Transactions September 2012

THE PUBLICATION OF THE PENNSYLVANIA ASSOCIATION OF COMMUNITY BANKERS

Pennsylvania’s Community Banks. For people and their neighborhoods.

September 2012

Introducing

Ronald B. Geib The 2012-2013 PACB Chairman

Giving Back

2012 COMMUNITY SERVICE AWARDS Page 10

That’s My Bank

COMMUNITY BANKS & COUNTY FAIRS Page 16

Convention A PHOTO RECAP OF VAIL Page 44

UPCOMING EDUCATION EVENTS SEPTEMBER • 2012

Compliance Seminar September 26, 2012 DoubleTree Monroeville - Monroeville, PA

i

ALM Seminar September 27, 2012 DoubleTree Monroeville - Monroeville, PA

OCTOBER • 2012

ALM Seminar October 3, 2012 PACB Headquarters - Harrisburg, PA Tech Conference October 10, 2012 PACB Headquarters - Harrisburg, PA

Plan your training for this year with our variety of educational seminars and conferences. Registration is easy and just a click away at pacb.org.

Marketing Conference October 17-18, 2012 Hilton Garden Inn - Hershey, PA

NOVEMBER • 2012

Directors College November 1, 2012 Doubletree Monroeville - Monroeville, PA Directors Training November 7, 2012 Radisson Hotel Valley Forge - King of Prussia, PA Directors Training November 13, 2012 Hershey Lodge - Hershey, PA

FEBRUARY • 2013

SEPTEMBER • 2013

Credit Administration Seminar February 26, 2013 PACB Headquarters - Harrisburg, PA

136th Annual Convention September 20-24, 2013 Boston Marriott Copley Place - Boston, MA

APRIL • 2013

OCTOBER • 2013

Commercial Lending School February 19-20, 2013 Crowne Plaza Harrisburg - Harrisburg, PA

Security Seminar April 9, 2013 Harrisburg, PA

Directors Training November 14, 2012 Scotch Valley CC - Hollidaysburg, PA

CCBSP Q2 Webinar April 15, 2013

JANUARY • 2013

JUNE • 2013

CCBSP Q1 Session January 15, 2012 DoubleTree Monroeville - Monroeville, PA

Directors Conference June 4-5, 2013 Hershey Lodge - Hershey, PA

CCBSP Q1 Session January 16, 2012 PACB Headquarters - Harrisburg, PA

JULY • 2013

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CCBSP Q3 Webinar July 15, 2013

ALM Seminar September 10, 2013 PACB Headquarters - Harrisburg, PA

CCBSP Q4 Webinar October 22, 2013 CCBSP Q4 Webinar October 23, 2013

NOVEMBER • 2013 ALM Seminar November 5, 2013 Pittsburgh, PA

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IN 2013, YOUR STAFF CAN BECOME CERTIFIED COMMUNITY BANK SECURITY PROFESSIONALS.

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Contents September 2012

FEATURE ARTICLES 10 2012 Community Service Awards Announcing the 2012 PACB Community Service Award winners.

16 Preserving Pennsylvania’s Agricultural Spirit A look at how Somerset Trust Company and MCS Bank are giving back to their communities through local County Fairs.

22 Notice of Proposed Rules What does Basel III mean for you and what does PACB have planned to help.

24 The PACB Strategic Plan: Ron Geib’s Key To Our Success An overview of PACB’s new strategic plan and how PACB’s new Chairman, Ron Geib, plans to help the organization carry it out.

30 Anticipated Effect on Pennsylvania Banking Institutions of Department of Banking Merger with Securities Commission What does this recent merger mean and how does it affect you?

32 Blindsided By Basel III A multi-dimentional view on how Basel III will impact Community Banks.

34 Understanding the Details of ALLL Assessment for Directors A look at Allowance for Loan and Lease Losses and how it is related to income and loss.

36 Basel III: Key Points for Community Bankers The four main points where Basel III has an impact on Community Banks.

38 Five Minutes With Congresswoman Allyson Schwartz The Congresswoman for Pennsylvania’s 13th Congressional District discusses redistricting, her accomplishments, her committees, and more.

44 PACB’s 135th Annual Convention Recap A photographic look back at PACB’s 135th Annual Convention in Vail, Colorado.

ADVERTISERS 15 Financial Outsourcing Solutions 15 Rhoads & Sinon LLP 21 Signature Information Solutions 33 Bybel Rutledge LLP 35 ParenteBeard 39 Smith Elliott Kearns & Company, LLC 39 Shumaker Williams P.C. Snodgrass| www.pacb.org 43 4SR | Transactions

ON THE COVER

Introducing PACB’s new Chairman, Ron Geib. A look into his goal for his year as Chairman - putting the Strategic Plan into action.

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THAT’S MY BANK!

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THE PUBLICATION OF THE PENNSYLVANIA ASSOCIATION OF COMMUNITY BANKERS

Pennsylvania’s Community Banks. For people and their neighborhoods.

Transactions Magazine is published monthly by Pennsylvania Association of Community Bankers 2405 North Front Street, P.O. Box 5319 Harrisburg, PA 17110-5319 BUSINESS HOURS: 8:30 a.m. - 5:00 p.m. M-F Telephone: 717.231.7447 Fax: 717.231.7445 www.pacb.org

PACB STAFF: Dominic D. DiFrancesco, nick@pacb.org - President/CEO Tim G. Arthun, tim@pacb.org - Director of Government Relations Natalie S. Bombatch, natalie@pacb.org - Publications Manager Saundra J. Cunningham, saundra@pacb.org - VP–Education Services Eric A. Kovac, eric@pacb.org - Publications Manager Patricia Kuharic, patty@pacb.org - Administrative Assistant Shirley A. Regan, sar@pacb.org - Comptroller/Office Manager

2012-2013 PACB LEADERSHIP EXECUTIVE COMMITTEE Chairperson - Ronald B. Geib President/CEO, Harleysville Savings Bank Chairperson Elect - Dennis D. Cirucci President/CEO, Alliance Bank Vice Chairperson - Andrew W. Hasley President/CEO, Allegheny Valley Bank Secretary/Treasurer - Terry L. Foster EVP/CEO, MCS Bank President/CEO - Dominic D. DiFrancesco Pennsylvania Association of Community Bankers Immediate Past Chairperson - Chuck Leyh President/CEO, Enterprise Bank General Counsel - Keith A. Clark, Esq. President, Shumaker Williams, P.C.

STANDING COMMITTEES: CHAIRS & VICE CHAIRS EDUCATION Gary Bradley, Cresson Community Bank Wendy Nagle, C&G Savings Bank FINANCE & BUDGET Troy M. Campbell, Altoona First Savings Bank Roger A. Zacharia, Ambler Savings Bank FIRSTPAC George M. Evans, Indiana First Bank LEGISLATIVE Rory Ritrievi, Mid Penn Bank MARKETING Pat Evans, Northwest Savings Bank Linda DeAngelis, C&G Savings Bank MEMBERSHIP Kevin J. Gallagher, Huntingdon Valley Bank Barron P. McCune, Community Bank STRATEGIC PLANNING Tim Zimmerman, Standard Bank, PaSB Terry Sager, William Penn Bank

PACB Chairman RON GEIB

A word from PACB’s Chairman First and foremost, I’d like to thank my fellow PACB members. It’s an incredible privilege to serve as PACB’s Chairman. I greatly appreciate the confidence and trust that you have in me. I’d also like to thank Chuck Leyh for his service to PACB during the past year. He visited with a majority of our member banks to help PACB develop a strategic plan. Though I won’t be visiting each bank individually, I plan to attend as many regional meetings as possible to help PACB move forward in the implementation and execution of the strategic plan.

I like to think about the strategic plan in terms of baseball and the concept of synergy. For me, synergy is when a team gathers to solve a challenge that results in a solution that no one individually owns. In baseball, for a team to work together as one, to win, each player needs to be aware of his individual duties. It is synergy that will help the community banking industry survive and succeed.

I have shared the following quote that I found on Successories.com with my staff at Harleysville Savings Bank, because not only is synergy important for the community banking industry as a whole, but also for our individual bank teams. “The strength of the team is in each individual member…the strength of each member is in the team.”

Synergy is the habit of creative cooperation or teamwork. Two people, creatively cooperating, will be able to produce far better results than either one would alone. Synergy lets us discover jointly things that we are much less likely to discover by ourselves. Finding

a third alternative is not a compromise; it represents a win-win situation for both parties.

As I begin my term as PACB Chairman, I urge you to keep this concept of synergy in mind and move forward with your fellow community bankers. Recognize and value the differences between your peers and synergize with them. It is especially important at this time that you, as a member of PACB, remain active and involved so that together we can deal with the issues ahead of us like, BASEL III and the TAG Extension. Our individual voices may not be far reaching, but when we synergize and band together as a team, our voice will be heard loud and clear.

It was extremely encouraging to hear from so many of you at the Annual Convention in Vail. The beauty of Vail was an awesome environment for Pennsylvania community bankers to gather and hear from regulators, vendors, and each other. I received many offers of help from members and their spouses and vendors. You’re engaged and you know that you need to be involved with PACB to survive. Our power is in our numbers.

On a final note, please feel free to call me should you need any assistance. And when you do call, please don’t apologize for taking my time. I have a support system built around me that includes my wife, my team at Harleysville, and the staff at PACB. They help me so that I can serve you.

P.S. Go Phillies!

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COMMUNITY BANKERS IN ACTION! We’re mad as…well you know…and we’re not going to take it anymore! While serving as county commissioner, I would hear comments like this one all the time. Very rarely did it result in any meaningful outcomes. Passion is a great thing, and some people simply need to vent. There are times when passion and venting – simply showing your emotions – is not enough. Now is one of those times!

Community bankers across the country are taking action to convey their frustrations. At a time when community banks are threatened daily in the name of Wall Street, Congress continues their outright assault on community banking. Whether by word or deed, the policies expressed by Washington are driving asset consolidation through bank mergers. Candidates like Elizabeth Warren push a regulatory agenda that hurts Main Street banks. President Obama speaks of the evils of the banking industry in nearly every political speech. Even a self-proclaimed “pro-business” Republican-led US House of Representatives has pushed back on our need to pass a (NO COST TO THE TAX PAYERS) extension of TAG. It is indeed time for community bankers to take action!

In this month’s Transactions you’ll meet PACB’s new chairman, Ron Geib. Ron is the President and CEO of Harleysville Savings Bank. Like every successful leader, Ron understands the power of “Team.” As individuals our voice is limited, but when we stand shoulder to shoulder we become a force. Ron will continue to lead PACB with the same enthusiasm as Chuck Leyh, and with Chuck’s same commitment to energizing participation in PACB. It is one thing to be a member and a much more powerful thing to be involved.

If you need a few ideas on how to take action, I have some suggestions to share. First, this presidential election is meaningful. The outcome will have a dramatic impact on the community banking industry. While your friends, neighbors and colleagues complain about being overwhelmed by the commercials and mail and debates, you have to remain focused. Listen to each candidate’s daily message, because they are not alike. It is up to you to decide which candidate best reflects your beliefs in the greatness of America. Once you decide, vote! There is never a good excuse not to vote.

As a community organization you can provide voter registration forms and even host Saturday morning events to draw in your customers and register your neighbors. In Pennsylvania, voter registration closes 30 days prior to the election, so if you plan an event, you need to do it soon. Voter registration forms can

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PRESIDENT/CEO NICK DIFRANCESCO be obtained at the county courthouse and through most State Senate and House of Representative offices.

Call ahead if you plan on asking for a large quantity of registration forms.

Taking action is important, and in campaigns, money matters. Money allows candidates who share your views to get their message out, in order to attract voters. In Texas, a group of community bankers formed a coalition to raise money for the Presidential candidate of their choice. They wanted to make certain that there was a way for community banks across the country to give to a campaign in a way that registered the support of the community banking industry. They worked with the campaign to organize a code that would identify every contribution made in the name of community banking. It was an innovative idea and a powerful opportunity for community bankers across the country to band together. There is power in numbers!

My message is simple. With all the significant issues we have on our plate – overcoming Basel III, TAG, CU business lending and a myriad of regulatory burdens – we need to stand together and take action.

The Presidential Election of 2012 is just about one month away, and that means Pennsylvanians will decide the fate of a President, a US Senator, 18 US Congressmen, 3 statewide officers, 25 PA Senators and 203 members of the PA House of Representatives. Now is the time to stop venting and get involved.

Likewise, now is the time to get actively involved with PACB. Our committees are still in formation and the goal is that every member bank assigns someone to actively engage in one or more of those committees.

Rest assured we make it easy. In most cases your voice can be heard without ever leaving your office. We do this because we respect your time and the demands that come with a small business. We make it easy, because our success depends upon your participation.

As Chairman Ron says, “The whole is greater than the sum of its parts.” Get involved, and together we can ensure the future of community banking in Pennsylvania and throughout this great country.

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DIRECTORS COLLEGE NOVEMBER 1, 2012 Stay up-to-date on the continuously changing regulatory and economic environment so you can avoid the consequences of noncompliance.

WHAT IS THE DIRECTORS COLLEGE? The Directors College is an interactive one-day seminar to provide ongoing education to bank directors on current topics and various elements of bank supervision. It is designed to help directors, both new and experienced, stay abreast of the ever-changing regulatory and economic environment. Now more than ever, directors are under constant pressure to remain current in their knowledge of the banking industry and the segment their institution serves. There must also be a basic understanding of what issues are currently impacting their institution’s financial performance and competitive environment. This program is offered in partnership with the Federal Deposit Insurance Corporation (FDIC) and includes a general session on current topics affecting community banks, a luncheon presentation on economic and banking conditions, and a choice of three interactive breakout sessions. There are six breakout session topics offered and each attendee can tailor this seminar to their own individual needs by registering in advance for those topics of most interest.

BREAKOUT SESSION OPTIONS 1. MANAGING INTEREST RATE RISK IN TODAY’S ENVIRONMENT This session will discuss the importance of interest rate risk (IRR) management strategies and practices in today’s challenging interest rate environment. The session will touch on an overview of IRR management techniques and Board responsibilities. Directors will have an opportunity to participate in a group case study on evaluating IRR strategies and approaches. This session will conclude with a need-to-know overview of recent regulatory guidance on IRR.

4. NEW DIRECTOR GUIDANCE This session will focus on fundamental board governance issues and is designed for Directors with less than five years experience. In addition to discussing participant questions, the session will cover Directors’ roles and responsibilities, insider rules, and effective ways to monitor bank performance.

5. COMPLIANCE MANAGEMENT SYSTEM: ENSURE YOUR BANK MEETS REGULATORY STANDARDS This session will provide an excellent understanding of what the consumer 2. INFORMATION TECHNOLOGY This session will provide an overview of the information technology examination protection examiners look at to arrive at your Compliance Management System (CMS) rating. Directors will be provided with an overview, expectations, and process as well as common examination findings. Directors’ best practices regarding the CMS elements: Board and Management roles and responsibilities in information technology Oversight; Compliance Program (including policies and oversight will be discussed. The session will procedures; monitoring; training; and complaint resolution); also provide insight to emerging technology and Compliance Audit. Real world examples will be used trends such as mobile banking, vendor to apply the CMS standards. hosted board packets, and personal tablets (e.g., iPads).

6. HOW DO EXAMINERS ASSIGN LOAN 3. COMMUNITY BANKING This session will provide an opportunity for participants to hear about the FDIC’s perspective on community banking and to dialogue on broad-based themes.

Learn what initiatives are planned for 2012 and how the financial crisis has impacted community banks.

Recent exam trends and current issues facing community banks will be discussed.

CREDITS: Attendees are eligible to earn up to 5 CPE credits and 4 CLE credits.

QUESTIONS: Contact Saundra J. Cunningham, VP-Education Services, at 717.231.7447 or saundra@pacb.org.

CLASSIFICATIONS AND RATE ASSET QUALITY? Do you know how examiners assign classifications and rate your loan portfolio? This session will focus on the regulatory perspective on loan classifications and the elements of lending that contribute to rating the Asset Quality component of the CAMELS rating system. Participants will have an opportunity to interact through case studies, reviewing pertinent aspects of loan examples and assigning appropriate classifications based upon the Six “P’s” of Credit.

REGISTER ONLINE BY OCTOBER 12, 2012 AT PACB.ORG/EDUCATION www.pacb.org | Transactions | 9

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COMMUNITY SERVICE AWARDS

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Overall Winner

BRENTWOOD BANK Brentwood Bank celebrated their 90th anniversary this year with a special project, “90 Causes for 90 Years.� To show their appreciation to those who have made this milestone possible, their customers and the communities they serve, the bank donated to and supported more than 90 charitable organiza-

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tions in local communities, including the American Cancer Society Relay for Life, the Bethel Park Volunteer Fire Department, and many others. In addition to support directly from the bank, Brentwood Bank team members dedicated countless hours to these and other community organizations.

Regional Winner

ALLEGHENY VALLEY BANK This year, Allegheny Valley Bank contributed to The Education Partnership “School Supply Drive” and “Holiday In-School Distribution Program.” The “School Supply Drive” campaign resulted in $2,035 in monetary donations and seven boxes of school supplies, whose estimated value was more than $600. The “Holiday In-School Distribution Program” helped 5,200 students in the community. Along with The Education Partnership’s staff and board members, Allegheny Valley Bank employees and other volunteers visited fourteen participating schools in December to distribute gifts of school supplies to students. For some students, it was the only holiday gift they received.

Regional Winner

ALLIANCE BANK As part of their “Community Involvement Program,” Alliance Bank employees donated toys to The Delaware Valley Children’s Charity, which they have supported for more than 20 years. The bank also organized two food drives benefitting the Upper Darby Food Center. Additionally, Alliance Bank participated in two local communities’ Crime Prevention and National Night Out celebrations. All of the proceeds went to the Delaware County Hero Scholarship Fund and the Springfield Community Watch Organization. Finally, bank employees volunteered for the Lansdowne-Yeadon Elm Street Program to help renovate the homes of elderly, low-income, and disabled persons in Lansdowne and Yeadon.

Regional Winner

BRYN MAWR TRUST Bryn Mawr Trust participated in the “Career Awareness Program” for children in the Fresh Air Fund, an organization that provides free summer vacations to children from underserved New York City neighborhoods. Younger children in the program enjoy simple summer activities with host families, while older children expand their experience in the program through the “Career Awareness Program.” Eight participants, ranging in age from 12 to 15, visited five different organizations to meet people in a variety of jobs. During their visit to Bryn Mawr Trust the children were greeted by Chairman and CEO Ted Peters, who spoke about the bank, different careers in the banking industry, and banking in general.

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Regional Winner

COMMUNITY STATE BANK OF ORBISONIA This year, Community State Bank of Orbisonia celebrated their 60th anniversary by holding the “60th Anniversary Community Success Contest.” The goal of the contest was to share their 60 years of success throughout their market area by presenting volunteer organizations with $5000 grants. More than 60 organizations applied for the grant, and three out-of-area judges selected five winners: Shade Gap PTO Playground Improvement Project, Huntingdon Area Meals on Wheels, Children’s Health Fair, sponsored by the Auxiliary to JC Blair Hospital, Hustontown Branch Library, and American Youth Soccer Organization. Addi-

Regional Winner

FIRST FEDERAL SAVINGS AND LOAN OF GREENE COUNTY The First Federal Savings and Loan of Greene County’s project this year was providing support for the American Cancer Society, an organization dedicated to helping persons who face cancer. The American Cancer Society supports research, patient services, early detection, treatment and education. One hundred bank employees contributed time toward the organization’s Relay for Life event, gifts, and financial support to this worthy cause. Employees also held raffles to raise funds for the organization.

Regional Winner

FIRST NATIONAL BANK OF MERCERSBURG Through the “Teach Children to Save” program, employees at the First National Bank of Mercersburg taught more than 1,500 students the importance of saving money, how to save money, and the difference between a want and a need. Each class received a piggy bank and as a group decided on a savings goal, including: donations to Haiti, donations to animal shelters, pizza parties, books for the school library, and even a hamster class pet. In addition the bank provided money- and coin-themed activity sheets, pencils, erasers, and coin sets as prizes.

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tionally, 10 more organizations were chosen as honorable mentions and received $500 grants.

Regional Winner

FIRST NATIONAL BANK OF MINERSVILLE In a multi-faceted effort, the employees of The First National Bank of Minersville supported the Minersville Public Library, Cell Phones for Soldiers, and the Minersville Food Pantry. State & federal budget cuts have hurt local libraries so in order to help out, the bank collected hundreds of new and gently used books. The First National Bank continued to be an official drop off location for the non-profit organization Cell Phones for Soldiers, whose goal is to provide every US soldier with a way to call home for free. The bank also acted as a collection point for donations of canned goods and non-perishable items for the Minersville Food pantry.

Regional Winner

HARLEYSVILLE SAVINGS BANK Participating annually in the North Penn United Way (NPUW) campaign is a major way Harleysville Savings Bank gives back to the communities it serves. Both the Board Chairman and President & CEO have served terms on the NPUW Board and also served as Campaign Chair. During the past three years, the bank has increased and exceeded their giving goals. This past year, with the bank’s 100% match, 115 employees from all seven offices contributed a total of $55,400. Additionally, the bank had 10 grand leaders ($1000 or more) and 100% participation of their 23-member management team.

Regional Winner

MALVERN FEDERAL To help commemorate its 125th year of continuous service to the community, Malvern Federal Savings Bank initiated “125 Days of Sharing,” a company-wide community service and volunteer project that commenced at the outset of 2012 and will continue through the end of the year. The entire staff pledged to provide a combined 125 days of community service to non-profit organizations within the bank’s footprint. Year-to-date, 53 employees and board members at Malvern Federal Savings Bank have completed a combined 560.5 hours of community service with 16 non-profit organizations, totaling 70 of their intended 125 days. They have touched the lives of individuals in a

meaningful way through their generous donation of time and talent to various community service projects.

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Regional Winner

MCS BANK

www.peoplesbanknet.com

In February, MCS Bank and the United Way of MifflinJuniata co-sponsored a “Walk for Warmth” event that raised funds for the Coalition of H.O.P.E.S. (Help Offering People Essential Services). The Coalition is comprised of human service agencies throughout Mifflin and Juniata Counties that work to meet the needs of individuals in crisis and to assist them in achieving their goal of self-sufficiency. More than 50 walkers, which included approximately 20 bank employees, raised nearly $6,400 for the Mifflin-Juniata Energy Bank, an agency helping individuals with heating expenses. In conjunction with the “Walk for Warmth,” MCS Bank also sold gloves at their “Help-

ing Hands” booth during Lewistown’s annual “Festival of Ice,” raising $1,000 for the Mifflin-Juniata Energy Bank,

Regional Winner

PEOPLESBANK A CODORUS VALLEY CO. Through the “Care to Share!” program, each of the bank’s 220+ employees were provided with a $25 Visa Gift Card.

They were instructed to go out into the community and do something special and unexpected for someone they randomly selected. To name just a few, gas money was provided for a family traveling back and forth to Hershey to care for a seriously ill child, a group of retired men had some extra money to spend on groceries for a monthly breakfast they provide to homeless persons, and a client with limited income now had some money to purchase

Regional Winner

WILLIAM PENN BANK William Penn Bank supported a variety of non-profit organizations this year through their “Community Involvement/Service” project. Employees regularly volunteer at local organizations through the ongoing employee volunteer program, “Doing Goodwill with Bill.” In addition, William Penn Bank employees collected and delivered groceries to a local food pantry, donated gift certificates to local fire victims, sponsored a Mother’s Day Tea fundraising event to benefit the Bucks County Housing Group, sponsored a family to attend the Destined for a Dream Annual Scholarship Banquet, and donated grants to a number of other non-profit organizations in the community.

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much-needed medicine. Because of its tremendous success, PeoplesBank continued the program with a second distribution of cards in July. A third distribution is planned for later in 2012.

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Preserving Pen Agricultur

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ennsylvania’s ural Spirit

By: Natalie Bombatch www.pacb.org | Transactions | 17

L

ocal agricultural fairs, dating as far back as the 1600s, were important for trade, competition, and highlighting American culture.

Fairs today carry on these same traditions.

Each year, people of all ages gather at the local fairgrounds to show their prized exhibits, participate in contests, enjoy musical entertainment, learn about agriculture, and interact with others from the community.

businesses have stepped up to the task of helping their community fairs stay in business.

Somerset Trust Company is a sponsor of the Somerset County Fair, and MCS Bank, centered in Lewistown, supports three local fairs held within the counties they serve: the Mifflin County Youth Fair, the Huntingdon County Fair, and the Beaver Community Fair.

SOMERSET TRUST COMPANY Pennsylvania is the proud When the Somerset County home to 110 agricultural WE WANT THE FAIR TO REMAIN Fair is in need of donations, fairs attended by more than 5.5 million fairgoers each local businesses like SomerSUSTAINABLE TO SHARE AGRICULTURE year. Not only do fairs supset Trust Company step in WITH FUTURE GENERATIONS. port agriculture and tourto support. Jeff Romesburg, ism, Pennsylvania’s numPresident of the Somerset ber one and two industries, County Fair, explained, respectively, they are also essential to local commerce.

“For about seven years now, Somerset Trust Company has been a huge help to us. By sponsoring the first Sunday of the Unfortunately, many Pennsylvania fairs’ very existences are fair, the bank starts the week off on a very positive note. You can tell that the bank is dedicated to combining agriculture being threatened with increasing state budget cuts. Just 10 years ago, funding from the Pennsylvania Department of Ag- with youth and their families.” riculture for distribution among the state’s county and community fairs was $4.4 million. That number dropped to $2 Each year, Somerset Trust Company sponsors the “Somermillion in 2009, and was as low as $971,000 just last year. As set Trust Family Day at the Fair” at the Somerset County of June 30, 2012, the state budget passed with funding back Fair. This year, to entice attendees for that day, the bank up to $2 million; however, the instability of state funding has purchased billboards and mailed about 25,000 postcards to local residents inviting them to attend the fair at no charge. left many fairs scrambling to obtain funds elsewhere. Local 18 | Transactions | www.pacb.org

During the event, bank employees worked at the fair gates and distributed promotional items to attendees.

According to Roberta Lohr, Senior Vice President of Marketing, “Somerset Trust Company is so heavily invested in the fair because we realize that agriculture is an integral part of the community. We want the fair to remain sustainable to share agriculture with future generations, which is why we contribute each year.”

Youth Fair, the Huntingdon County Fair, and the Beaver Community Fair. 4-H is an organization that empowers youth to reach their full potential, working and learning in partnership with caring adults. MCS Bank President and CEO Terry Foster said, “The bank supports 4-H because the organization helps to perpetuate entrepreneurial spirit and the agricultural industry through successive generations.

We’re an agricultural area and it’s critical that we encourage agriculture and learning.”

Indeed, 4-H programs are Additionally, Somerset a huge learning experience County Trust employees WE’RE AN AGRICULTURAL AREA AND for local youth. Participants manned a booth at the fair for the entire week. At the acquire management skills, IT’S CRITICAL THAT WE ENCOURAGE finance skills, and basic life booth the focus is always AGRICULTURE AND LEARNING. skills, like responsibility, on children. In the past, the communication, and ethics. bank has had a duck pond, 4-H members spend money putt-putt contest, and a coin toss where children received prizes purchased by the to purchase their animal, put time and effort into raising it, and calculate how much they need to make at auction to bank. “We, at the bank, are very proud to live and work in offset that original cost. Often, the money earned is used to Somerset County. We support the Somerset County Fair because it brings together families, friends, and neighbors to purchase another animal for the next year. Foster elaboratcelebrate our agricultural heritage,” said Barbara Harrold, ed, “The programs definitely transcend agriculture. Really, Vice President – Branch Administration. they’re microcosms of the business cycle.”

MCS BANK MCS Bank also finds value in supporting today’s youth.

They donate to the 4-H programs of the Mifflin County

In past years, at all three fairs, MCS Bank supported 4-H programs by purchasing member-raised animals at livestock auctions. More recently, the bank wanted to enhance their involvement with 4-H and find different ways to meet their needs. www.pacb.org | Transactions | 19

A contact from the Mifflin County Youth Fair 4-H program told the bank that their members looked somewhat disjointed while showing their livestock at auction. MCS Bank satisfied that need by purchasing t-shirts, giving the members a unified and professional appearance. The shirts also advertised both 4-H and the bank to fairgoers, spreading the word about the organization and community support from local businesses. “The support from our community can’t be beat. If we need anything, we know that we can go to local businesses for support,” shared Darvin Yoder, Mifflin County Youth Fair Board Member.

Also, this year marks the 100th Anniversary of the Pennsylvania State Association of County Fairs. To celebrate, Mifflin County Youth Fair ran a campaign requesting 100 sponsors to donate $100 to benefit the 4-H youth camp. MCS Bank

responsibilities, and understand the importance of agriculture in Huntingdon County.”

MCS Bank has been involved with the Beaver Community Fair for several years. In the past, bank employees have helped serve chicken dinners. This is the first year that the bank donated t-shirts, similar to those purchased for the Mifflin County Youth Fair, for 4-H members to wear during the livestock auction.

In addition to the purchase of advertising at all three fairs, contributions in support of endowment fund programs have also been made in the past by the bank.

Pennsylvania has deep agricultural roots, and it’s the youth of today that will become the farmers and agricultural industry

Pennsylvania is the proud home to 110 agricultural fairs attended by

MORE THAN 5.5 MILLION FAIRGOERS has donated to this campaign. “In this area, we see a lot of kids going into the family farming business or agriculture field, and a lot of them start their careers through the 4-H program. The assistance from donors like MCS Bank helps them pay for a college education,” said Thomas Walker, Penn State Cooperative Extension District Director.

This year at the Huntingdon County Fair, MCS Bank donated hand towels to participants in the 4-H program to have with them while grooming and showing their animals. This was a creative way for the bank to advertise their support of the fair as well as give the group something useful. The bank also provided promotional items for gift bags given to children participating in a youth tractor pull event. Edsel Hamman, Huntingdon County Fair Board Member, explained, “We, as volunteers at the fair, get nothing but enjoyment from watching kids grow, learn

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professionals of tomorrow. Local community banks, like Somerset Trust Company and MCS Bank, are helping to perpetuate the agricultural tradition by donating to their local fairs’ youth programs. As generations of families come to the fair year after year, it becomes very apparent that their support is truly having a positive impact on youth and the community as awhole.

If you would like Transactions to feature your bank as our Community Bank Profile in an upcoming issue, please feel free to contact me at natalie@pacb.org or 717-231-7447.

Photo provided by Branden Snyder

ded by Snyder

UPCOMING FAIRS: York Fair (Sept. 7-16) Berlin Brothersvalley Community Fair (Sept. 9 & 12-15) McClure Bean Soup Festival & Fair (Sept. 9-15) Green Township Community Fair (Sept. 10-15) Denver Fair (Sept. 11-15) Sinking Valley Fair (Sept. 11-15) Albion Area Fair (Sept. 11-15) Beaver Community Fair (Sept. 16-22) Gratz Fair (Sept. 16-22) Harmony Grange Fair (Sept. 18-22) Southern Lancaster County Fair (Sept. 19-21) North East Community Fair (Sept. 20-22) Oley Valley Community Fair (Sept. 20-22) Bloomsburg Fair (Sept. 22-29) Ephrata Fair (Sept. 25-29) Morrisons Cove Community Fair (Sept. 25-28) West Lampeter Community Fair (Sept. 26-28) Hollidaysburg Community Fair (Oct. 2-4) New Holland Farmers Fair (Oct. 3-6) Unionville Community Fair (Oct. 5-7) Manheim Community Farm Show (Oct. 8-12) Dillsburg Community Fair (Oct. 16-20)

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NOTICE OF PROPOSED RULES By: Tim Arthun

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egulators have made a concerted effort in 2012 to implement language of the DoddFrank legislation and implement banking standards put forth by the Basel Committee on Banking Supervision. Earlier this year, the regulatory agencies proposed new rules on a variety of community banking issues including mortgage loans, Tier 1 Capital criteria, and risk weights for consumer and commercial loans. In October the public comment period will end for four very important rules proposed. This article summarizes some of 22 | Transactions | www.pacb.org

the components of the proposed rules and a sneak peek of PACB’s Government Relations Strategy.

CFPB PROPOSED RULES ON MORTGAGE SERVICING – COMMENTS DUE OCTOBER 9TH

Mortgage Servicing Rules • Servicers would be required to contact borrowers who are at least 30 days late on their payments by telephone, and follow up in writing with information about options for avoiding foreclosure.

• Servicers would have to provide regular billing statements about the next payment due, how past payments have been applied, and other important loan information.

• Vague requirements of servicers including providing “easy access to staff,” responding “quickly” to requests for payoff amount information, and giving consumers early warning about how upcoming rate changes could impact future changes. Many community banks already provide this prompt and courteous service without the need for a federal mandate.

TRUTH IN LENDING ACT AMENDMENTS – COMMENTS DUE OCTOBER 15TH

Appraisal Requirement on Higher-Risk Mortgages • Requires creditors to use a licensed or certified appraiser who prepares a written report based on a physical inspection of the interior of the property.

• Mandatorily disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.

being impacted by the notices, and several other informational tools. Also, PACB will be updating and upgrading the Government Relations portion of our website to include information about legislative priorities, resources for legislative and regulatory topics, and information about developing issues and stories that affect the industry. Enhanced visibility of PACB’s Government Relations work will be utilized by a strong social media campaign with regular updates about legislative happenings.

These “action packets” and similar tools are essential to keeping our member banks connected to the business of Harrisburg and Washington. The political rhetoric coming out of the halls of government could lead many to believe that community banks await a disparaging forecast. However, with an effective strategy that will combat the over burdensome regulations being proposed, community banks have the potential to enjoy great success in the future.

PACB is also looking for member banks that are interested in holding “bank visits” for elected officials. These visits are a chance to showcase your bank’s abilities while

We all need to come together and stand unified in opposition to

HARMFUL INDUSTRY POLICIES BASEL III PROPOSED RULES – COMMENTS DUE OCTOBER 22ND

Regulatory Capital Minimums and Capital Buffers • Establishes new capital requirements including; a common equity tier 1 capital ratio of 4.5%, tier 1 capital ratio of 6%, total capital ratio of 8%, and tier 1 leverage ratio of 4%.

• Requires financial institutions to hold additional buffer of common equity tier 1 capital in the amount of 2.5% of all risk-weighted assets, or places restrictions on capital disbursements and bonus payments.

Standardized Approach for Risk Weighted Assets • Residential Mortgage exposures would be weighted along a scale, based upon the loan-to-value ratio, between 35-200%. All balloon mortgages would fall between 100-200% risk weight.

• Certain commercial real estate loans would be assigned a 150% risk weight.

• On exposures that are 90+ days or non-accruing, risk weight would increase from 100% to 150%.

PACB STRATEGY Member banks will begin receiving “action packets” in September that detail PACB’s coordinated, multi-layered strategies and tactics in response to these notices. These packets will include sample letters to be sent to legislators and regulators, talking points for how community banks are directly

providing interesting and educational discussions about the effect of legislation. If you would be interested in hosting a bank visit, please contact PACB via telephone at 717-231-7447 and speak with Tim Arthun, Director of Government Relations.

WHAT YOU CAN DO AND HOW PACB WILL HELP Turning back the tide of burdensome regulations from the government will take a group effort. This is why we all need to come together and stand unified in opposition to harmful industry policies to achieve legislative success.

Regulators and elected officials want to hear directly from you! After all, you are the ones that have a vastly superior and technical understanding of how regulations made in D.C. will create ripple effects across the Commonwealth. This means picking up the phone, writing letters, and inviting elected officials into your bank to see the faces of the industry.

If you want to know more about the comings and goings in the PA Legislature or Congress, please feel free to call or e-mail me at tim@pacb.org or 717-231-7447.

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THE PACB

STRATEGIC RON PLAN: GEIB’S KEY TO OUR SUCCESS 24 | Transactions | www.pacb.org

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As Chairman, I plan to do all that I can do to support PACB in executing this strategic plan. I can’t guarantee our success as an organization‌no, but I can guarantee there would be no chance of success without meeting the objectives of this plan.

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on Geib, President and CEO of Harleysville Savings Bank and Harleysville Savings Financial Corporation, is ready to start his term as the new PACB Chairman. He follows Past Chairman Chuck Leyh, President and CEO of Enterprise Bank. Geib’s goal as Chairman is to be a continuation of those before him as well as a building block for those to come in the future.

The strategic plan has three main objectives that Geib refers to as “Pillars in the Plan,” which are described below.

PILLAR ONE

The first Pillar focuses on membership development and retention through improved member relationships. The plan calls for the creation of more interaction among our members, and also identifies strategies to engage more members of our banks’ management teams. There will be regional meetings Geib explained, “Being Chairman is all about building on to bring together our member banks, encouraging them to the legacy of the past. Of the most recent Chairmen, Rich interact and become more involved in the issues affecting the Meares helped us transicurrent state of community tion to PACB President and banks, such as BASEL III NOW THAT WE’VE IDENTIFIED THE CEO, Nick DiFrancesco, and the TAG Extension. making way for Chuck TARGET, IT’S TIME TO PUT THE Leyh to aid the Board of Geib noted that there are STRATEGIC PLAN INTO MOTION. Directors in developing a always two ways to look strategic plan for the next at the state of community three years. Now that we’ve identified the target, it’s time banking. He said, “On one hand, unfortunately, there’s more to put the strategic plan into motion. That’s what I fully regulatory burden today for community banks. We need to intend to do.” be focused more on what is coming at us in the future. On the other hand, community bankers have never been in a Geib is a huge believer in strategic planning and identifybetter time or place to tell our stories that differentiate us ing the values of an organization. Geib’s goal as Chairman from big banks. We have the opportunity to point out that is to help members understand what their role is in helpdifference – they caused a problem and we didn’t.” ing both PACB win and the community banking industry win. He used the phrase, “The clearer the vision, the fewer The story that differentiates Harleysville Savings Bank from the options, the fewer the questions, the easier the anbig banks centers on the importance of community. He lives swers,” to describe the benefits of creating and implementby the philosophy of Anne Beiler, founder of Auntie Anne’s ing a strategic plan. With a strategic plan built for clarity Inc., which is, “Give, to get, to give again.” Geib believes and connectivity, the Board of Directors, PACB staff, and that giving back to community members, local organizamember community banks can all strive to work together tions, and the environment creates value for everyone. “It toward a common goal. is the community relationship feel that attracts both cuswww.pacb.org | Transactions | 27

tomers and staff to Harleysville, and we’re proud of that,” acknowledged Geib. Relationships are incredibly important and powerful; stories like his are what PACB members need to share in order to separate themselves from big banks and the problems they’ve caused.

PILLAR TWO The second Pillar identifies strategies to improve each of the four ‘core’ functions contained in the PACB mission statement: “1) Promoting the ideas of community banking by addressing the 2) Educational, 3) Legislative, and 4) Networking needs of our members.”

Geib elaborated, “On the legislative focus, when I first got involved with PACB, I thought we existed to have a voice in Harrisburg regarding community banking issues.

Although that is true, I have come to realize that our involvement and resources are needed in Washington, DC, as well.” It is important that Pennsylvania community bankers have a relationship with national members of congress in order for the needs of community banks to be understood when policy is being formed. It’s impossible for ICBA to have a relationship with all 535 members of congress in Washington – and also, voting constituents have more clout than paid lobbyists.

Savings Bank was established in 1915 and is headquartered in Harleysville, PA with seven full-service branches in Montgomery County.

This year marks an especially important milestone for Harleysville Savings Bank. As of August 31, the bank will be in its 25th year as a public company. Geib said that it was humbling to discover that of the 41 PA Stock Thrift Companies in existence on December 31, 1988, Harleysville Savings Bank is the only bank still in existence. He added, “This gives testimony to what can happen when Directors make decisions with a long term view in mind.”

Since beginning his position as CEO, Geib has placed a heavy focus on teamwork. To communicate with his staff and encourage their involvement with the bank and the community, he has emailed a “Thought of the Week” for the past five years. Topics include events in the community, bank values, and practices for personal growth.

He graduated from Bloomsburg University with a B.S. in Accounting in 1976. His education also includes attendance at the Ohio State University Academy for Financial Executives.

Geib began his career in community banking directly after

Being Chariman is all about

BUILDING ON THE LEGACY OF THE PAST PILLAR THREE The final objective recognizes that PACB needs to do more than just make the existing business model better.

The association needs to expand their ability to generate revenue. The third Pillar calls for PACB to develop new programs, products and/or services to enhance the “Value Proposition” to existing and potential members; quantifying with an objective dollar value, which reflects a return on dues.

Geib concluded, “This is PACB’s target for the next three years. As Chairman, I plan to do all that I can do to support PACB in executing this strategic plan. I can’t guarantee our success as an organization…no, but I can guarantee there would be no chance of success without meeting the objectives of this plan.”

ABOUT RON On January 21, 2007, Ron Geib was appointed President and Chief Executive Officer of Harleysville Savings Bank and Harleysville Savings Financial Corporation.

Harleysville Savings Financial Corporation is the holding company for Harleysville Savings Bank. Harleysville 28 | Transactions | www.pacb.org

graduating from college. He spent four years as a Branch Manager for Harleysville Savings Bank. In 1980, he earned the position of Chief Financial Officer, a position he held until becoming the Chief Operating Officer in 1999. In 2003, Geib was appointed the President and COO of both the Bank and Harleysville Savings Financial Corporation.

Many men like Geib have hobbies like hunting, fishing or golfing; however Geib’s hobby truly is community banking.

He joked, “I’ll tell my wife that I’m going to go sit in a tree stand, but really I come into the bank.” Numbers make him tick and he enjoys interacting with the people of the community. Community banks provide the environment where numbers and people come together. He commented, “I enjoy being able to do what I love every day – making a difference in people’s lives and in banking.”

During the past 30 plus years, Geib has served both the financial industry and his community in various positions. He is a Past President of the Insured Financial Institutions of the Delaware Valley, and Past President of the Philadelphia Chapter of the Financial Managers Society. Geib also serves as the Treasurer of the Board of the North Penn United Way and was the 2007 Campaign Chairman. He serves other local non-profit organizations in various capacities.

I enjoy being able to do what I love every day – making a difference in people’s lives and in banking.

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ANTICIPATED EFFECT ON PENNSYLVANIA BANKING INSTITUTIONS OF DEPARTMENT OF BANKING MERGER WITH SECURITIES COMMISSION

By: Reginald S. Evans, Esq. Shumaker Williams, P.C.

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iscussions of whether to merge the Pennsylvania Department of Banking and the Pennsylvania Securities Commission turned into legislation that was passed unanimously by the General Assembly and signed into law by the Governor on July 2, 2012. The new law is Pennsylvania Act 86 of 2012. Pursuant to the Act, the Pennsylvania Department of Banking, a State Agency under the Governor’s jurisdiction, and the Pennsylvania Securities Commission, an independent State Agency, will “consolidate” to become a unified “Department of Banking and Securities”.

REORGANIZATION AND ENFORCEMENT The Department will proceed forward with the Secretary as Agency. The Securities Commissioners will no longer be agency heads. Instead, they will have a reduced yet important role. In that regard, there will be a newly formed “Commission” established within the Department. The Commission’s role will be to serve as

the Department of Banking and Securities. Considered together, the Banking Fund will fund the Department as it is now, pre-merger, and the securities fees will fund the securities division of the Department. These banking and securities monies will support the overall management of the Department. The Banking Fund is not intended to subsidize the securities division but is to pay for the regulation of banking institutions and nondepository licensees.

TIMING OF THE CONSOLIDATION This consolidation of State Agencies is on a fast track.

Act 86 became law on July 2, 2012. The Secretary is required to submit a reorganization plan to carry out the reorganization to the Pennsylvania Executive Board by August 31, 2012. If the reorganization plan is approved by the Executive Board, the plan takes effect on September 28, 2012. The target reorganization date and the effective date of most of the provisions of Act 86 discussed above is the same, October 1, 2012.

The Banking Fund is not intended to

SUBSIDIZE THE SECURITIES DIVISION the final adjudicator or decision maker regarding every administrative enforcement matter that requires a hearing officer and is commenced by the consolidated Department under any law that it administers. The Commission will have such other functions as the Secretary chooses to authorize. The Commission is to be composed of five individuals including the Secretary, a designee of the Governor, and three individuals nominated by the Governor and approved with the advice and consent of the State Senate.

For regulation and enforcement organization purposes, Act 86 provides that the consolidated agency will have a securities division for regulation of securities law matters. Pursuant to Act 86, the Department will continue to regulate, license, examine, and enforce Pennsylvania’s banking laws as well as licensing laws affecting nondepository entities.

FUNDING OF THE DEPARTMENT Pursuant to Act 86, the “Banking Department Fund” is redesignated as the “Banking Fund.” The sources of this Banking Fund shall not include fees, assessments, charges, and penalties generated from the Pennsylvania Securities Act or the Takeover Disclosure Law. Separately, Act 86 provides that a securities division is established within the Department and that the ability of the Pennsylvania Securities Commission to impose fees on persons or entities that it regulates is transferred to

EFFECT OF CHANGE The addition of a Commission that acts as “judge” in enforcement matters expands from one to five the number of people who decide whether the Department’s enforcement pursuit or the regulated entity’s defense is correct and therefore enforceable. By dividing the banking regulatory side in fiscal terms from the newly in formation securities division, combined with the separate expertise that staff have from both of their agencies, banking institutions can probably expect regulation to continue in a substantially similar manner to how it has been handled to date.

Mr. Evans’ practice includes representation of banks, savings associations, holding companies, and nondepository mortgage lenders and brokers, regarding regulatory compliance, licensing and enforcement issues under federal and state law, charter conversions, mergers and acquisitions, and intellectual property. Mr. Evans served as chief counsel to the Pennsylvania Department of Banking from 1995 to 2003.

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BLINDSIDED

BY BASEL III

By: John Gagnon Bank Strategies M Benefit Solutions

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n the fall of 2010, the Basel Committee on Banking despite original intent. However, when the federal bank Supervision introduced the Basel III international regulatory agencies rubber stamped approval of the intercapital standards. These measures were aimed at national version for U.S. institutions in June, the industry improving risk appeared to be caught flatmanagement so footed as to the all-inclusive THE INDUSTRY APPEARED TO BE CAUGHT that, ultimately, nature of the proposal. The the bank industry weight and complexity of FLAT-FOOTED AS TO THE ALL-INCLUSIVE could better withstand futhese reforms, coupled with NATURE OF THE PROPOSAL. ture economic crises. When current and other proposed these reforms were first esnew regulations, poses a tablished it was generally thought that they would apply real threat to the community banking industry. to international “too-big-to-fail” banks or “systemically important financial institutions.” It is doubtful community M Benefit Solutions – Bank Strategies provides Executive banks expected to be totally exempt or immune from the benefits consulting and assists community banks in investnew standards, since most regulations trickle downstream, ing in bank owned life insurance (“BOLI”) as a financing 32 | Transactions | www.pacb.org

or cost-recovery vehicle for employee benefits. This article examines new banking regulations in two ways: how the regulations will impact the community bank marketplace in general (a macro view) and how the regulations will impact the products and services to banks (a micro view).

From a macro point of view, the federal bank regulatory agencies proposals create new capital standards with underlying changes in how regulatory capital is calculated as well as significant changes to asset risk weights, particularly residential loans. These proposals would most likely impede lending and, due to the implementation timeline, hinder smaller banks ability to raise new capital, when necessary. Imposing complex rules and regulations originally intended for the largest international banks on small, traditional community banks makes little sense. The overall outcome, if these standards are implemented, could very well be massive bank consolidation as many smaller, private banks will be forced into distressed sales or assisted mergers due to an inability to raise capital quickly.

From a micro point of view, one area stands out – the inclusion of accumulated other comprehensive income (AOCI) in regulatory capital. Currently, unrealized gains and losses from available-for-sale (AFS) securities, which fall under AOCI, are excluded in the calculation of regulatory capital.

This change adds extra volatility and will totally alter the investment strategies of banks. This could positively impact capital in some instances; however, given the current rate environment and the inevitable rise in interest rates, this could have a devastating effect. The rule will discourage holding long-term debt and push banks toward holding shorter durations or many may just move assets from AFS into the heldto-maturity (HTM) securities category. This could potentially weaken the market for typical bank held securities such as municipal bonds and agency mortgage-backed securities.

and trade organizations are actively pointing out the flaws in the current proposals.

To provide comments on these regulations you can find resources at: • http://www.icba.org/advocacy/index. cfm?ItemNumber=130925 • http://www.fdic.gov/regulations/capital/rulemaking.html • http://www.occ.treas.gov/news-issuances/ bulletins/2012/bulletin-2012-24.html • http://www.federalreserve. gov/newsevents/press/ bcreg/20120607a.htm M Benefit Solutions offers securities through M Holdings Securities, Inc. a Registered Broker/Dealer, Member FINRA/SIPC. M Financial Group is the parent company of M Benefit Solutions and M Holdings Securities, Inc. This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney, tax advisor or plan provider.

Bank Owned Life Insurance (BOLI) can potentially be a partial solution to this problem. A bank worried about the capital risk of their securities portfolio could move these funds into the tax favorable environment of BOLI, which has always been accounted for as an “other asset.” The bank could choose to invest in the general account of the life insurer or potentially fulfill their investment mandate by diversifying their funds in underlying sub-accounts of certain types of BOLI products. While BOLI is not a complete solution to the volatility and other issues that will emerge if unrealized gains/losses from AFS securities flow through regulatory capital, BOLI could provide a useful option for banks.

When federal regulators presented these proposed regulations, it does not appear they anticipated the extent of the opposition. Regulators minimized the impact pointing to the fact that most U.S. banks already met or exceeded the ratio thresholds. However, this underestimated the massive cost and complexity that these standards will impose on community banks, not to mention the myriad of unintended adverse consequences. While the regulators had two years to review these proposals prior to implementing, the banking industry has a few months to state their case and banks www.pacb.org | Transactions | 33

UNDERSTANDING THE DETAILS OF ALLL ASSESSMENT FOR DIRECTORS

By: John E. Scherer, Sr. Software Implementation Specialist Harland Financial Solutions

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n the current climate of bank examinations and the in the bank’s best interest to have the process accessible, exsometimes contentious recommendations made plainable and able to be validated. An examiner’s confidence during and after reviews, board members should be in the bank’s processes will generally lead to fewer questions familiar with bank about methodology, downexaminer responsigrades and guidance requirbilities, particular- IT IS ALWAYS IN THE BANK’S BEST INTEREST ing review process improvely when it comes ments. Allowance for Loan TO HAVE THE PROCESS ACCESSIBLE, to asset quality. The OCC and Lease Losses (ALLL) is EXPLAINABLE AND ABLE TO BE VALIDATED. the accounting and financial Comptroller’s Handbook, which can be found at www. outcome of the bank’s own occ.treas.gov, shows the speasset quality review. It is dicific guidance for examiners as to what to assess but not a rectly related to the bank’s income and so prudently grading specific methodology. The examiners are to assess “all signifiand reserving for losses while remaining a profitable entercant aspects that affect the collectability of the portfolio”…, prise is sometimes a very narrow path. Keeping examiners and they are to exercise their judgment as to whether the confident in the bank’s asset quality assessment and limiting bank has a process that adequately rates the risk of the porttheir downgrades will allow better planning with fewer surfolio and effectively reserves for potential losses. It is always prises and a less adversarial review process.

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The loan review and asset quality assessment environment at every bank is somewhat different. Each institution has a culture and the board/management interaction is driven by personality and skill set as well as the size of the bank.

Virtually all operate with a high level of trust between the executive officers and the board. Some directors want all the details on a criticized loan and while others just want the bottom line. What is consistent at every bank is the need to have that detail accessible and able to be presented to both the board as warranted and the examiner as required. It is in the director’s best interest to work with bank management to understand what the risks in the loan portfolio are and how the bank is addressing those risks. Directors should be comfortable with the bank’s methodology for downgrading a loan (or not), what factors are being considered and what the result of the downgrade will be.

The ALLL process should be clear and well documented.

The bank should also have in that process, identifying in a timely manner, potential downgrades and collectability issues. A director should ask: Does my bank have a process for collating similar type loans, similar collateral, similar location and similar industries, and extrapolate from those segments, a global portfolio risk? The process does not necessarily need to be complicated but the bank should have the ability to take a loan or relationship with a known issue (i.e., reduced collateral type value, industry slowdown, changes in a commercial borrower neighborhood) and identify similar loans and relationships in their portfolio and review for a possible downgrade. A “stress test” review of those loans may show that a specific loan is dis-

similar enough to the criticized or downgraded loan that no further action is needed. However, it may show that there is increased risk in a segment and allow the bank better management of the collection process and its ALLL, as well as limit pursuit of new business in that segment. The process will show the examiner a quantifiable risk based on segments, and also, that the risk is being managed.

Having quantifiable oversight of the bank’s portfolio risk should limit the number and extent of additional downgrades discovered during examinations, but more importantly, allow a realistic analysis of the potential losses the bank may face. ALLL is a valuable assessment for bank management and directors. The write downs required by non-performance of loans are generally understood by directors and other reviewers. What is just as important to the bank is to have a process to accurately assess and accrue for the potential write down, before it gets to that nonperforming status. As a director, knowing the details of that process is essential.

John E. Scherer is a senior software implementation specialist at Harland Financial Solutions and can be reached at john.scherer@ harlandfs.com.

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BASEL III:

KEY POINTS FOR COMMUNITY BANKERS By: Jack H. Goldstein Managing Director Strategic Risk Associates, LLC

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he summer’s unusual hot weather has also brought on hot regulatory changes, specifically Basel III, that will result in consequences for the community banking industry.

able to count TruPS as Tier 1 capital. Banks under $15 billion will be subject to a phase out of TruPS over 10 years beginning in 2013. Many banks have executed interest rate swaps from fixed to floating in order to take advantage of the low rate environment. So why is this important?

The proposed capital rules are designed to meet international Basel III standards. The • Are TruPS still acceptable if they are no longer Tier 1 most surprising factor in the proposed rules was that the capital, or really subordinated debt? In this current interest rate environment TruPS at LIBOR + 2%, or less standard applies to all bank holding companies over $500 are not a bad deal, especially if they can be swapped million, as well as all subsidiary banks regardless of size. for a longer term fixed rate instrument. The execution Dodd-Frank carved out some new capital provisions, primarily Trust Preferred Seof this strategy is worth curities (TruPS) continuing consideration since holdCAPITAL STANDARDS WILL CHANGE, to qualify for Tier 1 capiing company debt ranges tal. Larger banks began to from 4% to 6%. Rates on AND IT WILL BE EXPECTED THAT plan for this change, but it TruPS that exceed LIBOR COMMUNITY BANKS DOCUMENT THEIR left smaller banks behind + 2% may not make sense the planning curve. The and a redemption stratPLANS IN 2013 TO MEET THE NEW NORM. proposed rules are still in egy should be considered. the comment phase, but • Then there is the issue understanding key points will assist community bankers of structure. Maybe you are happy with the cost and in developing capital plans to meet the proposed regulaTruPS and they still count partially as Tier 1 capital, tory standards. and the cost is less than existing debt. Again an interest rate swap strategy with options to cancel in the 1. Trust Preferred Securities Phase Out future may make sense. However, keep in mind, the optionality will impact the rate so it needs to be part All banks over $500 million in total assets will no longer be of an overall capital management plan.

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2. Gains and Losses on AFS Securities Now Count in Capital This proposal is the most troubling and will have a significant impact on Community Banks. As rates have remained low and loan demand weak banks have added significant amounts of securities to their balance sheet at longer durations. When rates begin to rise the unrealized losses will be larger and a bigger percentage of capital. In some cases, a 300 basis points shock results in a portfolio loss, of 10% or more. Let’s say you are a $250 million community bank with $100 million in AFS securities, and $25 million in capital. A 10% loss is a 40% swing in capital. This could have a devastating effect upon capital with banks falling below well capitalized. In some cases regulators are asking banks to further shock these portfolios in severe stress scenarios of 400 to 500 basis points. This analysis widens the loss having a more significant impact on capital.

The answer is to shorten duration (price risk), but how will that impact your earnings? This is a proposal that needs attention and community bankers must advocate for a change during the 90-day comment period.

3. Capital Buffer The proposed new “capital buffer” is designed to increase capital levels. The buffer is a sliding scale, but in principle requires banks to hold 2.5% more capital. Falling short of this capital buffer will limit some forms of executive compensation and dividend payments. Community Banks need the flexibility of dividend payments to maintain and attract outside capital sources. This capital buffer may not be an immediate issue, but keep in mind the above proposed changes will result in community banks looking for sources of other capital to meet this buffer.

The lack of dividend payments will make it difficult to attract such capital.

4. New Risk Weighting Rules The proposed rules substantially change many risk weightings placing emphasis on risk weighted capital measures. Today’s fairly simple system becomes much more complex. The proposed rule changes will include additional risk factors, primarily LTV measurement. This will be a challenge to community banks who do not periodically update collateral values on residential loans (or other loans secured by real estate), or track LTVs on their core system. This makes stress testing a more compelling argument for community banks that have not historically stress tested their portfolios. Banks should begin to employ independent stress testing on the entire loan portfolio as a capital planning tool regardless of the proposed rule changes. Stress testing is not only expected by regulatory agencies at any size level, but is an excellent capital planning tool providing a forward looking estimate over a two-to-three year period.

community bank strategies going forward. Proper planning, enhanced risk management tools, and redesigned strategies will help community banks to be better prepared to meet these new regulatory capital standards. A couple thoughts: • Capital continues to be King and Basel III may find Community Banks short of capital; • Capital must be supported with strong risk management, such as enterprise risk management, and stress testing; • The “capital buffer” increases based on the risk profile of the bank similar to SCAP tests where regulators have more tools to limit executive compensation, and dividend payments; • New risk weighted rules require greater data capture requiring independent third party stress testing, enterprise risk management scoring models, and capital simulation. This will be the new norm.

It is important to note that these proposed rules are still in the comment period, and it is rumored that the period may be extended (or the comment period on portions of the proposed rules). So make sure you are an advocate for the industry, and that you are heard. Best advice is start planning today, capital standards will change, and it will be expected that community banks document their plans in 2013 to meet the new norm.

Jack H. Goldstein is Managing Director for Strategic Risk Associates, LLC (www. srabank.com). Mr. Goldstein in his 30 year banking career has specialized in all aspects of bank operations including credit risk management, strategic planning, capital planning, due diligence, loan review, stress testing, and ALLL Analysis. Mr. Goldstein has held various senior management positions with regional and community banks in Pennsylvania and Maryland.

Strategic Risk Associates, LLC (SRA) is an innovative consulting and advisory firm specializing in the banking industry. Our partners and associates have a strong commitment to innovation, customer service and continuous improvement. Our team provides fast efficient, and practical consulting and advisory services on strategic planning, capital management, stress testing, loan review, internal audit, accounting, risk management programs (ERM), and merger and acquisitions advice.

Mr. Goldstein may be contacted at (443) 907-3000, or at jgoldstein@srabank.com.

The changes are significant and will have an impact on www.pacb.org | Transactions | 37

FIVE MINUTES

WITH CONGRESSWOMAN

ALLYSON SCHWARTZ TIM ARTHUN (TA): The redistricting process changed your district slightly but also contains several areas that are new. Do you anticipate the issues and needs of the new district differing much from the previous district?

(AS): I was proud to have been a part of expanding access to quality, affordable health coverage for all Americans through my work on the Affordable Care Act. I specifically fought for provisions to improve primary care, ensure coverage for children with pre-existing conditions, allow young adults to stay on their parents coverage, and strengthen Medicare for our seniors now and into the future.

CONGRESSWOMAN ALLYSON SCHWARTZ (AS): While there are several new areas of the 13th Congressional District, I continue to represent As the daughter of a KoWITH THE MANY ECONOMIC AND POLITICAL suburban Montgomery rean War veteran, I firmly County and Northeast believe that we have the CHALLENGES AMERICA FACES TODAY, I HAVE responsibility to ensure that Philadelphia. I look forWORKED PARTICULARLY HARD TO BRIDGE THE our nation’s veterans can ward to meeting my new find work when they return constituents and reprePARTISAN DIVIDE AND GET SOMETHING DONE. home. Too many veterans, senting their needs in especially Post-9/11, are Washington and here at home, as I have done for the current district for eight struggling to find employment. That is why I have introyears. The number one concern for all of my constituduced legislation to support our veterans. In my first term ents remains strengthening our economy -- now and in Congress, I introduced legislation to provide tax credits into the future. That means preserving and growing to businesses that hire unemployed veterans. This bill was our middle class; prioritizing education, infrastrucsigned into law in 2007 and later strengthened by President ture, and innovation; improving the quality of life in Obama in 2009. To build on the success of that law, I introduced the Hiring Our Veterans Act, which was signed into our neighborhoods; and ensuring access to affordable, law by President Obama in November 2011 as part of a largquality health care for everyone. er package to strengthen the economic climate for veterans.

(TA): This is your 4th term in Congress and you have alI have worked to strengthen our economy with targeted tax ready earned the reputation of being a rising star. What do you consider to be your greatest accomplishment during incentives for emerging industries, creating the right enviyour time in Congress? ronment for private sector job growth. The Therapeutic Tax 38 | Transactions | www.pacb.org

Credit, legislation I championed in 2010, provided $1 billion dollars to 3,000 small biotech companies across the country to ensure America continues to lead the world in innovation and research and development.

In February 2012, I was honored to be appointed to the joint Senate-House conference committee charged with with resolving differences between the House and Senate so we could extend middle class tax cuts, protect seniors’ access to their doctors, and extend unemployment benefits for Amer-

and all Americans, and build sustainable communities in Pennsylvania and across the country. These include the GREEN JOBs Act, the Community Restoration and Revitalization Act and the Manufacturing American Innovation Act. My bipartisan efforts on health care this year include legislation to address the shortage of physicians in this country through new medical residency training opportunities, and the Medicare Physician Payment Innovation Act, which prevents a scheduled 30 percent cut to physicians serving Medicare patients

The number one concern for all of my constituents remains

STRENGTHENING OUR ECONOMY icans still searching for work. The conference committee was one of the only bipartisan groups in the 112th Congress to reach a bipartisan agreement successfully.

With the many economic and political challenges America faces today, I have worked particularly hard to bridge the partisan divide and get something done.

I take very seriously my responsibility in Congress to find that common ground and accomplish our goals for the American people. I have worked across the aisle on a number of important bills to incentivize innovation and spur job growth, strengthen health care for seniors

and reforms the Medicare payment system to improve quality while reducing costs.

(TA): Currently you serve on two committees; the House Budget Committee and House Foreign Affairs Committee.

What are some of the challenges you face in these assignments?

(AS): As the number two Democrat on the House Budget Committee, I take very seriously the need to tackle our nation’s economic and budget challenges. The federal budget is a statement of our priorities and values as a nation. Dur-

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ing this time when we face significant economic challenges, we must put forward budget solutions that ensure we meet our nation’s obligations, and reduce our deficit, but also grow our economy.

We must commit to reducing the nation’s deficit in a balanced and fiscally responsible manner. Spending cuts must be balanced with increased revenue, and increase greater efficiency and effectiveness from all sectors of government.

We must continue to make strategic investments in our economic future. Both cuts and revenue must protect and grow a robust middle class, incentivize small business and domestic manufacturing, and eliminate unnecessary and costly special interest tax breaks.

As a member of the House Foreign Affairs Subcommittee on the Middle East and Southeast Asia and the Subcommittee on Terrorism, Nonproliferation, and Trade, I have worked to counter Iran’s nuclear ambitions by tightening sanctions against the Iranian regime. A nuclear-armed Iran would undermine our nuclear non-proliferation efforts by setting off an arms race in the Middle East; provide Hamas and Hezbollah with the protection of a nuclear umbrella; and increase the chances that a nuclear weapon could end up under the control of a terrorist organization. I am also committed to strengthening U.S-Israel relations and have worked to enhance security coordination between our two countries.

(TA): Which legislative priorities do you feel are must

pass before the end of the year? Do you think that with the proposed sequestration cuts the country is headed for a “fiscal cliff” without Congressional action?

(AS): Congress has much to accomplish and not that much time in which to accomplish it. Americans continue to call on Congress to work together. That is why we must set aside politics and take actions to grow our economy, like extend the middle class tax cuts for 114 million middle-class families. We must also continue to invest in our future innovation and economic growth by extending targeted tax incentivizes for businesses like the R&D tax credit.

In addition, Congress must continue to ensure patient access to physician care by preventing drastic cuts to physician reimbursements and permanently reforming the existing Medicare physician payment system. The current payment system has created uncertainty and instability, not only in our health care system but also in the larger economy, and it must be addressed.

(TA): I know you keep an extraordinary schedule, but can you share a little bit with us about your personal life?

What do you like to do in your spare time?

(AS): I am incredibly lucky to have a wonderful husband, two very successful sons, a new daughter-in-law, and my first grandchild on the way. When I am not spending time with my family, I enjoying reading and like to keep active by walking and playing tennis.

U.S. Representative Allyson Y. Schwartz is currently serving her fourth term representing Pennsylvania’s 13th Congressional District. The 13th District includes both the close-knit neighborhoods of Northeast Philadelphia and the first ring suburbs of Montgomery County.

existing conditions; and strengthening benefits for seniors. Most recently, Schwartz has taken the lead on reforming the Medicare physician payment system to protect seniors’ access to their doctors, provide physicians with stability and certainty, and improve quality and efficiency while driving down costs in Medicare.

As a centrist Member of Congress, Schwartz is recognized for her commitment to finding effective, bipartisan solutions to fix our economy, improve the quality of life for Pennsylvania families and communities, and make our nation more secure. She currently serves on two committees in Congress: the Budget Committee, as the Vice Ranking Member, and the Foreign Affairs Committee.

Schwartz is founder and Co-Chair of the Healthcare Innovation Task Force, founder and Co-Chair of the Academic Medicine Caucus, and serves on the Livable Communities Task Force.

Schwartz’s first piece of legislation, which was enacted in 2007, offers tax credits to businesses that hire veterans returning from Iraq and Afghanistan. These credits have helped ease the process of returning home for our soldiers and are an important token of our gratitude for their service.

As a leader on health care policy, Schwartz has played a significant role in strengthening primary care; improving access to quality, affordable coverage for all Americans; ensuring coverage for children with pre-

40 | Transactions | www.pacb.org

Back home, Schwartz has secured funding to revitalize the Delaware riverfront, improve SEPTA stations, create bike and pedestrian paths throughout the Commonwealth, bolster Main Street districts in Lansdale and Ambler, and improve Dilworth Plaza in Philadelphia.

Prior to her service in Congress, Schwartz was a leading healthcare executive in Philadelphia. From 1990 2004, she served as a member of the Pennsylvania State Senate, where she was considered one of the most accomplished legislators for her adeptness at forging bipartisanship relationships. She earned a B.A. from Simmons College in Sociology and a Masters of Social Work from Bryn Mawr College. She is married and has two grown sons.

www.pacb.org | Transactions | 41

DIRECTORS TRAINING Sponsored by:

DIRECTORS TRAINING AGENDA 3:00 - 4:00 PM | THE GAME IS ABOUT TO CHANGE - WHAT A COMMUNITY BANK DIRECTOR NEEDS TO KNOW ABOUT THE NEW CAPITAL RULES This session will provide an overview of the capital rules recently proposed by the federal banking regulators as they are likely to apply to community banking organizations. The session will focus on those aspects of the rules that a community bank director needs to know in order to ensure their institution is prepared for the transition to the new framework. Additionally, because the new rules will almost certainly require community banking organizations to hold more capital, this session will also discuss the primary sources of capital available to such organizations and the means by which a community bank can raise such capital in light of the recently enacted JOBS Act. 4:00 - 4:30 PM | RECEPTION 4:30 - 5:30 | DINNER 5:30 - 6:30 PM | IT’S 2012...DO YOU KNOW WHERE YOUR RISKS ARE? UNDERSTANDING AND PREVENTING COMMUNITY BANK DIRECTOR LIABILITY IN A NEW REGULATORY WORLD As the banking crisis continues to unfold, banking directors and officers find themselves under heightened scrutiny and at increased risk for their personal decisions. An era of heightened regulatory enforcement has led to a vast amount of rules, regulations, and guidance aimed at increasing banking directors’ responsibilities. The goal of this session is to focus on the risks that directors face as individuals given the current regulatory environment and how directors can be proactive in reducing the likelihood of facing individual liability. Specifically, this session will discuss the traditional role and duties of banking directors, the common mistakes and risks that can lead to individual director liability, and the preventative measures that directors and officers of community banks can take to mitigate the risk of individual liability.

CREDITS: Attendees are eligible to earn up to 3 CPE credits.

QUESTIONS: Contact Saundra J. Cunningham, VP-Education Services, at 717.231.7447 or saundra@pacb.org.

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November 7, 2012 Radisson Hotel Valley Forge 1160 First Avenue | King of Prussia, PA 19406 November 13, 2012 Hershey Lodge 325 University Drive | Hershey, PA 17033 November 14, 2012 Scotch Valley Country Club 18 Clubhouse Drive | Hollidaysburg, PA 16648

REGISTER ONLINE AT PACB.ORG/EDUCATION

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135

th A N N U A L

CONVENTION

August 17-20, 2012 • Vail Mountain Resort & Spa • Vail, CO

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th A N N U A L

CONVENTION

August 17-20, 2012 • Vail Mountain Resort & Spa • Vail, CO

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135

th A N N U A L

CONVENTION

August 17-20, 2012 • Vail Mountain Resort & Spa • Vail, CO

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p a c e R www.pacb.org | Transactions | 49

PACB welcomes our

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Debit Card Error Resolution & Regulation E Investigations Heather Briganti, AAP, Mid-Atlantic Payments Association Accountiong For OREO Bruce Richter, CPA & Christopher Lee, CPA, Eide Bailly LLP Meeting the New Requirements for Capital Adequacy & Contingency With a Special Look at Basel III Gary Young, Young & Associates, Inc. Fee Income Challenges: Best New Revenue & Cost Cutting Opportunities Lee Wetherington, AAP, Director of Strategic Insight, Profitstars Safe Desposit Boxes: Drilling, Unpaid Rent, Death & Unclaimed Property Elizabeth Fast, JD & CPA, Bankers Choice Troubled Debt Restructuring Update on Regulatory Guidance S. Wayne Linder, Young & Associates, Inc. Frontline Professionalism: Compliance at Account Opening Ann Brode, Brode Consulting Services, Inc. UBPR Peer Group Comparison: Getting It Right!

Gary J. Young, CEO, Young & Associates, Inc. Business Accounts: Who is Authorized to Open, Close, Transact?

Deborah L. Crawford, gettechnical inc Analyzing Ratios & Cash Flow in Commercial Lending Tim Harrington, CPA, Team Resources Managing E-Sign, E-Statements, & E-Disclosures Nancy Flynn, Founder & Executive Director, The ePolicy Institute

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The March 2012 Deadline Has Passed: Do Your ATMs Meet ADA Accessibility Requirements?

Elizabeth Fast, JD & CPA, Bankers Choice Top 10 IRA Issues: Compliance, Reporting, Death & Distributions Deborah L. Crawford, gettechnical inc Being Prepared For Regulatory Exams Kenneth Proctor, Abound Resources The Board’s Role With The Loan Committee Ann Brode, Brode Consulting Services, Inc. Advanced Collection Tools David L. Osburn, MBA, Osburn & Associates, LLC Wire Transfer Compliance Rhonda Hudson, Compliance +, Inc. Bank Protection Act Robbery Preparedness For All Staff Barry Thompson, CRCM, Thompson Consulting Group, LLC Legal Update - Loans: 2012 In Review Elizabeth Fast, JD & CPA, Bankers Choice Best Practices In IT Risk Assessment Programs Dr. Kevin Streff, Secure Banking Solutions Regulation E Alert: New Requirements For Consumer Foreign Remittance Transfers: Deadline February 7, 2013 Deborah L. Crawford, gettechnical inc

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