Transactions December 2014

THE AWARD-WINNING PUBLICATION OF PENNSYLVANIA ASSOCIATION OF COMMUNITY BANKERS

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

December 2014

Secretary of Banking and Securities

GLENN E. MOYER Captain at the Helm THAT’S MY BANK SOMERSET TRUST COMPANY PAGE 08

GOVERNMENT FIRSTPAC CHAMPIONS PAGE 16

BOND MARKET INTEREST RATES PAGE 52

YOU CAN ADVERTISE IN OUR AWARD-WINNING MAGAZINE!

THE PUBLICATION OF THE PENNSYLVANIA ASSOCIATION OF COMMUNITY BANKERS

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

CONTACT RICH OFSTHUN AT THE WARREN GROUP TODAY FOR MORE INFORMATION ROFSTHUN@THEWARRENGROUP.COM or 800.356.8805 ext. 307

SAVE THE DATE

2014/2015 WEBINARS & TELEPHONE SEMINARS DECEMBER

JANUARY

DECEMBER 2, 2014

JANUARY 6, 2015

Opening Accounts for Nonprofit Organizations Mary-Lou Heighes, Compliance Plus, Inc. DECEMBER 3, 2014 Traditional & Roth IRA Reporting Responsibilities: Requirements, Issues & Answers Frank LaLoggia, LaLoggia Consulting, Inc. DECEMBER 4, 2014 Handling ACH Exceptions & Returns, Including Recent NACHA Rule Changes Luann Kohlmann, WACHA Filing UCC Financing Statements: Getting DECEMBER 9, 2014 it Right!

Todd Sprang & Matthew Kramer, CliftonLarsonAllen, LLP DECEMBER 10, 2014 Supporting Documentation for the ALLL S. Wayne Linder, Young & Associates, Inc, DECEMBER 11, 2014 Community Bank Taxation: Strategies for Short- & Long-Term Planning for the Board & Senior Management Amanda Garnett & John Matthiesen, CliftonLarsonAllen LLP DECEMBER 16, 2014 Advertising Compliance: Website, Print, TV & Radio Elizabeth Fast, Bankers Choice DECEMBER 17, 2014 Denied Loan Requirements: Consumer, Commercial & Residential Ann Brode-Harner, Brode Consulting Services, Inc. DECEMBER 18, 2014 Self-Examination for Fair Lending Compliance Bill Elliott, Young & Associates, Inc.

JANUARY 7, 2015

JANUARY 8, 2015

JANUARY 13, 2015

HMDA: What to Know Now & What’s on the Horizon?

Susan Costonis, Compliance Consulting and Training for Financial Institutions Apple Pay, the Mobile Payments Game Changer: Considerations & Action Steps for Community Banks Lee Wetherington, Jack Henry & Associates, Inc.® Disaster Management & Continuity Planning, Including Critical Vendors Ann Brode-Harner, Brode Consulting Services, Inc. IRA & HSA Update 2014-2015 Tax Years Frank J. LaLoggia, LaLoggia Consulting, Inc. CFPB Rules for Mortgage Loan Originator Compensation Tracy Jean Ashfield, Ashfield & Associates Advanced Endorsements: POAs, Businesses, Trusts & More Mary-Lou Heighes, Compliance Plus, Inc. FDIC Trends & Deficiencies Cited in Matters Requiring Board Attention (MRBA) Elizabeth Fast, Bankers Choice Security Officer Reports to the Board: Compliance & Best Practices in Fulfilling Your Annual Requirement Barry Thompson, Thompson Consulting Group, LLC Call Reports: Basel III & RC-R Changes Line by Line Rhea Hemish, Eide Bailly, LLP Customer Complaint & Response Management Brian Witt, Farleigh Wada Witt Dealing with ACH Tax Refunds: Exceptions, Posting & Bank Responsibilities Luann S. Kohlmann, PAR/WACHA The UBPR: Understanding Peer Group Comparison to Improve Bank Performance Gary J. Young, Young & Associates, Inc.

137th Annual Convention JANUARY 14, 2015

JANUARY 15, 2015

September 5-8, 2014 JANUARY 21, 2015

Ritz Carlton, Amelia Island, Florida JANUARY 22, 2015

JANUARY 23, 2015

JANUARY 27, 2015 JANUARY 28, 2015

JANUARY 29, 2015

Contents December 2014 FEATURE STORIES 08 SOMERSET TRUST COMPANY: NEVER BREAKING TRUST WITH 9-11’S CITIZEN-SOLDIERS 28 SECRETARY GLENN MOYER: A LEGACY OF CREDIBILITY

ARTICLES 16 FirstPAC Champions: Acknowledging Community Banks Participating in the 2014 FirstPAC Campaign 20 Data Breaches Hasten EMV Migration Plans; Latest Debit Issuer Study Shows Renewed Card Security Focus 22 Energy Outlook 2015 24 Are Your Financial Statement Requirements a Burden?

40 Could Corporate Bonds Be In Your Future?

42 Loss Mitigation: Here to Stay 44 Community Banks Must Manage the Risks Associated With Vendor Outsourcing 48 What Merchants Need to Know about EMV Technology 50 Succession Planning: Is Your Organization Prepared?

52 Off and Running: Bond Investors Marking Time Till First Rate Hike 54 News From You

ADVERTISERS 07 18 19 26 27 38 39 46 47 55 56

Secure Banking Solutions Shumaker Williams P.C. John M. Floyd & Associates Herbein + Company, Inc / FOS SNL Banker Rhoads & Sinon LLP COCC Williams HR Solutions, LLC SHAZAM Burns White Baker Tilly

ON THE COVER Secretary Glenn Moyer sits down with PACB to talk about the Department of Banking and Securities’ accomplishments over the past four years and how the department is positioned for emerging trends in the 21st century of banking.

www.pacb.org | Transactions | 3

THE AWARD-WINNING PUBLICATION OF PENNSYLVANIA ASSOCIATION OF COMMUNITY BANKERS

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

Transactions 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. Monday through Friday 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 Lynn L. Bubb, lynn@pacb.org - Chief Operating Officer Saundra J. Cunningham, CMP, saundra@pacb.org - VP–Education Services Eric A. Kovac, eric@pacb.org - Communications Director Patricia L. Kuharic, patty@pacb.org - Administrative Assistant Shirley A. Regan, sar@pacb.org - Comptroller

2014-2015 PACB LEADERSHIP EXECUTIVE COMMITTEE Chairperson - Andrew W. Hasley, Allegheny Valley Bank Chairperson Elect - Terry L. Foster, MCS Bank Vice Chairperson - William E. Wood, Clearfield Bank & Trust Co. Secretary/Treasurer - Frederick P. Henrich, Coatesville Savings Bank President/CEO - Dominic D. DiFrancesco, PACB Immediate Past Chairperson - Dennis D. Cirucci, Alliance Bank General Counsel - Keith A. Clark, Esq., Shumaker Williams, P.C.

STANDING COMMITTEES: CHAIRS & VICE CHAIRS EDUCATION Gary Bradley, Cresson Community Bank Wendy Nagle, C&G Savings Bank FINANCE & BUDGET Terry Sager, William Penn Bank Brendan McGill, Harleysville Savings Bank FIRSTPAC George M. Evans, Indiana First Bank Chuck Leyh, Enterprise Bank LEGISLATIVE Rory Ritrievi, Mid Penn Bank Mark Nelson, Union B&L Savings Bank MARKETING Jennifer Crain, Jonestown Bank & Trust Linda DeAngelis, C&G Savings Bank PACB SERVICES Todd Hurley, First Savings Bank of Perkasie Scott Fritz, FNB of Mifflintown

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PACB CHAIRMAN ANDREW HASLEY

A WORD FROM PACB’S CHAIRMAN

upon us to invest in them.

The holiday season is the time of year most deeply steeped in tradition. Family gatherings, fragrant balsam wreaths, twinkling lights, freshly baked holiday treats, heart-warming songs and services – all are a cherished part of this “most wonderful time of the year.”

The hard-working men and women who show up every day at our community banks to execute our mission should always be expanding their knowledge base by receiving additional training on various critical subject matters: new regulations, leadership training, interest rate risk management, new marketing concepts, use of social media, customer service, and industry best practices and trends… just to name a few.

In our own banks as well, the tug of tradition runs strong. So, too, does the lure of new technology and the cyber-wave of the future.

Winston Churchill said, “A love for tradition has never weakened a nation; indeed, it has strengthened nations in their hour of peril; but the new view must come, the world must roll forward.”

Training also gives our employees the priceless opportunity to network with employees of other banks in like positions. Making human connections is one of the most vital and valuable consequences of training – and of life. Building professional and personal relationships for the future is vital to facing the new millennium. It is also the essence of the holiday season.

Indeed, the world is rolling forward, often at lightning speed. In this ever-changing world, nothing stays the same. That is why tradition should guide us but not bind us.

Please take the opportunity to give your bank and yourself a gift that keeps on giving – take the next step and enroll in PACB training and education opportunities in the New Year.

In developing our business plans and budgets, we must all seriously examine how much money we allocate to training and educating our employees.

Knowing that our employees are our most important asset – our silver and gold – it is incumbent

I wish you all the greatest joy, peace, hope and love this holiday season. I am eager to enter 2015 with so many forward-thinking community leaders and community servants. Until then, enjoy the holiday traditions with those who mean the most to us.

The tension between the past and the future often invades our present-day decision-making.

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FROM THE PRESIDENT/CEO’S DESK Merry Christmas and Happy New Year! I don’t know if you share my surprise, but it is shocking to me that this year passed so quickly. I guess I say that each year, and each year the days pass that much faster. The older I get the more I come to appreciate every available moment I spend with the people I love the most.

This month we are proud to profile a very special community bank. Somerset Trust is located in rural Southwestern Pennsylvania. Nestled just outside the busy suburbs of Pittsburgh, this quaint community found itself in the middle of the war on terrorism when Flight 93 came crashing down on September 11, 2001. Somerset’s battle was not one fought with military weapons. Instead, this community raised its arms to provide support to the many hurting families that lost loved ones on that fateful flight. This small, rural community poured its heart and financial resources into giving to those in need.

Caring for others is what community banking is all about.

We listen to our customers, and we try to meet their needs.

Community banking is not about an established computer program that forces every customer into a box. Community banking is about relationships. When something stands in the way of meeting our community’s financial needs, we fight back. Currently, our greatest battles bring some sense of sanity to the overly burdensome regulatory environment created by the Dodd-Frank legislation.

I don’t think I can recall an Election Day that so dramatically changed our national landscape. Now that US Senator Harry Reid is no longer in charge, the entire US Senate can rejoice. Democrats and Republicans alike must have been disgusted by the roadblocks imposed by Senator Reid. At a time when our nation needed leadership, we were force-fed politics. For the past four years, good policies were being developed and passed by the US House.

These policies languished in the Senate without the slightest hope of even a moment of debate.

Pundits will twist and turn the meaning of last month’s election, but one thing is clear. America came out and voted to end the era of do-nothing politics.

Community bankers are passionate advocates for economic and community development. We care about the abundance of affordable housing, and we want that housing accessible to all. We care about the small businesses that line Main Streets across this nation. These comprise the fabric of our US economy, and we want to see them grow. We care about the financial stability of every hard working family, retired household and young entrepreneur that struggles each day just trying to make a life. We care, and we expect better out of our nation’s leaders.

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PRESIDENT/CEO NICK DIFRANCESCO This month we celebrate the spirit of Christmas. Families and friends will gather, traditions will repeat and each of us will likely pause to count the blessings of the past year and consider the opportunities of the year to come. As an industry we can take heart in knowing that meaningful reforms are now possible, but the benefits gained in last month’s election have a short shelf-life. We have two years until the next national election. We must make every moment count.

PACB has a hefty legislative agenda to carry out during this “window of opportunity.” We look forward to working with our new Governor, Tom Wolf, and new friends in Congress like Brendan Boyle and Ryan Costello. These men and their colleagues share our desires to grow stronger communities throughout our Commonwealth. In order to accomplish our mission, we need our industry–we need you–fully engaged.

As you prepare your community bank agenda for 2015, I urge you to include attendance at ICBA’s Washington Policy Summit in April. PACB will take care of the details, including an aggressive itinerary of visits with Congressional leaders. All our members need do is schedule the event and join our delegation. This investment of time and travel will bear real fruit as we work to clear the path for smart regulatory reform. If you care about these issues, then you must join the effort to make reform happen.

In closing I want to thank the nearly 44,000 professionals across this Commonwealth who make community banking happen in their towns and neighborhoods. Because of you, jobs are created, homes are purchased and families have the opportunity to gather and celebrate their blessings.

Until next month…

3UHIHUUHG SURYLGHU RI

NEVER BREAKING TRUST WITH 9-11’S CITIZEN-SOLDIERS

By: Diane McNaughton 8 | Transactions | www.pacb.org

he World Trade Center. The Pentagon. A field in Somerset County.

That unlikely triumvirate has invaded the American consciousness as the emotion-packed shorthand known as “9-11.”

Few numerical couplings evoke such a powerful groundswell of emotion in every American who lived through the harrowing events of September 11, 2001.

ring with searing courage and catastrophe.

Henry Cook, President and CEO of Somerset Trust Company, realizes the incongruity of these three sites: the center of international commerce and the center of American democracy, paired with the center of tranquility in small-town Pennsylvania.

“We are middle America,” said Cook, the fifth generation of Cooks to lead Somerset Trust Company. “We were the only place in middle America directly impacted by 9-11.”

The memory of the Boeing WE ARE FARMERS AND COAL 757 passenger airplane, on a flight path from Newark, “Nothing bad’s supposed to MINERS… WE WERE LIVING New Jersey to San Francisco, happen here.”

OUR LIVES, WORKING HARD. is still as vivid as the cloudless aquamarine skies and “We are farmers and coal miners… we were living our golden sunlight of that late lives, working hard. Up until then, we were just part of the summer morning. The silver vessel crashed into the quiet world they just flew over.” countryside of Shanksville, Somerset County. All 40 passengers and crew perished in the crash, but not before a determined team of heretofore-strangers fought off four Islamic To have United Airlines Flight 93 crash in southwesthijackers in an act of unmitigated heroism. These spontaneern Pennsylvania and serve as the final resting place for 40 innocent passengers and crew, bestows a heavy ous heroes no doubt saved dozens, if not hundreds, more obligation upon Cook and his family-led bank, one of lives as they successfully diverted the plane from the hijackAmerica’s oldest. ers’ intended target—the U.S. Capitol.

Passenger-hero Todd Beamer’s final words, “Let’s roll,” still

That tragedy forged an unbreakable bond between the www.pacb.org | Transactions | 9

grieving family members of the victims, the bank’s employees and customers, and the entire Shanksville area.

Somerset County became an instant support network for the families.

That collective, extended group hug earned Somerset Trust one of Cook’s fondest recollections.

Cook recalled the huge emotional drain they sustained.

Firefighters are taught to save and protect, and they could do neither. Even the debris was so small, there was little to recover.

Traveling at 580 miles per hour, “The plane just lunged into the ground and exploded into a mushroom cloud,” driving plane pieces deep into the earth, Cook said.

At the first anniversary ceremony, a leader of the Families of Flight 93 rose to his feet and said: “We would never wish this tragedy on anybody. But if it has to happen to anyone, pray it happens in Somerset County.” Those words brought the victims’ families to their feet, and a tidal wave of applause and appreciation washed over the bank leaders and other community leaders present.

“There was enormous frustration.”

The love given was love returned, in multiples.

Soon after the crash, as the shell-shocked families of the fallen began responding to the charred remains at the scene, the townspeople knew where the families were staying, but they dared not invade their privacy. Instead, in a poignant show of support, they lined the streets linking the families’ temporary home to the crash site with people, posters, banners, flags, flowers, ribbons and wreaths.

There is no greater return on investment for community banks than that, Cook believes.

In addition to that reminiscence, the bank’s role in embracing 9-11’s community of grievers and honoring the heroes of Flight 93 also earned them one of PACB’s coveted “Grow Your Community Awards” for 2014. They are no stranger to awards.

“Our goal is to save property and lives but here there was nothing to save and protect. It was devastating to my brother firefighters,” Cook said.

IN THE DAYS AND HOURS AFTER 9-11

“We created this corridor of honor and good wishes,”

Our goal is to save property and lives but here there was

NOTHING TO SAVE AND PROTECT The bank won the Governor’s Impact Award in 2013 and was also a finalist in May 2014. In 2000, before 9-11 even shook our nation’s sense of safety, they were recognized as one of the best Internet banks in the U.S. by a New Hampshire-based publication.

THAT FATEFUL DAY Cook was in a policy meeting at the bank when someone came in and announced that an airplane had hit one of the iconic towers of Manhattan’s World Trade Center, soon after 8:06 a.m. The group turned on the TV, watched the billowing smoke from the North Tower, and thought it was a tragic accident. When the second plane hit, the suspicion of something more sinister spread like the edges of the hungry flames.

Then a rumor hit that an airplane had crashed on the runway in Somerset. Knowing of a local test pilot, Cook assumed, with horror, that the victim was that familiar resident.

Cook, a volunteer firefighter who was inactive at the time of the crash, had many friends respond to the field and the smoking fire at the crash site. Both Shanksville Volunteer Fire Department and Somerset Fire Department responded within minutes.

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Cook recalls.

The Friday after 9-11, the community memorial service at the town’s stately county courthouse attracted thousands of mourners–so many that they had to close the streets of Somerset. It was a collective embrace from a grief-stricken and grateful nation.

On the six-month anniversary of the crash, the families came together again to talk about how to honor the victims and to petition for a national monument. Somerset Trust Company, 125 years strong, opened its restored headquarters building in the heart of Somerset, at the top of a stalwart hill, for their meeting place.

“Tensions, emotions, were running very high,” Cook remembers.

He was the first speaker to address the room, charged with the onerous burden of breaking the ice and setting the tone.

He felt enormous pressure. When he spoke about the building in which they were meeting, under the colorful stained glass dome, and what their presence meant to the people of Somerset, he said tensions in the room eased palpably.

“The ambiance of that room helped them to bring down their pain,” he said.

Visitors at Flight 93 National Memorial pause to reflect on the names of the forty passengers and crew whose courageous actions stopped the terrorists’ planned attack on our nation’s capital on September 11, 2001. To learn more or to plan your visit to Flight 93 National Memorial, please visit www.nps.gov/flni. (photo by Chuck Wagner, Shanksville)

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More than serving as a meeting place, the bank played a leading role not only in constructing the Flight 93 National Memorial, but in commissioning a ship known as the U.S.S. Somerset. They led the fundraising campaign to raise $50,000 from the Somerset area.

Many of his employees remain members of the Friends of Flight 93 today and are planting trees to protect the sacred site.

its unbreakable bond to the Keystone State. They succeeded.

Joined by the Philadelphia Navy League, the bank and others even raised money to sponsor buses to the ship commissioning on March 1, 2014 at Penn’s Landing in Philadelphia.

Fifteen hundred people from Somerset County traveled to Philadelphia for the boat’s commissioning.

U.S.S. SOMERSET A long column of uniformed I WAS SO HONORED TO To have a ship named specifiyoung U.S. sailors and Macally after Somerset County rines saluted them from the BE THERE. IT STILL is deeply meaningful to Cook boat’s massive deck.

BRINGS A TEAR TO MY EYE. and his bank. The U.S.S. Somerset is capable of embarking “I was so honored to be there. a landing force of more than It still brings a tear to my 1,000 Marines, with more than 350 sailors serving as regueye,” Cook said. lar crew members.

The $1.2 billion ship, stretching to 684 feet in length and Cook attended the christening ceremony in New Orleans weighing almost 25,000 tons, will not only support the U.S. for the U.S.S. Somerset, which joined the U.S.S. New York Navy, but will undertake humanitarian relief operations and U.S.S. Arlington to honor all the victims of 9-11. around the world during disasters.

“It was a powerfully moving ceremony.”

That helping role in particular touches Cook’s heart.

After that ceremony, he and the bank began advocating for the commissioning to happen in Pennsylvania because of

Cook said to a Flight 93 family member, “I am so glad the ship also has a peaceful mission.”

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The Flight 93 friend said, “That is the spirit of the people of Somerset, put into that ship.”

“This was the first fight back. This is the beginning of the War on Terror.”

9-11 IN 2014

FLIGHT 93 NATIONAL MEMORIAL

Somerset’s role in 9-11 is still bittersweet.

Cook is proud that Flight 93 National Memorial was the fastest created national memorial in American history.

“This is where our fellow citizens fought back. It’s very powerful.”

He is especially touched that the passengers took a vote on what to do.

“They took a vote,” he repeated. “That overwhelms me.

President George W. Bush signed into law the bill authorizing the construction of a 2,200-acre park managed by THIS IS WHERE OUR the National Park Service.

FELLOW CITIZENS FOUGHT BACK. IT’S VERY POWERFUL.

The site design features a Circle of Embrace modified by the design team, led by Paul and Milena

“They met and voted to alter their destiny.”

Murdoch of Los Angeles.

From the black box and cell phone messages retrieved, we k now that the passengers decided to take over the plane, after reaching a site of low housing density.

Cook served on the 15-member jury charged with picking the design of the memorial. From 1,500 choices, they narrowed the field down to seven or eight, and then to one.

They rushed the cockpit. “These were citizen-soldiers. This is the essence of how this country started.”

“This needed to be honored. To be respected.”

“It was one of the most important things I’ve ever done in my life. You just want to get it right, to honor these people.”

Cook notes that the sixteen-year-olds who come to Somerset today were only two or three years old on that infamous www.pacb.org | Transactions | 13

day. Already a generation is growing up without having lived through 9-11.

The foundation started by Fred Rogers, of public television’s Mr. Rogers’ Neighborhood fame, is working to create a teaching tool for children that will be instructive without being frightening at the memorial site. Ambassadors also tell tales about each passenger, bringing each individual story to life.

That tragedy stings all over again.

And soon after 9-11, another nightmare struck Somerset County, but this one had a jubilant outcome. Nine coal miners trapped in the Quecreek Mine were saved, after a massive, tedious, 77-hour rescue effort in July 2002.

ELEPHANTS

In addition to revering the past, the bank is investing in the future, too. They are working to save elephants AT EVERY LEVEL OF THE BANK, and rhinos from the lucrative ivory trade.

The bank also offered their trust services to the foundation for gratis.

In 2012, the National Park Service completed the plantWE ALL FELT THE IMPORTANCE. ing of 40 Memorial Groves.

EVERYBODY STEPPED UP. To protect dwindling popuIn April 2013, more than 500 volunteers, many from the lations of endangered African elephants, officials at bank, planted 15,500 seedlings across 23 acres. These trees will serve as a windbreak the International Conservation Center in southern Somerset County broke ground in October 2013 for an elefor the trees in the Memorial Groves. phant barn. The new facility will house a one-acre indoor space for four female elephants and their calves. The 724In October of this year, tragedy struck at the site again. A small fire broke out, and smoke once again was seen rising acre site is home to a male elephant named Jackson. from four structures on the hallowed grounds. Some of the artifacts left at the site that were not yet catalogued were Somerset Trust Co provided a matching grant of up to lost, including an American flag donated by the U.S. Con- $50,000 to build the facility. Jackson’s photograph holds a place of honor on the bank’s wall. gress that flew over the U.S. Capitol on 9-11.

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“Who would have thought we would be raising elephants in the snow in the Laurel Highlands on the Allegheny Ridge?” Cook quipped.

PENNSYLVANIA AS POWER PLACE Cook reflects upon the singular role of Pennsylvania in United States history. “I find it extraordinary.”

their calendars, their homes, their hearts.

The bank’s community service record spans the 9-11 Memorial, to a naval vessel, to a mining drama, to an elephant sanctuary on the top of a mountain.

And the message from that unlikely pairing is crystal clear.

“Anything is possible.”

“If you want to learn about the American Revolution, go to Valley Forge. If you want to learn about the Civil War, go to Gettysburg. If you want to see the start of the War on Terror, go to Somerset County.”

That is one message that Som-erset Trust Company will en-sure lives on.

“We are the custodians of history.”

“It just happened to us,” Cook said. “We weren’t raising our hand for anything.”

But like the unsuspecting citizens-soldiers on the ill-fated plane, “We did what had to be done.”

“At every level of the bank, we all felt the importance. Everybody stepped up.”

Diane McNaughton is a freelance writer who has penned numerous news stories, columns, and feature articles for area magazines and newspapers. She is also a legislative aide, a community volunteer, and House of Style author for Pennlive/Harrisburg PatriotNews, and mother of four.

They opened their arms, their wallets, their garden sheds,

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FIRSTPAC CHAMPIONS: ACKNOWLEDGING COMMUNITY BANKS PARTICIPATING IN THE 2014 FIRSTPAC CAMPAIGN By: Tim Arthun Director of Government Relations PACB he community banking industry is thriving with over 44,000 employees in Pennsylvania. Each of these employees has a com commitment to the communities they work and live in as evidenced by their decision to w work for a community bank.

Community banks are active in their communities because they have a desire to be rooted in every aspect of the towns, boroughs, and townships that dot the commonwealth’s landscape. Just as important as being involved in their communities is the need to be involved in the political and regulatory environment that so greatly affects the future of the industry.

FIRSTPAC is the only political action committee exclusively representing community banks in Pennsylvania.

It is a tool used to encourage constructive dialogue with elected state leaders to ensure the viability of the dual banking system and promote legislation that is beneficial 16 | Transactions | www.pacb.org

to community banks and the communities they serve.

PACB would like to thank and recognize those community banks that have been active in engaging in the political dialogue and taking a stand for their future!

FIRSTPAC 2014 CAMPAIGN: PARTICIPATING COMMUNITY BANKS • Allegheny Valley Bank • Alliance Bank • Altoona First Savings Bank • Ambler Savings Bank • Brentwood Bank • The Bryn Mawr Trust Company • C & G Savings Bank • Charleroi Federal Savings Bank • Chelten Hills Savings Bank • Clearfield Bank and Trust Company • Coatesville Savings Bank

• Community Bank • Community First Bank • Community National Bank of NW PA • Community State Bank of Orbisonia • County Savings Bank • Cresson Community Bank • Enterprise Bank • Fidelity Savings and Loan Association • First Federal Savings and Loan Association of Greene County • First National Bank and Trust Company of Newtown • First National Bank of Mifflintown • Fleetwood Bank • The Gratz Bank • Harleysville Savings Bank • Indiana First Bank • Jim Thorpe Neighborhood Bank • Jonestown Bank and Trust Company • Marquette Savings Bank • MCS Bank • Mercer County State Bank • Neffs National Bank • Phoenixville Federal Bank and Trust • Port Richmond Savings • Sewickley Savings Bank • Sharon Savings Bank • Slovenian Savings and Loan Association • Union Building and Loan Savings Bank • United American Savingss Bank • United Savings Bank • William Penn Bank

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 717-231-7447 or tim@pacb.org. g

www.pacb.org | Transactions | 17

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DATA BREACHES HASTEN

LATEST DEBIT ISSUER STUDY SHOWS he Debit Issuer Study, commissioned annually by PULSE, has proven its value during its first nine years. For instance, five years ago, the 2009 Debit Issuer Study predicted the rise of mobile banking. Six years ago, the study identified quick-service restaurants and bill payment as important growth opportunities for debit. Seven years ago, the study stated, “Mobile devices may replace the traditional card as the primary debit transaction source.”

Well, you can’t get them all exactly right.

As has been the case since the first Debit Issuer Study was commissioned in 2005, the 2014 study objectively presents facts about debit card issuer performance and perspectives across electronic payments. It reaches far beyond PULSE issuers, seeking data and insights from 71 banks and credit unions across the spectrum of type, size, location and network participation. In fact, participating financial institutions collectively represent more than 140 million debit cards and 76,000 ATMs. Some findings have been constant over the years, such as optimism about debit growth, concerns about fraud and the constant tweaking of rewards programs.

The impact of major disruptive events also has been tracked and reported, such as how belt tightening following the recession increased consumer preference for debit, and how Regulation II prompted financial institutions to reassess business strategies related to their debit programs.

The 2014 Debit Issuer Study reported on the impact of another major disruptive event: high-profile data breaches.

Many financial institutions are reacting by ramping up their plans to issue EMV cards – something that previously seemed stuck in neutral. The Target breach over the holidays last year proved to be a great motivator for financial institutions and the cardholders they serve.

The highly publicized breach affected between 70 million and 110 million customers, many of whom lost both payment card data and personal information, and impacted every one of the 71 financial institutions that participated in our study. Eighty-four percent reported reissuing all cards exposed in the breach. This is far greater than the 29 percent 20 | Transactions | www.pacb.org

of banks and credit unions that typically reissue exposed cards ds as a standard response to a breach.

Thiss year’s study confirms the industry is reaching a tipping g point toward EMV, with 86 percent of respondents telling us they plan to begin issuing EMV cards in the next two years, a significant increase from 50 percent in 2012.

2. Indeed, the industry continues to come together her to look for solutions to advance EMV implementation plementation and increase security.

SECURITY A KEY OBJECTIVE To say the Target breach was a watershed event nt for the industry is an understatement. nt. Separate reports from the Consumer Bankers kers Association and the Credit Union National ional Association estimate the cost to financial ncial institutions of replacing the payment ment cards compromised in the breach ach at more than $200 million.

The Debit Issuer Study found thatt issuers are responding by re-evaluating valuating their strategies for improving proving card security in 2014.

After er the previous Debit Issuer Study dy showed a drop in net fraud during ing 2012, fraud increased in some areas during 2013, the study dy showed. PIN debit fraud loss rates remained constant at 0.3 cents per transaction on avv erage, ge, while signature debit loss ratess increase to 2.2 cents per transaction, nsaction, up from 2.0 cents.

Overall, erall, the percentage of debit cards ds exposed in data breaches nearly rly tripled in 2013. Fourteen percent cent of all debit cards were exx posed ed last year, compared to five percent in 2012.

012. The resulting 2013 fraud losses to financial institutions ns amounted to 5.7 basis points for signature debit and 0.7 basis points for PIN debit.

Another other measure found that loss rates from international transactions were more than six times greater llast year h

EMV MIGRATION PLANS;

S RENEWED CARD SECURITY FOCUS By: Steve Sievert Executive Vice President PULSE Marketing and Communications compared to 2012. The study found that international tra transactions experienced loss rates of 51 basis points, compa compared to two basis points for domestic card-present transacti transactions (PIN and signature combined).

20.1 per month from 19.4 a year earlier. Metrics such as penetration, active rate and ticket size remained consistent year-over-year. Business debit card usage grew, with transactions rising to 14.5 per active card per month from 13.5.

BROAD COMMITMENT TO EMV Highly publicized data breaches have helped help many financial institutions overcome their hesih tancy to commit to EMV. The cost of the Target Tar breach, paired with EMV’s promise to reduce red financial card fraud, provided the catalyst for finan institutions to re-examine their strategies to migrate to EMV technology.

Tony Hayes, a co-leader of the study and a were partner at Oliver Wyman, said, “We w embrace surprised by the across-the-board embr of EMV by debit issuers. There has bee been a dramatic shift from their tepid inte interest last year to active plans to implement implem EMV beginning in 2015.”

Most issuers said they would be begin issuing EMV debit cards by 22015, with the most common strategy to provide account holders with EMV EM debit cards as part of their regu regular card reissuance cycle. As a result, res institutions say the migration will w take about three years. InternationInternati al travelers and heavy debit users us will be first to migrate, in many m cases in advance of the liability liabi shift in October 2015.

We continue to see a decline in signature debit’s share of total transactions. In 2013, signature debit made up 62 percent of consumer transactions, down slightly from 64 percent in 2012. This continues a trend we saw a year ago, and is driven by that fact that large debit issuers now tend to prefer PIN transactions, due to lower processing costs.

Rewards programs, which declined following Regulation II implementation, are rebounding. Many financial institutions are moving to merchant offers as traditional debit rewards programs have unsustainable economics in the post-Reg II environment for regulated issuers. Almost half (47 percent) of issuers now offer debit rewards programs. Of those, 55 percent feature merchant offers.

The study also revealed continued growth in general purpose reloadable (GPR) prepaid cards, with issuers expecting spending to increase 20 percent and card loads projected to jump 7 percent between 2013 and 2016, to around $250 billion. However, the study shows the percentage of financial institutions that issue prepaid cards dropped 4 percentage points in 2013 to 80 percent.

Overall, the 2014 study showss that debit continues to grow, w, proving its resilience as a pre-ferred method of payment, even n after a turbulent year.

ISSUERS FOCUS ON GROWTH Despite the security issues surs data rounding several high-profile d breaches, we saw growth in both cconwas a sumer and business debit in 2013. This wa welcome development, following a turbulent 2012 with significant regulatory changes. usage During 2013, active cardholders increased their us off d debit b and d increased d transactions per active card d to

Steve Sievert is Executive Vice President of Marketing and Communications for PULSE, a Discover Financial Services company headquartered in Housouston, Texas. PULSE is one of the nation’s leading debit/ ATM networks, serving thousands of banks, credit unions and savings institutions across the country.

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ENERGY OUTLOOK 2015

By: Jennifer Samuels Communication Manager APPI Energy

ast winterâ&#x20AC;&#x2122;s extremely cold temperatures caused high energy costs for unprepared customers, some of whom are still feeling repercussions today. As the 2014-2015 winter season approaches, PACB members are asking if energy prices will continue to rise, and how they should prepare and budget.

The volatile energy markets are dependent on many factors, including legislation, weather events, consumer demand, and environmental concerns. It appears that energy prices reached historic lows in April 2012. Prices are likely to steadily increase through 2017. Several influencers come into play when forecasting 2015 energy 22 | Transactions | www.pacb.org

price trends. Extreme weather, Environmental Protection Agency (EPA) regulations, and domestic natural gas resources are three of many important considerations that impact todayâ&#x20AC;&#x2122;s energy price trends.

WEATHER Weather forecasters are predicting another cold winter in the U.S. Below-normal temperatures are expected to encompass two-thirds of the U.S., particularly the East Coast and Gulf Coast. Above-average precipitation and heavy snowfall are expected in these regions. Parts of the Midwest and New England were blanketed in snow as early as the first week of November 2014. The jet stream over the northern

region of the U.S. is expected to be erratic, which could force cold air from the polar and Arctic regions into the U.S., particularly into the East Coast and Deep South.

are at least 25 years old. Modernizing the U.S. grid system will cost $673 billion by 2020, according to the American Society of Civil Engineers.

The West Coast, on the other hand, will experience abovenormal temperatures, which means severe drought conditions could worsen. In California, where 60% of the state is suffering the worst category of drought, mountainous snowfall is crucial for recovery. Snowfall amounts, which depend on the strength of winter storms, are difficult to forecast more than seven days in advance. If extreme cold weather forecasts are accurate, electricity consumers should prepare for the risk of more electricity price volatility.

STABILIZE ENERGY COSTS

ELECTRICITY GENERATION New federal regulations on power plant emissions have prompted electric utilities and generators to schedule two dozen coal-burning generators in the U.S. for decommissioning, beginning in 2015. On April 29, 2014, the U.S. Supreme Court upheld the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), which is expected to cost power plant operators $800 million per year, starting in 2015. The EIA forecasts 16% of coal-fired capacity available at the end of 2012 will be retired by 2020. The increasing use of natural gas for power generation will put upward pressure on prices for both natural gas and electricity.

Fossil fuel consumption and emissions increase substantially during extreme temperatures. Cold weather increases the cost of power generation from gas, coal, and nuclear power plants. When the polar vortex triggered very cold temperatures in the U.S. in early 2014, energy use and carbon dioxide emissions notably increased.

ELECTRICITY DELIVERY Power outages cost the U.S. economy $18 billion to $33 billion per year. The average U.S. power plant is 30 years old, while 70% of the grid’s transmission lines and transformers

Customers who used variable or index prices for electricity supply in January 2014 experienced problematic cost increases. Some electricity suppliers quadrupled the variable price billed to customers from December 2013 through March 2014.

Weather-related events in January and February 2014 are examples of how unforeseen and uncontrollable circumstances can greatly affect electricity prices that impact RTOs, suppliers, and customers. Energy consumers are encouraged to mitigate risk exposure to volatile energy prices by using a fixed-price supply contract as soon as possible, to cover supply through at least March 2015. Customers unwilling to commit to a one-to-three year supply contract should at least consider locking in a short-term, four-to-five month supply solution.

Some industry experts now consider extreme weather, and resulting electricity price volatility, as the new norm. Achieving budget certainty now for this winter’s electricity costs is a prudent business decision.

Resources are available by request.

Jennifer Samuels is Communication Manager for APPI Energy. For more information, contact consulting firm APPI Energy at 800-520-6685 or info@appienergy.com.

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ARE YOUR FINANCIAL STATEMENT REQUIREMENTS A BURDEN? YOU MAY WANT TO CONSIDER WHETHER THE FINANCIAL REPORTING FRAMEWORK FOR SMALL AND MEDIUMSIZED ENTITIES IS A BETTER FIT FOR YOUR CLIENTS.

By: Allison M. Henry, CPA Vice President, Professional & Technical Standards PICPA

inancial reporting framework alternatives to U.S. generally accepted accounting principles (GAAP) are proliferating. The primary drivers of this trend are the increasing complexity of GAAP and the resultant cost of compliance. The 24 | Transactions | www.pacb.org

American Institute for Certified Public Accountants (AICPA) recently created a new financial reporting framework for privately held entities that is more robust than many other special purpose frameworks (such as cash or tax basis), and could be a cost-effective alternative for your clients.

BIG GAAP VS SMALL GAAP The debate over standards for privately held entities has been ongoing for decades. But on May 23, 2012, the Financial Accounting Foundation (the parent organization to the Financial Accounting Standards Board (FASB) which establishes GAAP) – with support of the AICPA and the National Association of the State Boards of Accountancy – created the Private Company Council. This group is tasked with proposing reporting alternatives for privately held entities that the FASB may endorse and include in GAAP after its due process. The AICPA, which has been driving much of the effort for change, issued a statement of support for the new FASB process, and announced that it would be creating a new, non-GAAP, set of accounting and reporting standards for privately held entities. About a year later AICPA issued the new Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs).

ABOUT THE FRF FOR SMES The FRF for SME framework is a nonauthoritative accounting and financial reporting framework. It is streamlined (at several hundred pages compared with the thousands for GAAP), and therefore more cost-effective. The framework draws from traditional accounting methods, along with some accrual income tax methods, and primarily uses historical cost. There is no guidance in the framework for special industries or complex areas that are typically not encountered by smaller-sized, privately held entities, such as extraordinary items, accounting for stock options, or derivatives. Unlike GAAP, parent-only financial statements are permitted under the FRF for SME framework. Key differences between statements using this framework and GAAP must be included in the footnotes. Additionally, the framework includes numerous options, so these choices must be explained in the footnotes and must be used consistently from one period to the next. For example, start-up costs can be expensed or capitalized, subsidiaries can be consolidated or accounted for under the equity method, and income taxes can be accounted for using the taxes payable method and the deferred income taxes method. Ultimately, the statements look similar to what financial statement users are accustomed to seeing. Specifically, the framework requires a statement of financial position, statement of operations, statement of changes in equity (may be in the footnotes), statement of cash flows, and notes.

This framework is designed for small and medium-sized, owner-managed, for-profit entities. In other words, this is a framework that can be used by main street businesses.

Direct access to management by financial statement users is critical. Please note, the framework would not be applicable for the following entities: • Those that need GAAP financial statements to comply with debt agreements, grant agreements, regulatory provisions, etc.

• Those that operate in an industry that has highly specialized accounting guidance.

• Those that engage in overly complicated transactions.

• Those that have significant foreign operations.

• Those that have any intention of going public.

A LOOK AHEAD Several large FASB standards changes are looming, and that may provide further incentive for privately held entities to consider AICPA’s new FRF for SME framework. Bankers must understand the current standard-setting trends and new financial reporting options when clients come call-ing. The AICPA has a compre-hensive site for the framework, including a toolkit for financial statement users.

Allison, with the PICPA since 2003, works to elevate practice quality through advocacy, outreach, and education. She currently administers PICPA’s Joint Ethics Enforcement Program am with the American Institute of Certified Public Accountants (AICPA), and serves as the PICPA staff liaison for eight statewide committees: Peer Review, Professional Ethics, Accounting and Auditing Procedures, Forensic and Litigation Services, Business Valuation, Notfor-Profit, Employee Benefits Plan, and IT Assurance.

Allison also is technical staff liaison for a number of working groups that reach out to regulatory agencies in Pennsylvania on behalf of the profession. She frequently shares her expertise by speaking at PICPA events, hosting webinars on key topics, writing for the CPA Now blog, writing articles for the Pennsylvania CPA Journal, and fielding technical inquiries.

Before joining the PICPA Allison spent several years as a senior manager with a regional accounting firm and nine years at Deloitte & Touche LLP, where she worked in the assurance and advisory services group. Allison’s diverse client service experience has included many not-for-profit, health care, and world relief organizations, as well as small and large manufacturing, distribution, and other service-oriented entities. She has also served as the designated employee benefits specialist.

Allison is a graduate of Washington University in St. Louis, and holds an accounting equivalency from the University of Arkansas in Little Rock. She spent four years in internal accounting positions, including the Department of Defense, while her husband was serving on active duty with the U.S. Army. Allison is a member of the PICPA and AICPA. She volunteers for the children’s ministry at Washington Crossing United Methodist Church. She is a ahenry@picpa.prg native of St. Louis, Mo., and is an avid runner.

www.pacb.org | Transactions | 25

The Stability You Want should come with the service you deserve

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PACB members: Learn how to preserve your noninterest margin and solve five other common banking challenges. Contact Julie Jones at 434.951.4419; partners@SNL.com.

SEC

A LEGACY O

28 | Transactions | www.pacb.org

CRETARY GLENN MOYER:

F CREDIBILITY

www.pacb.org | Transactions | 29

We try to take the common sense approach to modernizing but we really appreciate the power of teamwork.

30 | Transactions | www.pacb.org

Nick DiFrancesco (ND): Thank you for taking the time to sit down and recap all the work of the department since your appointment in 2011. Looking back over the past four years you have accomplished a lot. What do you consider to be your greatest accomplishment in the job?

The passage of all of these bills, as I’ve come to learn, coming into government service from the private sector, really was meant to try and position Pennsylvania’s financial services industries to be competitive in the 21st century.

You know, we’ve had remarkable input from the trade industry groups like the PACB, and the other groups that are involved with the issues we focus on, and we’ve had terrific cooperation on the part of the general assembly. I attribute that in large part to, not only to the overall credibility of the department, but someone like a Paul Wentzel (our Senior Legislative and Policy Director) on your staff who can guide and shepIf I had to step back and look herd legislation through at what we’ve accomplished and ask, what was the biggest and have the experience and MY MINDSET IS THAT success and what perhaps credibility that the legislaMOVING PARTS ARE A GOOD will have the biggest impact ture and their senior staffs on the industries we’re inreally trust. We try to take THING, NOT A BAD THING. volved with at the Banking the common sense approach and Securities Departments? to modernizing, but we reI’d have to point to the legislation that updates and modern- ally appreciate the power of teamwork! izes. That was our approach, looking at ways to modernize all of the major lines of business that we touch and essen- ND: I want to talk about that a little bit. Framing this proptially they were all seen through to completion. erly, the goals you’ve accomplished are even more amazing considering you did those things in the height of the Wall To run down the list first there’s the Banking Code, second Street backlash. While the debate in our nation’s capital the Loan Interest Protection Law, third the Department of was heated rhetoric, you accomplished major code changes Banking and Securities Code, the repeal of the Savings Asthrough the state legislature without that backlash ever besociation Code, the Credit Union Code, the Mortgage Licens- ing apparent. Your teamwork with the legislature really did ing Act, the Securities Act of 1972, Debt Settlement Services an exceptional job.

Act, and finally, something that had been discussed by the Joint State Government Commission for several years, the GM: Coming out of a period like the great recession is eiMotor Vehicle Sales Finance Act. ther the worst time to take on this type of policy agenda or

Secretary Glenn Moyer (GM): First of all it’s hard to put the four years into perspective when there’s been a tremendous amount of moving parts. My mindset is that moving parts are a good thing, not a bad thing. Thank goodness that we had a lot of possibilities when we came in.

www.pacb.org | Transactions | 31

it’s possibly the most advantageous. We chose to take a forward looking, fact-based approach and keep the emotions in check and on the sideline. It was a thought process of what do we need to give the different industries in order to give them the best chance, coming out of a difficult economic environment, to proceed going forward.

When you take that forward-looking approach and you understand that, our legislature, senior staff members and the industry groups really understand the value, for instance in the banking world, of the community banking model. To say look, let’s make sure that there’s not an unintended consequence that the community banking model can’t at least, although being challenged further, do well for the citizens of the commonwealth.

Once we painted the portrait that way there were a lot of people that said you know what, we want to be part of the solution. It was eye opening to me as a novice as far as the process, but the impact was always out in front of us to say, “If we can get this accomplished in a manner that makes sense, then we have positioned ourselves to look forward rather than backward.”

ND: We’ve very much appreciated your leadership in this role as Secretary of Banking and Securities Department. Of

tionships, and you don’t steal mine.” Somewhere after 1982 that changed. If you were going to be a successful commercial lender you were going to have to do the best you could for your existing portfolio accounts, but you’d also have to go out and convince people to bank with your organization.

Going from that passive, but good service model to active, competitive, but still good service is really one of the most significant paradigm shifts in banking.

The constant in all of this is still relationship banking. At the end of the day, small businesses and consumers want to know somebody they can go to when they have a question, or more importantly, when they have a problem.

It’s the investment in people. It’s the investment in relationship banking in the business arena, consumer arena, or trust asset management arena that has not changed. With advances in technology and commoditization of products I would argue that relationship banking is even more important today than in the past.

ND: What do you see going forward? Do you see consolidation of the community banking industry continuing in Pennsylvania for some period of time?

GM: We’re experiencing consolidation right now and I

The constant in all of this

IS STILL RELATIONSHIP BANKING course having a community banker in a regulatory role is a good thing because you bring a common sense perspective to the table. The industry has changed a lot so I’d like to get your thoughts on the changes you’ve seen through your experience and also your thoughts on an industry that is likely to go through further consolidation and what that means to the economy of Pennsylvania.

GM: Relative to my experience in the banking arena, I started in 1977 as I was coming out of the Air Force. I was fortunate enough to be accepted into a high quality and well-respected management training program at American Bank and Trust Co. of PA in Reading, PA. That really, as I look back now, was the building block that made all the difference.

As I think now about what is different and where we might be, there is no doubt the lack of investment in education of future leaders in the banking arena is a challenge that is becoming more obvious every day. The banking community is going to have to look at what is possible in that regard.

Now, if I were to look at the one thing that has changed the most, in 1977 when I was learning to be a commercial lender, one of the things you would learn that there was a tacit gentlemen’s agreement, “I don’t steal your commercial rela32 | Transactions | www.pacb.org

think there will be more in the not so distant future, and a few in the near future. I know there are some people that judge Pennsylvania banking by the number of charters, which now stands at less than 200. I understand that, but for me it’s less a focus on the number of charters versus the number of community-oriented banks that we have, both larger and smaller. I was pleased to hear BB&T president and CEO Kelly King speak about continuing with Susquehanna Bank’s community business approach once their acquisition is implemented. If I see two good communityfocused banks getting together, and if that dynamic merger gives their business model more staying power, it’s hard for me to see that as a bad thing.

Do I expect more M&A (merger and acquisition) activity?

Sure. Do I expect a rapid declination in the number of charters? Not really.

ND: I think last week’s announcements revealed, at least to me, that community banks are looking for partners that might not traditionally be in their footprint, but can share a culture and some of those expensive compliance issues, and continue to serve the communities where they do business in.

GM: Geography to me has always been just one of a litany of variables when you look at partners coming together. You

With advances in technology and commoditization of products I would argue that relationship banking is even more important today than in the past. www.pacb.org | Transactions | 33

can look at organizations that have grown both organically and through M&A and they look like American cheese.

You can look at others that look like Swiss cheese. Then you have to say, both of those models are working successfully so it must be an issue of efficiency, must be issues of culture, and must be an issue of cumulative shareholder value as they look forward.

internationally, something like a Bitcoin points out the inefficiencies that have evolved in how the traditional payment processors, including the Federal Reserve, relate to their customers and money. Certainly I can’t predict if Bitcoin is going to emerge as a significant or mainstream player in the financial markets in the coming years, but I am confident that the traditional payment providers are looking at ways to do things differently and better.

ND: Clearly there have been several challenges with the You and I recently heard the Federal Reserve talk about a changing nature of the market, including the evolution of fresh look at their payment systems to make it more contechnology. If you were to take ten bankers and ask them venient, more efficient, and less costly. I think those are if ApplePay will have an impact on their business you’d all going to be at the base get ten different opinions. of how we look at licensing How do we regulate an evand overseeing say someer-evolving industry that is EMBEDDED IN THE SYSTEM IS A thing like a virtual curdoubtful to mirror the inNEED TO ADDRESS THE VIRTUAL rency through the money dustry of the past? transmission process. It is a CURRENCIES THAT ARE OUT THERE. GM: The Department of concept that can be difficult Banking and Securities, in adfor people to get their heads dition to being a firm but fair, prescriptive-oriented regulator around because it has nothing to do with the hard curlooking at safety and soundness of our institutions, also has rencies that we have come to rely on in our daily lives. to keep looking to the emerging horizon. When I talk about the broad range of legislation we accomplished, one item that The biggest challenge is that as the efficiency occurs, as lower was not finalized was the state’s money transmitter’s act, and costs are put in, if someone has a problem where do they go that was a very deliberate and conscious decision. for problem resolution? The risk embedded in that today is very large and I think we all have to be thinking about ways to reduce that risk if it is to be accepted as a mainstream form Part of that decision was based on the fact that embedded in the system is a need to address the virtual currencies of currency. Bitcoin and virtual currencies are certainly on that are out there. As we stand back and look at it, why did our radar screen and will remain a focus of this department.

Bitcoin, if you assume it is a legitimate effort and I want to believe it is, why did that come about? I think it comes The other one I get asked a lot about is peer-to-peer (P2P) lending. It’s a relatively new way to move capital that really down to within our payment system, both nationally and 34 | Transactions | www.pacb.org

can’t be ignored because it’s really picking up. I want to say two things about this. First, there are no P2P lenders that are licensed to do business in Pennsylvania and secondly, lenders that are soliciting or making loans to Pennsylvania residents must be licensed under the Consumer Discount Company Act. We are trying to follow what’s going on in the peer-topeer lending arena and make sure people that are involved in it today understand that there is a licensing procedure so we’ll see how that plays out over the next few years.

there’s no right or wrong answer. In the last four years, we’ve seen 17 federally chartered banks choose to convert to a state charter and we have had no state chartered banks convert to a federal charter.

I attribute that to the boards and directors looking hard and seriously at what provides the best choice for them based on their business model and what they hope to accomplish.

But it also speaks to the dedication and professionalism of the state Department of Banking and Securities staff. It has ND: It’s certainly a constantly changing industry with been a tremendous opportunity for me to work with and plenty to do on the horizon. You’ve been a staunch ad- learn from the staff at the department. My hope is that I have been able to share some vocate for the preservation of my private sector experiof the dual banking system and there have been several THE INSTITUTIONS THAT ARE OVERSEEN BY ence is a positive manner that will help the department conversions to state charTHE DEPARTMENT, THE STATE CHARTERS, thrive going forward. The ters from federal charters. institutions that are overCan you share a little on ARE REALLY WELL SERVED. seen by the department, the your perspective? state charters, are really well GM: It’s been pretty gratifying to see the number of Penn- served. Our goal is that they feel like they’re getting good sylvania banks that have made the state charter their value for their money. “charter of choice.” The best thing about the depository world is that every board and every single management ND: You’ve been very deliberate about acknowledging the team has a choice. Take for example my counterpart in the work of the entire department and to an extent shedding the Insurance Department. If you want to be in the insurance limelight that comes with being a cabinet secretary. Talk a business in Pennsylvania, you have a state license. In the little about the team environment here. banking arena you can choose to be a federally chartered or a state chartered organization.

GM: Probably the best example I can point to regarding teamwork is the merger of the former Pennsylvania SecuriI firmly believe that whatever this department and I can do ties Commission into the Department of Banking that was to make sure that the dual banking option remains viable effective in October of 2012. I can tell you that there was and strong is worth everyone’s effort to do that, because nothing about the merger in any transition plan when I www.pacb.org | Transactions | 35

walked into the department and it was unplanned for most of the first year. However, this administration was focused on, “are there more efficient ways to still do an effective job by bringing together different government organizations?”

I feel good that we were able to get a good piece of legislation, Act 86 of 2012, through the general assembly after the merger was proposed by the Governor.

like a much leaner operation.

GM: It definitely is a leaner department. When the merger was proposed, the Office of Budget estimated there would be about 10-12% savings over the operating expenses of the Securities Commission. That was savings coming from pure redundancies like not needing two HR departments, two IT departments, two finance deI’m very pleased with how both staffs worked together to partments, etc… When we got people around the table implement; I’ll use the term a “rare bird,” of two govern- and started talking about how they did their work in the ment agencies merging and our whole mantra was that securities industry and how we did our work in the dewe would do so without “missing a beat.” While I’m sure pository and non-depository world, we found operationwe didn’t do everything peral similarities that would fectly, by keeping that goal allow for greater efficienand focus on the clients that OUR PEOPLE WERE ABLE TO WADE THROUGH cies. One of those was office we’re serving out in front space. We were able to move A MYRIAD OF CHALLENGES AND FOUND A of us, our people were able them from their building WAY TO BRING THINGS TOGETHER. to wade through a myriad into what was Department of challenges and found a of Banking space here in way to bring things together.

Harrisburg. That gets you What is remarkable is that we reached consensus on just further down the road to resolving issues when people about every front that had any impact, and we are well are seeing each other on a daily basis. along in that merger.

We ended up having savings that are in the 30-40% range of At the end of the day, we wanted it to be an integrated de- the previous operating costs of the securities commission. The partment and not something where the merged partner good news is that even though the funding is separated, the felt they were bolted on the side. That’s been what we’ve overhead costs have reduced, because they’re being shared, tried to accomplish and this speaks greatly to the team so that the burden of the entiree department is not on the Banking effort at the department. g Fund. That will hopefully servee those that pay into the Banking ND: Can you talk about some of those efficiencies that g came via the merger since it’s been integrated? It seems Fund over the longer term.

Glenn E. Moyer was appointed by Pennsylvania Governor Tom Corbett on April 1, 2011, and confirmed as Secretary of Banking by unanimous vote of the Pennsylvania Senate on May 3, 2011. [Note: On Oct. 1, 2012, he became Secretary of Banking and Securities following the merger of the Pennsylvania Securities Commission into the Department of Banking, which was mandated by Act 86 of 2012.]

Secretary Moyer provides overall leadership to the Pennsylvania Department of Banking and Securities, which fosters strong financial services industries for the commonwealth by ensuring the safety and soundness of statechartered financial institutions, the compliance with laws that govern financial service entities and the protection of consumers and investors in financial matters. The department supervises more than 215 Pennsylvania statechartered banks, credit unions and trust companies, and licenses and registers approximately 220,000 financial services professionals and companies that provide consumer loans, investment services and other financial services.

With the recent merger, the department also reviews more than 5,000 securities offerings annually.

By virtue of his position as Secretary of Banking and Securities, Moyer also serves as Chairman of the Board of

36 | Transactions | www.pacb.org

Directors of the Pennsylvania Housing Finance Agency and as a board director of six other state government-related entities.

Moyer was born and raised in the Boyertown area of southeastern Pennsylvastern Pennsylva nia. He is a graduate of Penn State University, where he earned a bachelor’s degree in secondary education. He also earned master’s degrees in education from Eastern New Mexico University and business administration from St. Joseph’s University in Philadelphia. Following graduation from college, he served as an officer in the U.S. Air Force, stationed at Cannon Air Force Base in New Mexico.

Upon his return to Pennsylvania, Moyer joined the American Bank and Trust Co. of PA, Reading, which later became Meridian Bank, Reading. Subsequently, he served as president and CEO of The Elverson National Bank and National Penn Bank and its holding company, National Penn Bancshares, Inc., Boyertown.

Moyer and his wife, Jane, reside in Oley Township, Berks County, and have two married children and two grandchildren.

www.pacb.org | Transactions | 37

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Launched in 1967, COCC was founded by its clients to provide them with more control over features, costs, and the delivery of their technology needs. Many of these original founding financial institutions are still active COCC clients today. This unique cooperative structure has set COCC apart from the competition and is one of the driving forces behind the success of COCC and the financial institution it serves.

Today, COCC is the fastest growing financial data processing company in the United States and recognized as a leader in delivering innovation and the quality service financial institutions demand and deserve.

by superior customer service, COCC has established a track record second to none in delivering on their commitments.

COCC is the only financial technology company to have successfully migrated its entire client base from a proprietary legacy system to an open, next generation relational database core system. This migration has helped clients lower their operations costs, improve their ability to service their members, and to positioned their financial institutions to succeed in the increasingly competitive financial service market place.

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COULD CORPO BE IN YOUR ommunity banks have not traditionally raised capital by issuing corporate bonds, but have offered equity in the bank or holding company. Although bonds require the payment of interest, they have the benefit of not diluting the interests of existing shareholders and offer significant flexibility with respect to their terms, such as duration and place in the capital structure.

One of the primary reasons that community banks have not availed themselves of corporate bonds is the fact that investors normally want instruments that have been rated and the major rating agencies have not viewed community banks as a market they wished to pursue. In 2014, however, the situation has begun to change. Articles in the Wall Street Journal and other publications have noted the willingness of Kroll Bond Rating Agency, Inc., a relatively new rating agency, to rate community banks with $1 billion to $10 billion in assets. Kroll anticipated it would rate approximately twenty banks by the end of October. Following Krollâ&#x20AC;&#x2122;s lead, Standard & Poor and Moodyâ&#x20AC;&#x2122;s have also evidenced an interest in entering the community bank market.

40 | Transactions | www.pacb.org

Although not very many debt offerings have occurred yet, a review of publicly available information concerning nine transactions that have taken place in 2014 shows both some patterns and some evidence of the flexibility available to the issuer.

Five of the transactions involved registration of the debt with the Securities and Exchange Commission and three were exempt from registration under the SECâ&#x20AC;&#x2122;s Regulation D (which contains certain requirements as to the nature of the offerees and involves the filing of a brief form with the SEC, but does not result in a non-SECreporting company being required to file reports). The ninth offering, some of the details of which were reported in a newspaper article, was apparently done under another exemption from Federal registration, since no filing was made with the SEC. For the most part the debt was subordinated, but two transactions involved senior unsecured debt.

The size of the transactions varied from approximately $12 million to $245

ORATE BONDS R FUTURE? By: Jane G. Davis Shumaker Williams, P.C. million, with all of the Regulation D offerings under $16 million and all the others at $65 million or above. The most common maturity was ten years, but one transaction included both five and fifteen year notes and one had a stated maturity of fifteen years and was callable after ten years; if the redemption did not occur, the interest rate changed from a fixed 6.0% to a floating rate. As would be expected, the interest rate was higher for longer term and for subordinated debt. The rate for the offerings where the information was publicly available ranged from 4.125% to 7.25%. The underwritersâ&#x20AC;&#x2122; discount varied from .65% to 1.125% on the registered offerings, while the placement agent fee for the Regulation D transactions ranged from 1.45% to 3.45.

Expenses for the registered debt (legal and accounting fees, trustee fees, printing, etc.) were between $300,000 and $600,000.

While it is becoming apparent that community banks of a certain size are already finding a market for their debt instruments and that they have

the ability to tailor that debt to their particular situation, it is also possible that, as investors become more used to buying that debt they will also become more comfortable with the conceptt of investing in debt is-sued by smaller com-munity banks.

Ms. Davis is a shareholder, a member of the Corporate and Financial Services Department and heads the Firmâ&#x20AC;&#x2122;s Securities ecurities Law practice. She counsels clients with respect to corporate and commercial matters, mergers and acquisitions, securities regulation and corporate governance. As part of the Firmâ&#x20AC;&#x2122;s International practice group, she also assists clients with transactions abroad and advises foreign companies establishing a presence in the U.S.

www.pacb.org | Transactions | 41

LOSS MITIGATION: HERE TO STAY

By: Christopher R. Arthur and Kristian E. White Steptoe Johnson anks always have offered assistance to borrowers in default, especially on loans secured by a borrower’s primary residence. Prior to 2008, assistance oftentimes came in the form of forbearance agreements or deeds in lieu of foreclosure. Today, loss mitigation often in42 | Transactions | www.pacb.org

cludes reducing the principal and/or interest rate; extending the maturity date; or waiving all arrearages. Loss mitigation is defined as “a process used by mortgage lenders to work with buyers who are delinquent on their home loans.”1 With the enactment of Home Affordable Modification Program (“HAMP”) in 20092, loss mitigation became mandatory for

many banks. Also, loan modifications replaced forbearance agreements as the primary loss mitigation tool. HAMP required banks to examine the situation of any borrower who was in default on a mortgage to determine whether a loan modification could be useful. Congress required that banks determine whether borrowers are eligible for loan modifications when it enacted Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (“Dodd-Frank”).3 Dodd-Frank, which became effective on January 10, 2014, added significant regulations. Dodd-Frank established the Consumer Financial Protection Bureau (“CFPB”) which has oversight powers and establishes guidelines and regulatory mandates. CFPB enacted regulations requiring banks to take more proactive steps relating to loss mitigation options. Banks which are not exempt now must consider a loan modification for every borrower who is in default. Banks may be prohibited, or at least delayed, from foreclosing or taking possession of their secured collateral after a default.

Regulations include: 1. Written notice that loss mitigation options may be available; 2. First foreclosure notice is not permitted until borrower is more than 120 days in default; 3. Foreclosure cannot move forward while a pending loan modification application is under review; 4. Disclosures are required to ensure borrowers understand the current state of their mortgage; 5. Early warnings that the loan is subject to have a change in the interest rate; and 6. Direct access to personnel who can assist the borrower with the loss mitigation applications.

Smaller banks may be exempt from points 1, 3, 5, and 6, especially if the bank services less than 5,000 mortgage loans.4 The 5,000 rule is determined annually on January 1st. However, the risk can be severe for violating any CFPB regulation, including daily penalties per violation from $5,000 to $1,000,000.

Due to the general confusion regarding loss mitigation options, borrowers, lawyers, and courts consistently express frustrations dealing with the strict requirements of programs like HAMP. Borrowers’ frustrations can lead to lawsuits. Lawsuits typically assert that the bank failed to review the borrower’s request for an appropriate loan modification, that the lender breached a duty of good faith and fair dealing by failing to enter into a loan modification agreement, that the lender committed fraud by making various misrepresentations relating to the loan modification process, and that the lender committed fraud by failing to follow loan modification guidelines. In such cases, courts oftentimes conclude that a jury must decide whether the bank made any misrepresentations. Production of the comment logs of the bank, and policies and procedures relating to loss mitigation oftentimes must be disclosed in these lawsuits.

What can banks do to lessen the risk of a lawsuit? First, bank employees must be educated regarding the best ways

to communicate with a borrower regarding loss mitigation options. Lawsuits typically are a direct result of a “he said” “she said” scenario. Avoid oral explanations of why a consumer was denied approval of a loan modification. Written explanations prevent heated exchanges with a denied borrower. Second, remove certain buzz words from bank employees’ vernacular. Specifically, “you are not eligible because you are current on your loan” or, “HAMP requires a borrower to be in default” or, “you may be eligible if you miss a few payments”. Finally, banks should implement policies to ensure that communications are standard and the content of those communications are well documented.

Loan modifications, short sales, deeds in lieu of foreclosure, and other alternatives to foreclosure sales are likely here to stay. Loss mitigation options will likely expand in the future.

Therefore, banks must educate their employees as to how to handle any borrower who is in default. At a minimum, recognize that the borrower is in a difficult situation, and therefore, empathize. Navigating the new loss mitigation regulations enacted by CFPB under Dodd-Frank may be a trying experience, but proper legal guidance and employee training may help prevent loss mitigation lawsuits.

1

www.findwell.com/real-estate-dictionary/definition/lossmitigation.com 12 U.S.C. § 5219 (2009).

3 12 U.S.C. § 5301, et al (2010).

2

4 12 U.S.C. § 5512; see also 12 CFR R 1026.41(e)(4)(iii); see also commentt

41(e)(4)(ii)-2.ii.

Mr. Arthur is an attorney in the Charleston, West Virginia office of Steptoe & Johnson PLLC who practices in the areas of banking, bankruptcy, creditors’ rights, real estate, and commer commercial transactions. He has been West Virginia counsel for several major financial institutions for over a decade and has represented their rights in hundreds of consumer litigation actions.

He also assists financiall institutions in complying g with the new regulatory y laws recently enacted.

Mr. White is the Office Managing Member of the Southpointe, Pennsylvania office of Steptoe & Johnson PLLC. He practices in the areas of banking, real estate, commercial al transactions, and energy. He is licensed in Pennsylvania and West Virginia and is a Certified Public Accountant.

www.pacb.org | Transactions | 43

COMMUNITY THE R

utsourcing criticall functions f and d services to trusted vendors is essential to the viability of any financial institution. However, the reliance on third party vendors may present risks to a bank’s earnings, ccapital, or reputation, as well as to consumers. Effective management of risks associated with vendor relationships is not only a required component of a community bank’s compliance management system; it is also a matter of sound business practice.

Regulatory oversight of banks extends to vendors who provide a material service to the bank. Examples of vendors to whom material services may be outsourced include ATM service providers, alternative lending providers, payment processors, automobile dealers, mortgage brokers, attorneys, accountants, collection agencies, debt buyers and IT providers. There are numerous factors that determine whether a vendor is providing a material service; however, the risk to confidential consumer data is of utmost concern. The greater the vendor’s access to sensitive consumer information, the greater the number of consumers impacted by the vendor’s services, the greater the need to identify and control risk.

The CFPB, FDIC and OCC have issued guidance which outlines the expectations for managing third party risk.

An institution’s risk management program is evaluated in distinct stages: • Developing a plan to manage the relationship is the first step in the third party management process. The bank must determine initially if a vendor is needed or if the service can be provided in-house, and must 44 | Transactions | www.pacb.org

weigh the risks and rewards of both approaches. The bank must identify the various types of potential risk posed by the proposed vendor relationship, and must determine whether the level of risk is acceptable. These initial determinations will guide the bank in the subsequent stages of its vendor management program.

• Due diligence must be exercised in the selection of an appropriate vendor to ensure that the vendor maintains goals and objectives consistent with the bank’s policies, and that the vendor is focused on customer service. At the selection stage the bank must gather and consider information about the vendor, including its financial condition, its relevant experience, its operation and controls, its reputation in the industry, its knowledge of laws and regulations, and its history of compliance. An on-site visit of the vendor may be necessary to allow the bank to understand and control the risks associated with the relationship.

• The contract with the vendor should be structured to clearly define the expectations and responsibilities of the vendor. Provisions related to vendor compensation should not include fees or incentives that encourage risk taking behaviors. The contract should include performance metrics for determining if contract requirements are being met. Any foreseeable scenarios should be addressed, such as the extent to which the vendor may rely on subcontractors to perform responsibilities under the contract, as well as plans for the continuation of operations in the event of natural or man-made disasters. Responsibility for responding to customer complaints should be identi-

Y BANKS MUST MANAGE RISKS ASSOCIATED WITH VENDOR OUTSOURCING

By: James C. Warmbrodt, Esq. Weltman, Weinberg & Reis Co., L.P.A. fied. The contract should identify remedies, such as providing for indemnification, should the vendor’s conduct expose the bank to liability. Finally, the contract should provide for when and how the vendor relationship will terminate. In addition to establishing the duration of the relationship under the terms contained in the present contract, the bank must spell out those events that will trigger termination, such as the failure to meet performance benchmarks or conduct that is contrary to the bank’s policies.

• Vendor management must include an audit function which involves an on-going monitoring of the vendor over the life of the relationship to ensure that the vendor is performing in compliance with the terms of the contract, as well as to update information about key factors that were considered in the initial selection process. To aid in its audit function the bank must convey to the vendor its expectations for the frequency and content of periodic reporting, as well as those events (e.g., a lawsuit) that will signal the need for immediate notice to the bank. Internally, the bank must make a clear designation of persons who will carry out the responsibilities for ongoing vendor oversight.

The foregoing discussion is designed to provide a framework for a vendor risk management program consistent with the expectations of regulating agencies. The summary provided herein is not designed to be an all-inclusive review of the issues or factors that a bank must address in the course of its third party vendor management; the process must be designed according to the specific needs of the organization and particular services to be provided. However, following

the h process outlined l d above b at the h various stages off the h vendor d relationship will help to ensure that the bank and its vendors remain compliant with applicable laws and regulations.

i

CFPB Bulletin 2012-03, Service Providers, April 13, 2012; FDIC FIL 44-2008, Third Party Risk, Guidance for Managing Third-Party Risk, June 6, 2008; FDIC Compliance Manual-January y 2014, VII. Abusive Practices – Third d Party Procedures; OCC Bulletin 2013-29, Third-Party Relationships: Risk Management Guidance, October 30, 2013.

James C. Warmbrodt is a compliance attorney in the Pittsburgh office of Weltman, Weinberg & Reis Co., L.P.A., where he is engaged in ensuring the firm’s compliance with applicable statutes and regulations, as well as in the defense of actions brought under the FDCPA and other consumer statutes. He is a graduate of Eastern Kentucky University and the University of Pittsburgh School of Law. A member of the Allegheny County Bar Association, he is admitted to practice before the U.S. District Court for the Western District of Pennsylvania and the Third Circuit Court of Appeals. He is a frequent writer and speaker on the CFPB and consumer financial laws.

www.pacb.org | Transactions | 45

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WHAT MERCHANTS NEED TO KNOW ABOUT EMV TECHNOLOGY

By: Shawn Dillon VP of Sales â&#x20AC;&#x201C; Financial Institutions Management First American Payment Systems 48 | Transactions | www.pacb.org

he Europay, MasterCard and Visa (EMV) global industry standard deadline is approaching fast, and domestic merchants need to update their transactional infrastructure before October 2015. This date holds particular significance because merchants will be responsible for fraud in most cases if they don’t possess the proper EMV equipment that can accept payments from a credit card with an EMV chip.

Although October 2015 is still a ways away, it’s likely businesses will begin to adopt new EMV based payment systems in the coming months. Randy Vanderhoof, executive director of the EMV Migration Forum told Information Security Media Group that the remainder of 2014 will be crucial for domestic migration to the new EMV card standards as merchants look to move from current, magnetic stripe payment processing to chip-based transactions.

NEXT STEPS FOR MERCHANTS Currently, a large portion of industrialized nations across the globe have already implemented EMV payment portals, but EMV is a big change in the industry. The U.S. is still playing the U.S. lags behind in terms of overall adoption. While there catch-up with the rest of the world when it comes to EMV will be a cost to update equipment, the savings merchants, technology, but it can certainly learn from its counterparts banks and ISOs will incur as a result of EMV acceptance are who’ve already adopted the chip-based systems. Industry likely well worth the money. website PaymentsSource reThe EMV industry deadline cently estimated that EMV comes at a crucial moment in has reduced fraud by 40 to A LARGE PORTION OF INDUSTRIALIZED the payment processing inpercent2, and in some inNATIONS ACROSS THE GLOBE HAVE ALREADY 60 dustry, especially in wake of stances, an even higher rate the high-profile data breaches of prevention was attained.

IMPLEMENTED EMV PAYMENT PORTALS. at major retailers like Target, Neiman Marcus and Home The next steps for merchants Depot. Industry newsletter The Nilson Report recently found across the country are to bolster their network security systems and to implement more robust and cutting-edge paythat payment card issuers, merchants and acquiring banks ment processing infrastructures. When working in tandem, lost more than $11.2 billion to fraud in 2012.1 the former and the latter aspect of fraud mitigation are highly effective in warding off any potential attacks, which are often EMV point-of-sale systems aren’t resistant to breaches, but detected after it’s too late and a breach can no longer be avoidthey provide an added level of security to everyday transed. Modern-day point-of-sale systems, whether tablet-based or actions. The chip-based transaction occurs when a micromobile, can add an extra level of security to a merchant’s opprocessor in the card connects with a POS application that erations - a much needed safety net in today’s digitally driven has EMV capability. Once the connection is made, the chip business landscape. securely stores information about the payment system and begins cryptographic processing. An added level of security is just what merchants need in today’s digitally driven 1 consumer landscape. Larger retailers are already beginning ht t p://w w w.n ilson report.com/pub-to make the move. licat ion _chart_ a nd_g raphs_ arch ive..

CHALLENGES TO MERCHANTS From a merchant standpoint, it’s likely they will be undergoing changes in the way they process payments and it’s important to meet consumers’ needs for secure payments as industry regulations begin to set in. Customers want a faster and more convenient means of transaction, and they also want added security with the former attributes. It’s a tall order for retailers, but not insurmountable. As the payments sector begins to evolve, merchants will be faced with two primary challenges going forward: • Cost: Migrating to a new system will require an investment from the merchant, and not all merchants can afford to make the switch at this time.

• Testing and installation: Two aspects of EMV adoption that may challenge retailers are the testing and installation of payment software on their new processors. Properly deploying the software on terminals can take time and energy. While it can be a concern, trusted payment processors can ensure that any new software is working properly before a full-scale deployment.

php?1=1&year=2013 2 ht t p://w w w.pay mentssou rce.com/ news/interchange/is-emv-a-securitysilver-bullet-3019155-1.html

As the Vice President of Sales, Financial Institutions, Shawn Dillon cultivates First American’s current bank relationships and leads the development of new relationships in the financial institutions space. Dillon initially began working for First American in 2008, leading strategic bank partnerships, and expanding on his previous experience establishing new outlets for partnerships. Additionally, he managed innovative value propositions that were tailored to individual businesses. He is formerly the Vice President of U.S. Sales- Financial Institution Acquiring at Global Payments and was the Director of Sales for First American in 2010. As an integral member of the sales team, Shawn aims to continue the development of unique, customized solutions that integrate progressive growth for our bank partners.

www.pacb.org | Transactions | 49

SUCCESSION PLANNING: IS YOUR ORGANIZATION PREPARED?

By: Dana Muth, MSODA S.R. Snodgrass, P.C. et’s face it, we all want good exams. While they can be thorns in our sides, we all know that examiners have a job to do, and we do our best to keep them on our good sides.

Seasoned bankers know that examiners have their hot buttons each year. In our travels, we sometimes see the same finding from bank to bank depending on the year. Whether it’s Bank Secrecy Act, GLBA, or asset-liability management, bankers do their best to anticipate what’s coming down the road, often 50 | Transactions | www.pacb.org

through the fraternal bankers’ grapevine.

This year is no different, and one of the hot buttons is something we all think about but hesitate to formalize: succession planning. This is a common finding in state exams this year:

“Management has not developed a formal succession plan to address the key management positions in the event of a sudden vacancy. It is acknowledged that the Strategic Plan does highlight succession planning as one of the goals for 2014; however, management has not yet begun to formalize

a plan. The succession plan should address each position and the necessary steps and requirements to fill those position duties on a short and long-term basis.”

Now, I know what you’re thinking. Isn’t this just another “form over substance” type of finding that bankers get hit with each year? Why is there a need to formalize a succession plan? We all know who is next in line, right?

malized process can help you identify the dead weight.

It’s often surprising to me how many disaster recovery issues are uncovered the first time a bank performs tabletop testing. What might appear to be a perfunctory exercise can instead become an eye-opening, helpful experience when deftly facilitated. This exercise is not unlike good succession planning. The results can sometimes be startling, and can even help retain the good people you want to keep.

Too often we only think of succession planning in terms of who will take over for the CEO. But as we all know, many When engaging in succession planning, you should involve key positions could leave the bank vulnerable if someone managers in all parts of the organization so they can continwere to move along. IT proually identify gaps in talent fessionals are a classic examand focus on developing the ple because they often have GOOD SUCCESSION PLANNING IS NOT A ONE- talent into high performers. marketable skills that are TIME SHOT; IT’S AN ONGOING PROCESS THAT This will ensure that people sought outside of banking. with the best skills are movSHOULD BE REVISITED FROM TIME TO TIME. ing into the right jobs at the What do you do if your top IT person resigns? Do you react, necessary times. or are you prepared? What happens if the entire IT staff goes? It’s happened.

It’s often difficult for managers to see themselves the way their subordinates see them. Are managers sending the So instead of putting it off, let’s look at succession planning message to the high-performing subordinates that they are as an opportunity to build a stronger financial institution. regarded in the organization? A formalized succession plan A formalized succession plan will help ascertain perfor- helps managers communicate that message. mance and technical skills, as well as leadership potential.

What is leadership potential? It’s a mixture of technical Good succession planning is not a skills and cognitive abilities, coupled with emotional intel- one-time shot; it’s an ongoing pro-ligence, or the “it factor” as some like to call it. Some have cess that should be revisited from m “it” and others don’t. time to time. The best time to startt is before the examiners make your Traditionally, bankers who move up the food chain and bank’s next finding. emerge to executive leadership roles have the technical skills and ability to meet performance objectives. Just look around your organization. Many of the executive leaders Dana R. Muth, MSODA, is were previously great producers, right? Many probably a Senior Executive Consulcame from the commercial line of business and know credit tant with S.R. Snodgrass, a regional accounting and better than anyone around. They manage risk, credit qualconsulting firm. A handsity, and net interest margins better than anyone. Do those on change agent and trusted technical skills equate to the leadership competence needed to navigate, lead, and execute the bank’s strategy in today’s business partner, Dana provides expertise in the areas of strategic planning, succession planning, leadercomplex environment? Not necessarily. Imagine, however, ship, and talent development. if those technical skills and performance abilities were coupled with leadership competence and a high degree of Throughout her 20+ years in the industry, she has been emotional intelligence. a catalyst for building, leading, influencing, and sustaining the alignment of people, performance, and revIf you really want to execute the strategic plan that you’ve enue generation, resulting in shareholder value. Dana’s heavily invested in already, you’ll need a formalized, wellproven experience has been with full-service communiconstructed succession plan to help you identify those ty banks, as well as multibillion-dollar financial instituqualities in your next generation of leadership. Moreover, tions with wealth management and insurance affiliates. a detailed plan will help you objectively recognize successors and their readiness to take on the identified role.

Dana earned her master’s degree in Organization DeIt will help you objectively look inside as well as outside velopment & Analysis from Case Western Reserve Unithe organization. And it will address competency gaps versity’s Weatherhead School of Management. She has through development plans so that your leaders are ready academic teaching experience, namely for the Univerwhen you need them to be. sity of Pittsburgh’s Katz Graduate School of Business and Duquesne University’s Center for Corporate and An effective, formalized succession planning process will Executive Education. conquer this very issue by creating a solid development plan for your identified high-potential successors. Moreover, a forwww.pacb.org | Transactions | 51

OFF AND RUNNING BOND INVESTORS MARKING TIME TILL FIRST RATE HIKE By: Jim Reber President & CEO ICBA Securities ept. 17, 2014 will be recorded as a big non-event in monetary policy annals. At the conclusion of the regularly scheduled Federal Open Market Committee (FOMC) meeting, the press release that followed contained few substantial, or significant, edits from the prior meeting six weeks earlier. It had been widely anticipated, for example, that the “considerable time” sound bite would be eliminated.

52 | Transactions | www.pacb.org

Although the language was little different than recent commentary, it serves as a convenient line of demarcation for bond market analysts. The last time that the Fed signaled it was preparing to hike short-term rates, in 2004, fixed-income investors (which include community banks) had very aggressive reactions. This column will look back a decade to see how interest rates moved in anticipation of the Fed’s actual brake-stomping.

eventually stamped out inflation fears.

WAY BACK WHEN Let’s take the March 16, 2004, meeting as a start. Fed Funds had a target rate of 1.00 percent, and the FOMC had consistently used the term “policy accommodation” in describing the historically low rates. In fact, that phrase had been used in every FOMC statement since December 2001. At that time, key interest rates were as follows: • 1-year Treasury bill • 2-year Treasury note • 5-year Treasury note • 10-year Treasury note

1.17% 1.47% 2.64% 3.68%

• 1-year Treasury bill • 2-year Treasury note • 5-year Treasury note • 10-year Treasury note

2.09% 2.68% 3.77% 4.58%

The intermediate part of the curve probably performed the worst, as the combination of rising rates and price volatility pushed prices down. The five-year Treasury note issued in June 2004 was still worth only about 96 cents on the dollar two years later. Fixed-rate mortgage-backed securities likewise were underwater significantly.

BUCK STARTS HERE

So, what lessons can we learn? Maybe there are three takeaways from this review. First, the Fed will telegraph its intentions before it actually raises rates. The individuWhen the Fed next met, on May 4, the statement was al- als on the FOMC speak often, and the committee’s transtered to say “… policy accommodation can be removed parency is better now than it was a decade ago. There at a pace that is likely to be measured.” There had been are also more Fed watchers than ever before. A number several FOMC members of blogs actually track and who made speeches duranalyze the members’ every ing this seven-week period syllable, written and oral.

NOT ALL OF THE PRICES OF YOUR that tipped their hand, and COMMUNITY BANK’S INVESTMENTS rates had risen rapidly in Secondly, the FOMC doesn’t that window. By close of actually have to change the WILL CHANGE IN A PARALLEL FASHION. business on May 4, here is a target rate one iota for interyield-curve run: est rates to move long distances. We can expect (especially) short rates to begin to rise • 1-year Treasury bill 1.57% was soon as some of the phraseology begins to transform.

• 2-year Treasury note 2.33% • 5-year Treasury note 3.67% Finally, keep in mind that not all of the prices of your • 10-year Treasury note 4.57% community bank’s investments will change in a parallel fashion. Two variables are in play, and they ironically To say that bonds had a bad couple of weeks is decidedly are usually negatively correlated as rates rise. We know English in tenor. But we weren’t finished. The next meet- that the longer the duration is, the more price volatility is embedded. Conversely, a rising rate environment almost ing took place on June 30, and the Fed actually hiked Fed Funds to 1.25 percent, and proffered that “… inflation data always results in a flattening curve (and, separately, narrowing spreads). So keep your eyes on your duration, as are somewhat elevated.” Here’s what we ended up with at it’s constantly changing. the end of the second quarter of 2004:

In other words, with just a 25 basis point rise in the Fed Funds rate, the one-year Treasury bill went up 89 basis points and the 10-year note jumped 90 basis points. More importantly, the market got far ahead of the Fed, and short rates continued to climb while longer rates began to idle.

By the time the Fed finished tightening in June 2006, Fed Funds was up to 5.25 percent, and everything else yielded about the same.

HORIZON RESULTS During this two-year period of rising rates, there was wide disparity in the performance of different bank-suitable investments. Yields on the very shortest investments, like discount notes and Small Business Administration pools, went up over 300 basis points. Yields on the longest municipal bonds, interestingly, fell, as the Fed’s policy of tightening

There is one more FOMC meet-ing this year: December 17. Hap-py Fed watching!

Jim Reber was elected as President and CEO of ICBA Securities effective April 1, 2005. From 1990 through 2005 he worked as a Senior Vice President and registered representative for ICBA Securities. He is a frequent speaker at bank conventions, seminars and conferences. Jim also writes a monthly investment column for Independent Banker magazine.

He is a Certified Public Accountant and a Chartered Financial Analyst. He is on the Board of Regents of the Paul W. Barret School of Banking and is on the Executive Committee. Jim holds a BS degree in Accounting from Christian Brothers University in Memphis, Tennessee, where he serves on the Board of Trustees.

www.pacb.org | Transactions | 53

News From You FIRST COLUMBIA BANK EMPOWERS LOCAL STUDENTS TO MAKE INFORMED FINANCIAL DECISIONS THROUGH INNOVATIVE WEB-BASED PROGRAM

Bloomsburg, PA – First Columbia Bank announced today that they certified 157 students in financial literacy during the 2013-2014 school year through the First Columbia Bank Financial Scholars Program. This program is an initiative to bring critical financial literacy education to high school and middle school students across their communities.

First Columbia Bank has partnered with EverFi, Inc., the nation’s leading education technology company, to bring this interactive, web-based financial management program to high school students at Southern Columbia High School, Benton Middle-Senior High School, Millville Junior Senior High School, and Central Columbia High School—at no cost to the schools or taxpayers. An impressive 93% of students, who used this program in their classes, reached certification in financial management. Furthermore, the students increased their scores by an average of 21% on the program’s post assessments compared to preassessment levels, signifying their mastery of complex financial topics such as financing higher education, taxes, budgeting and investing.

Powered by EverFi technology, the web-based learning high school platform uses the latest in new media technologies – video, animations, 3-D gaming, avatars, and social networking – to bring complex financial concepts to life for today’s digital generation. High school students become certified in over 200 topics in financial education, allowing 54 | Transactions | www.pacb.org

them to become more informed, responsible citizens.

“From the small rural towns to major cities across the US, EverFi technology is literally transforming how students learn, and we are incredibly grateful for the public-private partnerships that make this possible,” said EverFi CEO Tom Davidson. “First Columbia Bank is critical to the success of our mission to ensure that these cutting-edge tools reach all communities.”

First Columbia Bank’s Marketing Director, Maria Valles, added, “As a local community-minded business, we are committed to doing all we can to support our youth and help them succeed. The EverFi program is one way to help prepare students for the many financial decisions and responsibilities that lie ahead.”

The Financial Scholars Program is a 10-unit course that offers 6-8 hours of programming aimed at teaching, assessing and certifying students in a variety of financial topics including credit scores, insurance, credit cards, student loans, mortgages, taxes, stocks, savings, 401k’s and other critical concepts that map to national financial literacy standards. The learning platform tracks knowledge gain as well as students’ attitudes and behaviors on these important issues. Students who successfully complete the course receive certification in Financial college applications and resumes.

SCOTTDALE BANK ANNOUNCES NEW OFFICE IN DOWNTOWN MOUNT PLEASANT Scottdale, Pa. - The Scottdale Bank & Trust Company is pleased to announce that they will open a new office in early 2015 at 632 W. Main St., Mount Pleasant.

Grow on.

We’ve got you covered.

“We’re very pleased to be opening a new office in Mount Pleasant. We were approached by the owners of the building about the possibility. After some consideration, we agreed it was a great opportunity to expand our service area and customer base,” said Donald Kiefer, president of The Scottdale Bank & Trust Company. “Mount Pleasant has a very vibrant downtown and it is an ideal location. The opening of this new office proves our continued commitment to the community and our approach to providing outstanding, personalized service and convenience to our customers.”

As a part of the FayWest area since 1901, the Scottdale Bank & Trust Company is dedicated to continued growth in the local communities it serves. The bank’s personalized customer service is defined by the small town values that are part of its history.

“Since we opened our doors, a part of our culture has been to support the communities that we serve through donations to local festivals, sports activities, fire departments, libraries, and school districts. We look forward to continue our support,” added Kiefer.

While the exact opening date in early 2015 has yet to be determined, the branch will host a grand opening week-long celebration in February 2015.

In every issue of Transactions magazine, we would like to include updates from you, our member banks, regarding newsworthy happenings in your banking facilities. Let us know about: • Branch Openings • New Customer • Awards or Recognition Services • Special Staff Training • Community or Education Involvement • Individual • Anniversaries or Promotions or Hirings Celebrations • New Facilities

For publication consideration, please email press releases to Eric Kovac, Communications Director, at eric@pacb.org. To ensure publication in Transactions magazine, all entries must be received by the 5th of the preceeding month.

The industry challenges that you’re facing now may not be the same ten years from now. As your business grows and changes, so should your outside counsel.

From transactional matters to litigation to regulatory guidance, the Banking and Financial Services Litigation Group at Burns White offers a full spectrum of legal services customized to meet your specific needs. Our experienced attorneys are committed to understanding your business and working hand-in-hand with you throughout our strategic partnership.

David B. White (Founding Member) dbwhite@burnswhite.com 412-995-3000 www.burnswhite.com

News From You www.pacb.org | Transactions | 55

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