerwithisparamountwhenbeginninganinvestmentprogramastheimplementationprocessandoperationoftheprogramrequiresattentionfromprofessionalsthatareexperiencedinthefollowing:

•ProgramStructure•Recruiting•Compensationdesign•Territorydesign•Complianceandoversight•Internalandexternalpromotionoftheprogram

Withsomuchoftheprogram’ssuccesstiedtotheadvisor(s),it’snosurprisethatupgradingoraddingadvisorsmaybeanimportantpartofthesolutionandonethatshouldbelefttoyourpartner.Chooseafirmthatnotonlyinterviewscandidatesandconductbackgroundchecks,butalsohelpsinproactivelycallingthepotentialadvisorsinthecommunity.Somefirmsalsogivestheirpartneringbankthefreedomtodecidetheprogramstructurethatbestsuitsitsneeds–whetherthatmeanstheadvisorisemployedbythebrokerdealerorthefinancialinstitutionitself.Additionally,somefirmsprovidecompensation,financialprojectionsandstructuralguidance,includingsampleagreements,toinsurefaircompensationtoboththebankandtherep.

Whiletheintricaciesofoperatingasuccessfulfinancialprogrammayinitiallyappearchallengingoroverwhelming,thetopbrokerdealerdedicatedtothecommunitybankchannelcontinuallyhonerepeatableblueprintsforsuccess,allowingbankstoprovidethesevaluableservicestotheircustomers,whilegeneratingmuch-neededanddesirednoninterestincome.Additionally,withnoregulatorybarrierstoentryandarelativelyspeedyimplementationprocess,fewbetteroptionsexistforbankstoenhancetheircustomerrelationshipsandincreaseprofitability.

Ifyou’venotconsideredandinvestmentprogramforyourcustomers,orifyouhaveand/orcurrentlyrunanunsuccessfulprogram,rethinkyouroptions.Investmentprogramsareanuntappedopportunitytoincreaseyourfinancialinstitution’snoninterestincomeeasilyandstrengthenyourrelationshipsalongtheway.

Sources:1.SNLFinancial,LC;2.KehrerBielanResearch&Consulting,LLC

David Doerflinger is a Regional Director for Investment Professionals Inc (IPI). For more information on this CBI Endorsed Member, visit www.invpro.com.

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