Virginia Banking Jan/Feb 2016

January/February 2016

5th Annual

Financial Forecast IN THIS ISSUE

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January/February 2016

2015-2016 Officers and Directors of the Virginia Bankers Association T. Gaylon Layfield, III, Chairman, Xenith Bankshares, Inc. John G. Stallings, Chairman-Elect, SunTrust Bank John R. Milleson, Immediate Past Chairman, Bank of Clarke County G. William Beale, Union Bank & Trust Christopher W. Bergstrom, Cardinal Bank Michael W. Clarke, Access National Bank Barry C. Elswick, TruPoint Bank Scott C. Harvard, First Bank, Strasburg William H. Hayter, First Bank & Trust Company Charles Henderson, Bank of America, NA Glen Kelley, Wells Fargo Bank, N.A. Brad E. Schwartz, Monarch Bank Joe A. Shearin, EVB Susan K. Still, HomeTown Bank Daniel G. Waetjen, BB&T Michael O. Walker, Benchmark Community Bank Robert Wojciechowicz, Capital One Financial Corporation AT-LARGE MEMBERS VBA Benefits Corporation Chair J. Peter Clements, The Bank of Southside Virginia Management Services Inc. Chair M. Andrew McLean, Middleburg Bank Government Relations Committee Chair Ronald D. Haley, River Community Bank, NA VBA Education Foundation Chair Charles H. Majors, American National Bank & Trust

EDITORIAL & EXECUTIVE OFFICES 4490 Cox Road Glen Allen, VA 23060 804-643-7469 Fax 804-643-6308 www.vabankers.org Bruce T. Whitehurst President and CEO Virginia Bankers Association Chandler Owdom Director, Communications & Strategy Virginia Bankers Association

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cover

12

More Than 620 Attend 5th Annual Financial Forecast

features

16

Inside the Business Valuation Process: A Primer for Commercial Lenders

in every issue 4 Calendar of Events 5 Insights 6 Worth Noting 7 New VBA Endorsed Vendors 8 Legislative Update 10 Legal Line 11 New Associate Members 14 Washington Update 15 Compliance Corner 18 Bankers on the Move Send us your thoughts or ideas on Virginia Banking! Please email Chandler Owdom at cowdom@vabankers.org. Has your information changed? Please email Kellee Edelin at kedelin@vabankers.org with your new contact information.

Calendar of

Visit www.vabankers.org/event-calendar to learn more about these events.

INSTRUCTOR-LED SEMINARS BANK SECRECY ACT & ANTI-MONEY LAUNDERING TWO-DAY SCHOOL GLEN ALLEN FEB. 23-24, 2016 SECURITY RISK WORKSHOP CHARLOTTESVILLE MARCH 1-2, 2016 RETAIL BANKING & MARKETING CONFERENCE CHARLOTTESVILLE MARCH 9-10, 2016 BANK DIRECTOR & EXECUTIVE MANAGEMENT CONFERENCE BLACKSBURG MARCH 22, 2016 BANK DIRECTOR & EXECUTIVE MANAGEMENT CONFERENCE RICHMOND MARCH 23, 2016 SUPERVISOR BOOT CAMP GLEN ALLEN APRIL 6-7, 2016

WEBINARS REVISED ABILITY TO REPAY/QUALIFIED MORTGAGE OPTIONS FEB. 16, 2016 DEVELOPING RESILIENCE: HOW TO THRIVE IN TIMES OF CHANGE FEB. 16, 2016 LOAN DOCUMENTATION 101 – PART 2: LIEN PERFECTION: BUSINESS COLLATERAL FEB. 17, 2016 ADVANCED TAX RETURN ANALYSIS FEB. 17, 2016 EXTRA, EXTRA: READ ALL ABOUT SECURITY ISSUES AND IT SOLUTIONS FEB. 17, 2016 GETTING MORE INFORMATION FROM PERSONAL FINANCIAL STATEMENTS FEB. 17, 2016 LOAN DOCUMENTATION 101 – PART 3: REVIEWING COLLATERAL FILES FEB. 18, 2016 15 STEPS TO PROFITABLE/PRUDENT CONSTRUCTION LENDING FEB. 18, 2016

COMPLIANCE SCHOOL AND ADVANCED COMPLIANCE CHARLOTTESVILLE APRIL 11-15, 2016

GETTING BEST VALUE/BETTER RESULTS FROM BUSINESS DEVELOPMENT INVESTMENTS FEB. 18, 2016

HR, BENEFITS, & TRAINING CONFERENCE CHARLOTTESVILLE MAY 1-3, 2016

PROBLEM LOAN IDENTIFICATION AND PREVENTION FEB. 18, 2016

FUNDAMENTALS OF CREDIT ANALYSIS & BUSINESS FINANCING GLEN ALLEN MAY 10-11, 2016 OPERATIONS & TECHNOLOGY CONFERENCE CHARLOTTESVILLE MAY 17-18, 2016 ANNUAL CONVENTION THE GREENBRIER, WHITE SULPHUR SPRINGS, WV JUNE 19-22, 2016 CFO CONFERENCE RICHMOND AUG. 28-30, 2016 CREDIT MANAGEMENT CONFERENCE CHARLOTTESVILLE OCT. 3-4, 2016

FINANCIAL ANALYSIS TOOLKIT PART I: PERSONAL FINANCIAL STATEMENT ANALYSIS FEB. 19, 2016 COMPLETING THE CURRENCY TRANSACTION REPORT FEB. 23, 2016 7 HABITS OF HIGHLY SUCCESSFUL SUPERVISORS FEB. 24, 2016 EVERY CIRCUS NEEDS A RINGMASTER – DIRECTING FOR SUCCESS IN SALES FEB. 24, 2016 LEVERAGING THE MIDDLE OF YOUR ORGANIZATION FEB. 24, 2016 4 STEPS TO A PRACTICAL BUSINESS CONTINUITY PLAN IN AN IT WORLD FEB. 25, 2016 CONVERTING CUSTOMER SATISFACTION INTO CUSTOMER LOYALTY FEB. 25, 2016

LEADERSHIP CONFERENCE RICHMOND OCT. 6-7, 2016

OUTSOURCING YOUR INFORMATION TECHNOLOGY – RISKS AND REWARDS FEB. 25, 2016

ENTERPRISE RISK MANAGEMENT WORKSHOP GLEN ALLEN OCT. 27, 2016

RECIPE FOR AN EFFECTIVE SALES ENVIRONMENT FEB. 25, 2016

WOMEN IN BANKING SEMINAR RICHMOND NOV. 17, 2016

GOVERNMENT RELATIONS EVENTS VBA/ABA GOVERNMENT RELATIONS SUMMIT WASHINGTON MARRIOTT MARQUIS, WASHINGTON, DC MARCH 14-16, 2016

4 Virginia Banking | January/February 2016

OPENING DEPOSIT ACCOUNTS FOR HIGH RISK CUSTOMERS: CIP, CCD & RISK FEB. 26, 2016 FINANCIAL ANALYSIS TOOLKIT PART II: INTRODUCTION TO PERSONAL & BUSINESS TAX RETURNS FEB. 29, 2016 TRID: SIX-MONTH CHECKUP MARCH 1, 2016

www.vabankers.org

Insights

Turn the Page "Here I am, on a road again There I am, up on the stage Here I go, playing the star again There I go, turn the page"

I Bruce Whitehurst President and CEO, Virginia Bankers Association

bet you are familiar with the classic Bob Seger song, “Turn the Page.” While the song is about the seemingly endless road trip a rock star encounters while on tour, it strikes me as somewhat relevant to the banking industry as we turn the page from 2015 to 2016.

We have been on a long journey for almost a decade, having experienced the financial crisis and great recession that was truly devastating to many American families, businesses and certainly to the banking industry as well. We have been on a slow road to economic recovery that finally seems to be picking up steam – enough that the Fed raised interest rates in December.

Where the famous Bob Seger song seems most fitting is in our industry advocacy efforts. To be sure, we had a major breakdown in our economy and financial system; a good number of books have been written about all the suggested causes and strong opinions remain on this topic. One area where there is strong consensus within the banking industry – and growing agreement from others – is in the Congressional antidote to the financial crisis that came in the form of the Dodd-Frank Act of 2010. As tends to happen in the heat of the political moment, Dodd-Frank went way too far in some areas and in others, did not even align with root causes of the financial crisis; otherwise, surely it would have included Fannie Mae and Freddie Mac reform.

Our efforts to bring about some common sense corrections to Dodd-Frank, especially those that would clearly benefit our customers and our communities, represent a long journey along a winding road. To continue the analogy, we have had an uphill climb against significant opposition to any reform from some political figures. We have had a

few successes along the way – like the recent beneficial changes on privacy notice mailing requirements and moving the exam cycle from 12 to 18 months for highly rated banks up to $1 billion – but we have also stopped short of cresting the big hill we were so close to reaching last year in Congress.

Being one of 50 to 75 groups trying to have items added to an omnibus spending bill – kind of like hitchhiking as we proceed on our long journey toward regulatory reform – was not how we wished to play this out, but it was the political reality of Congressional dysfunction in 2015. Whether to allow the exportation of American crude oil became a more important negotiating point than making common sense repairs to Dodd-Frank that would free banks to better serve their customers’ financial needs. That, in a nutshell, is the problem when the only legislative alternative is to stick your thumb out and hope someone will pick you up from the side of the road.

So, we turn the page. We are in a new year that will bring political change in the form of the November Presidential election. We will see how this year’s elections affect the political balance among and between the White House, the Senate and the House of Representatives.

For the banking industry – and for American business – we need to press for a road that is not as steep as it has been in recent years. We need to continue our tireless efforts to speak up for the families and businesses that rely on banking as the fuel that keeps our economy going. We may be tired from this road trip that has already been so long and hard, but we must keep getting on the stage, making sure our industry voice is heard for those we want to serve with more clarity and less background noise that really hurts, even though it was supposed to help, our customers.

Please keep going up on the stage with us as we continue this most important journey!

Email Bruce Whitehurst at bwhitehurst@ vabankers.org with any comments on this article or tweet him at @BruceTW. January/February 2016 | Virginia Banking 5

Noting

Worth

served as president of American Savings Bank, F.S.B. from 2008 to 2010 and as COO from 2007 to 2008. He was CFO of South Financial Group Inc. from 2004 through 2007.

CARDINAL FINANCIAL ANNOUNCES CLINEBURG TO ASSUME EXECUTIVE CHAIRMAN ROLE

VA FREE UNVEILS NEW SKIDMORE CENTER FOR ETHICS AND PUBLIC POLICY

At the VA FREE luncheon on Dec. 17, Brenda Skidmore, senior vice president of SunTrust Bank, was recognized with the creation of the new Skidmore Center for Ethics and Public Policy at the Wilder School at VCU. The center was named after Skidmore for her steadfast support of VA FREE for many years. Skidmore was also honored as the outgoing chair of VA FREE. Kudos to Skidmore for this well-deserved recognition!

HALEY APPOINTED TO NATIONAL COUNCIL FOR COMMUNITY BANK LEADERS

The American Bankers Association (ABA) has selected Jeffrey V. Haley, president and CEO of American National Bank and Trust Company and American National Bankshares Inc., to serve on ABA’s Community Bankers Council. The ABA Community Bankers Council, which meets twice a year, is made up of approximately 100 bankers from institutions with generally less than $3 billion in assets. Members are appointed by the ABA chairman. Congratulations to Haley on this appointment.

SCHOOLS APPOINTED PRESIDENT AND CEO OF HIGHLANDS UNION BANK

Timothy K. Schools was appointed president and CEO of Highlands Bankshares Inc. and its wholly-owned subsidiary, Highlands Union Bank. Schools also was appointed to the boards of directors of Highlands Bankshares Inc. and the bank. Schools served as chief strategy officer at United Community Bank from January 2013 through September 2015 and as regional president of North Carolina and Tennessee from November 2011 through 2012. Previously, he 6 Virginia Banking | January/February 2016

As of January 2016, Bernard H. Clineburg will become executive chairman of the board of directors for both Cardinal Financial Corp. and Cardinal Bank. Christopher W. Bergstrom will be appointed acting president and CEO of both companies. As executive chairman, Clineburg will focus on ensuring a seamless transition in leadership along with corporate strategy and mergers and acquisitions.

Bergstrom will be responsible for the day to day management of the companies. Clineburg will remain principal executive officer.

MCLAUGHLIN RETIRES FROM BANKING

On Dec. 31, 2015, one of the banking industry’s senior statesmen, Philip L. McLaughlin, retired from banking.

He ends his service as chairman of City National Bank of West Virginia and its publicly traded holding company, City Holding Company.

A native of Lewisburg, West Virginia, McLaughlin graduated from Greenbrier Military School and received a Bachelor of Arts degree in mathematics from the College of William and Mary. He also completed the Stonier Graduate School of Banking program. McLaughlin began his banking career in 1967 and served as president and CEO and director of Greenbrier Valley National Bank from 1971 to 1993.

In 1993, Greenbrier Valley National Bank merged into Horizon Bancorp. McLaughlin served as the president and COO, and as a director, of Horizon Bancorp Inc. from 1993 until 1998, when Horizon Bancorp merged into City Holding Company, and the Greenbrier Valley Bank merged into City National Bank, creating one of West Virginia’s largest banking organizations, operating 59 branches in 1999.

At the culmination of the merger of Horizon and City, McLaughlin became chairman of the combined company.

He retired from active management of City, and stepped down from the position as chairman on June 30, 2002, but remained on City’s board. In April of 2007, the board again asked McLaughlin to assume the role of non-executive chairman, a role he held until his retirement.

In addition to his role in creating and leading one of West Virginia’s largest banks, McLaughlin served the banking industry as a director of the West Virginia Bankers Association from 1985 to 1990, and served as Chairman of the organization in 1988-89. He also served a three-year term as a director for the Federal Reserve Bank of Richmond, a prestigious honor. Best of luck to McLaughlin in retirement. www.vabankers.org

E

ND

Virginia Bankers Association Management Services Endorses Two New Organizations After thorough evaluation, the board of directors of VBA Management Services Inc. recently endorsed PrecisionLender and Discover Debit. For more information about any of the VBA’s endorsed vendors, visit www.vabankers.org or contact Matt Bruning, senior vice president, government and member relations, at mbruning@vabankers.org.

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January/February 2016 | Virginia Banking 7

Legislative

Update

Credit Unions Won’t Stay in Their Lane

T Matt Bruning Senior Vice President, Government & Member Relations, Virginia Bankers Association

he exhortation to stay in your lane is often sound advice whether it is relative to business or personal decisions. Sticking to what you do best, your purpose or your core functions, allows businesses to better focus and meet the needs of their customers. This is not necessarily a demand to spurn innovation or create an unwillingness to adapt and change. It is the realization and acceptance that a business cannot and should not be all things to all people. On the personal side, it’s a softer way to convey someone should not stick their nose where it doesn’t belong.

Some point to contributions of the recent financial crisis as players – financial institutions, government policies and policymakers and consumers – not staying in their lanes and stretching beyond what they knew, understood and could control. Those participants in the same markets who did understand and abided by that advice came out better in the end.

One group that continues to fail to heed that advice is credit unions. Despite their original mission to serve people of low and modest means, despite the preferential tax treatment bestowed on them by Congress in the 1930s, despite almost unfettered access to membership opened in the 1990s, and despite a cheerleading federal regulator openly championing their expansion, credit unions refuse to stay in their lane. We have seen them continue to press for expanded business lending authority at the federal level, all the while ardently defending their anachronistic tax advantage.

While credit unions have failed to achieve broader latitude from Congress on their powers, they are now seeking to veer further away from their mission through state policy. In the 2016 Virginia General Assembly session, credit unions are seeking two major enhancements to their already broad powers.

The first proposal they are pursuing is the ability to serve as a qualified public depository, or QPD. A QPD in Virginia, currently

restricted to banks, savings institutions or trust companies, is a Virginia Department of Treasury approved institution that may hold state and local government revenues. At least 120 banks currently are approved to serve as QPDs in Virginia, undermining the credit unions’ claim that additional competition is necessary. The vast majority of those approved QPDs are Virginia-based community banks.

Credit unions are exempt from state taxes.

All banks pay the Virginia Bank Franchise Tax, 80 percent of which is remitted directly to localities where those banks have branches.

Credit unions are not subject to any equivalent tax. Because the Bank Franchise Tax is allocated based on deposits held in those branches, any reductions of state or local tax monies held at banks would mean a reduction in state and local revenue. As a matter of policy, because credit unions do not pay many of the same taxes paid by Virginia banks, they should not be able to hold taxpayer dollars – and in the process, reduce taxable income by taking public deposit business away from banks. Bottom line: If they don’t contribute, they shouldn’t have access to those tax dollars.

The other proposal is a broad expansion of powers for state-chartered credit unions. Historically, Virginia statutes governing credit unions have directly linked their powers and authorities with federal laws and regulations.

By directly linking state laws applicable to state-chartered credit unions with those governing federally-chartered credit unions, parity between the two charters exists. In times where the credit unions have sought to update Virginia law to ensure continued parity, the VBA has not objected. However, this year’s proposal goes well beyond parity as the credit union lobby seeks to divorce the rules for state-chartered credit unions from federal law and regulation.

The credit unions recommend several changes that would decouple Virginia policy

Email Matt Bruning at mbruning@vabankers.org with any comments on this article.

8 Virginia Banking | January/February 2016

www.vabankers.org

from federal law, mostly dealing with restrictions on field of membership eligibility. They suggest totally removing the current 3,000 employees per company limitation that applies to a multiple common bond credit union, expanding the geographic basis for community charters and permitting them to serve multiple communities and allowing credit unions to serve memberships based on both common bonds and community based membership.

Each of these proposals go well beyond current National Credit Union Administration rules for federallychartered credit unions. In late November, NCUA issued a draft rulemaking that touches on some of these

proposed changes. At the very least, the credit union lobby should wait to see what final rules are adopted. The Code of Virginia already outlines a path for state-chartered credit unions to convert to state-chartered, taxpaying mutual institutions. If a credit union wants to have the same access to potential members as banks have to potential customers, it should convert to a bank charter, pay the same taxes and play by the same regulatory rules as a bank.

Further expansion in field of membership erodes the foundational mission of credit unions for which they receive their special tax treatment.

Communities across Virginia already have access to financial services

through tax-paying banks of all sizes.

Allowing greater expansion authority to credit unions unnecessarily increases competition and tilts even further the un-level playing field credit unions already enjoy.

Each of the proposals from the credit unions are blatant examples of not heeding the advice to stay in your lane. As the VBA works on defeating these misguided efforts, we need your help. Please contact your local members in the Virginia General Assembly to encourage them to oppose the credit unions’ mission expansion.

You can find the contact information for your state representatives at whosmy.virginiageneralassembly.gov or by contacting the VBA.

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January/February 2016 | Virginia Banking 9

Line

Legal

Cybersecurity In Banking

T Mel Tull General Counsel, Virginia Bankers Association

he ever-increasing use of online and mobile banking services requires banks to remain vigilant against the threat of cyberattacks. Vigilance requires not only understanding the threat in its current form, but also appreciating the evolving nature of the threat and the constant need to test and update procedures and safeguards.

There are several cybersecurity resources available to banks. For example, the Federal Financial Institutions Examination Council on E-Banking has published extensive recommendations regarding security procedures and other loss prevention measures.1 The FFIEC materials describe e-banking risks in the areas of transaction/operations risks, compliance/legal risks, strategic risk and reputation risk, as well as useful e-banking risk management activities, including board and management oversight, managing outsourcing relationships, information security programs and administrative controls. They also provide a lengthy reference list of laws, regulations and guidance applicable to bank cybersecurity issues.

The Conference of State Bank Supervisors has its own Resource Guide for Bank Executives2 that describes four common categories of cyberattacks against banks: • Distributed denial of service – attackers overwhelm a banks’ website with traffic in order to disrupt online service, causing reputational harm and potentially distracting the bank from some other fraud.

• Corporate account takeover – attackers impersonate a bank’s business customer and request unauthorized wire and ACH transfers to accounts controlled by the attackers.

• ATM cash-out – attackers gain access to and alter the setting on ATM web-based control panels, causing large-dollar losses.

• CryptoLocker – attackers send phishing emails to bank employees that contain

malware to infect the bank’s computers and encrypt its data. The attackers then demand a ransom payment in order for the bank to recover access to its files.

Obviously, large investments in technology and training are required to mitigate against each of these risks. However, the second category of risk – the corporate account takeover – requires the customer’s cooperation and vigilance.

Fortunately, the Uniform Commercial Code helps banks avoid the risk of loss on commercial accounts through account agreements that provide for robust security procedures, such as “dual control,” to verify the authenticity of payment orders. Account agreements should require that customers follow and maintain the confidentiality of the specified security procedures. They should also require that customers prevent unauthorized access to accounts and immediately notify the bank of any unauthorized access to or disclosure of confidential information to unauthorized persons.

Banks who use third-party vendors should also review their vendor contracts and confirm that the vendor is required to implement commercially reasonable security procedures and to provide immediate notification of suspicious activity.

Finally, banks should discuss cybersecurity insurance with their professional liability insurance agent to understand what cybersecurity coverages are available, as well as what exclusions, caps and deductibles might apply. This is a new and evolving insurance product and significant differences exist from policy to policy.

For more information about cybersecurity legal and regulatory considerations contact Mel Tull, VBA General Counsel, at mtull@ vabankers.org or (804) 819-4710.

Footnotes 1. http://ithandbook.ffiec.gov/it-booklets/e-banking 2. https://www.csbs.org/CyberSecurity/Documents/CSBS%20Cybersecurity%20101%20Resource%20Guide%20FINAL.pdf 10 Virginia Banking | January/February 2016

www.vabankers.org

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January/February 2016 | Virginia Banking 11

Virginia Bankers Association and Virginia Chamber of Commerce Host More Than 620 Members of the Business Community for the

5th Annual

Financial Forecast O

n Jan. 8, more than 620 bankers and business people attended the Virginia Bankers Association/Virginia Chamber of Commerce 2016 Financial Forecast at the Greater Richmond Convention Center. Each year, the event aims to help prepare the state’s business community for what lies ahead for Virginia and for the economy.

This year’s Forecast speakers provided dynamic updates and an outlook for Virginia and the U.S. Tom Farrell, chairman, president and CEO of Dominion Resources Inc. discussed the energy system and the effects of recent regulations stemming from the Clean Power Plan. He also discussed the December climate change summit in Paris, and the steps Dominion is taking to continue to supply safe and reliable energy that is also affordable.

Chris Low, chief economist for FTN Financial, discussed gradual tightening and rising interest rates. Low predicted that low inflation will fall lower still when the Fed tightens, but also that market volatility should calm shortly after. In regards to Virginia, Low said the tighter Federal budget did hurt the state’s growth, but “Virginia has outperformed and should continue to outperform.”

Welcome and speaker introductions for the event were given by Bruce Whitehurst, president & CEO, Virginia Bankers Association; Thomas C. Palmer, regional vice president and senior vice president, Central VA Regional Commercial Banking, Wells Fargo Bank NA, and chairman of the Virginia Chamber of Commerce; T. Gaylon Layfield, III, president & CEO, Xenith Bank, and Chairman of the Virginia Bankers Association; and Barry DuVal, president & CEO, Virginia Chamber of Commerce.

Thanks to all who attended the 5th Annual Financial Forecast. Please save the date for the 2017 Financial Forecast on Jan. 6, 2017.

12 Virginia Banking | January/February 2016

www.vabankers.org

www.vabankers.org

January/February 2016 | Virginia Banking 13

Update

Washington

Standing Together for a Strong Industry

A Rob Nichols President and CEO, American Bankers Association

s I assume my responsibilities as ABA’s new president and CEO and look ahead to all the challenges and opportunities facing our industry, there’s one thing that I’m especially grateful for: the alliance that ABA has forged over the years with our 53 state association partners.

I have worked in Washington long enough to know how critically important – and sometimes rare – such effective, nationwide alliances are.

And there is no doubt that they provide a strategic and tactical advantage for any lobbying organization lucky enough to boast one.

That’s why the day I was named ABA’s next CEO last spring, the first thing I did was pick up the phone and personally call each state association executive. In these conversations, I had the opportunity to listen to the priorities, concerns and aspirations of the people that I will have the privilege of working closely with in the coming days, months and years. My message to them, and to you, is simple: as we fight for the common goals of regulatory relief for our industry and a fair playing field for banks in the face of growing nonbank competition, we must all – community banks and large institutions alike – stand together as one.

A unified industry is essential for success in

Washington. We’ve all witnessed the difficult realities of getting meaningful legislation through Congress. Lawmakers face too many demands from too many different areas to worry about bankers if we all disagree. The responsibility lies with us to focus on the things we have in common and the ways that we can work together to elevate our industry and strengthen our economy – and our partnership with the state associations is indispensable to finding that unified focus.

With such a diverse industry, building consensus can sometimes be a challenge, but it is both doable and worth doing. ABA and the state associations together represent the full range of banks – institutions of different asset sizes, business models and charters – that help American businesses, consumers and communities succeed.

Each member of our diverse industry plays a critically important role in the financial ecosystem, making our economy stronger and our country’s banking sector the envy of the world. That impresses policymakers. It makes them want to know where we stand, and it helps them understand the implications of their policy decisions.

Our partnership with the state associations is not only critical to creating unity, it also produces a muscular response when grassroots action is needed. Effective advocacy organizations need both strong fundraising and boots on the ground in every congressional district. State associations deliver that. They have been the key to making BankPac a top-10 PAC, and between our joint Washington Visit program and the annual Government Relations Summit, they bring more than 2,000 bankers to the nation’s capital every year for face-to-face meetings with policymakers.

So as we roll up our sleeves and get to work on our priorities for 2016, I’m thankful for many things. I’m thankful for the opportunity to lead ABA as we navigate through whatever challenges the future has in store. I’m thankful for the strong alliance with our state associations that will help us remain unified as an industry and achieve our common goals. And most of all, I am thankful for all of you – for everything you have done and continue to do to help us succeed.

Email Rob Nichols at nichols@aba.com.

14 Virginia Banking | January/February 2016

www.vabankers.org

Compliance

Corner

Overdraft Rules Confirmed for 2016

I

By Nathan McDonald Associate General Counsel, Compliance Alliance

www.vabankers.org

n October, the CFPB confirmed its plans to engage in rulemaking for overdraft in its 2016 rulemaking agenda. It has been a long road getting to this point, since 2012 when Director Cordray described overdraft practices as “harmful” in a speech given that year.

As part of its rulemaking preparations, the agency is currently conducting additional research and consumer testing of opt-in initiatives. Recently, it sought permission from the Office of Management and Budget to conduct a web-based survey of 8,000 consumers as a part of its study of ATM/ debit card overdraft disclosure forms, under the authority provided by the Electronic Fund Transfer Act. As claimed in its filing, the survey will be used to “explore” consumer comprehension and decision-making in response to revised overdraft forms. It also aims to “explore” overdraft product usage, consumer behavioral traits and characteristics that may interact with a consumer’s experiences with overdraft programs and disclosures.

In addition to the forthcoming rules, the CFPB has already exercised its enforcement powers to curb overdraft practices it feels are harmful to consumers, levying a fine of $7.5 million against Regions Bank for allegedly charging overdraft fees to consumers who had not opted-in for coverage. In addition to the fine, the consent order required the bank to refund overdraft fees to consumers in an amount exceeding $49 million. On the same day, the CFPB also issued a consumer advisory regarding overdraft services, notifying consumers of how to avoid overdraft fees, and urging consumers to shop around.

Enhanced scrutiny currently placed on overdraft has not been limited to the CFPB’s agenda, as the Department of Education recently announced new regulations banning overdraft fees on student debit and prepaid cards. Additionally, several class action lawsuits have been initiated against large banks in the last few years regarding overdraft practices. Most recently, Wells Fargo lost its fight in a federal appeals court to set aside class certification of three lawsuits in which the bank has been accused of collecting millions of dollars in improper overdraft fees from consumers. HSBC also reached a preliminary settlement

for $30 million late last year in a lawsuit before the New York Supreme Court for allegedly reordering transactions to boost overdraft income, while also defending against a class action suit in federal court based on similar allegations.

Although income from overdraft fees has declined since opt-in requirements went into effect in 2010, it continues to be a significant source of non-interest income. At the three largest banks alone, overdraft income amounted to nearly $1.1 billion in the first quarter of 2015. During the same period, the roughly 600 banks required to report overdraft fees reported approximately $2.5 billion in overdraft fee income. Currently, overdraft charges average $33.07, exhibiting an increase of nearly 10 percent over the last five years.

At this time, it’s too early to tell what, how and to what extent the new rules may impact overdraft programs. Until then, it would be prudent to evaluate the level of overdraft income at your institution, and preliminarily consider the possible impact that reduced overdraft income would have on earnings, budgeting and strategic planning.

Compliance Alliance offers a comprehensive suite of compliance management solutions. To learn how to put them to work for your bank, call (888) 353-3933, visit compliancealliance.com, or email info@compliancealliance.com.

A former federal and state banking regulator, Nathan brings unique knowledge and diverse experience to Compliance Alliance. Prior to attending law school, Nathan obtained his bachelor’s degree in business administration and served as an OCC examiner in the New York metro area. While at the OCC, he served as a portfolio manager and the analyst to the resident EIC of a mid-size national bank, a rare opportunity for a junior examiner. After obtaining his J.D. from The University of Texas at Austin in 2011, Nathan worked at the Texas Department of Savings & Mortgage Lending where he served as an associate general counsel, developed and implemented the department’s successful and innovative compliance examination program with the FDIC, and gained valuable experience participating in FDIC compliance examinations.

January/February 2016 | Virginia Banking 15

Within

A Look

Inside the Business Valuation Process: A Primer for Commercial Lenders segment of community and mid-size banks, the valuation process and related requirements may be more of an enigma where SBA loan volume is lower.

This short tutorial provides lenders with guidance on who should perform a valuation for their client, how the lender can help with selecting a valuation professional and an overview of the factors a valuation analyst will consider.

I

By Dan Doran Principal, Quantive Business Solutions

n the end, it all comes down to the bottom line. “Value,” like beauty, is subjective – what the business is worth to the owner may not be what it is worth to the market. But if a business is to be sold, its value must be objectively determined – a sticking point for the lenders involved in the transaction.

In all buy-sell transactions, valuation is the proximate issue: just how much is the business worth? From a seller’s perspective, one way to find out is to let the market speak by soliciting offers. From the buyer’s perspective, past experience might be one method to understand value, or perhaps quantifying what one can afford in terms of cash out of pocket and monthly loan payment is another.

Both of these methods tend to be imprecise.

And while they may satisfy the parties – and lenders – in some smaller deals, when it comes to Small Business Administration lending, the SBA’s standard operating procedure requires that when goodwill exceeds $250,000, an independent, thirdparty valuation is required.

Typically lending teams within larger financial institutions are more accustomed to the valuation process and requirements. However, for a large

16 Virginia Banking | January/February 2016

WHO CAN PERFORM THE VALUATION? The SBA requires that the valuation be performed by someone who routinely performs business valuations. While this makes sense at first blush, it also segues into a recent change: CPAs are not qualified to perform business valuations in the absence of an accompanying valuation credential.

Many jump to the conclusion that business valuation is a core component of CPA work. It’s not.

While there are CPAs who also perform valuation work, the CPA credential on its own does not indicate that a practitioner routinely performs valuation work.

The SBA does recognize several credentials that are acceptable for third-party valuation firms.

Those include: • CVA, a credential from the National Association of Certified Valuators and Analysts.

• ASA, from the American Society of Appraisers.

• ABV, Accredited in Business Valuation, awarded to CPAs by the American Institute of Certified Public Accountants.

• CBA, Certified Business Appraiser, from The Institute of Business Appraisers Inc. WHAT SHOULD LENDERS CONSIDER? When selecting a firm to perform a third-party business valuation it’s important to consider the experience of the appraiser or appraisal firm.

Items to look for include: • Industry experience: Does the appraiser have experience working in the given industry?

• Valuation specialization: Does the appraiser routinely perform valuation work? Or merely hold a valid credential but rarely perform actual valuations? www.vabankers.org

• Capacity: How long will it take to complete the project? We all know the old saying, “time kills deals.” Ideally the appraiser has capacity to turn the project around in a reasonable time – typically one to three weeks.

WHAT WILL AN ANALYST CONSIDER? Each valuation is slightly different, but the valuator will consider three approaches: the market approach, the income approach and the asset approach. Each of these approaches considers the company in a different light, allowing the appraiser to take a deep look at the business.

For SBA loan valuations, the asset approach is usually considered, but not relied upon. The asset approach essentially looks at the book value of the company, perhaps making adjustments for assets and liabilities that may not transfer to the buyer. In most common applications of the asset approach there is no goodwill.

Given that the SBA requirement is predicated on goodwill, it stands to reason that the asset approach is infrequently relied upon.

The market approach seeks to compare the subject company to other similar companies in the market. This approach – often comparing the subject company’s earnings, gross profit or revenues to other, similar companies – can provide great insights into how the market has priced similar businesses. The downside is the availability of data. Companies that fit within the SBA program are invariably not public, and data can be sparse and misleading. If the business type is common – such as daycares, gas stations or insurance agencies – market data may be robust. But finding data for less common businesses is more challenging.

The income approach seeks to develop a discount rate – essentially a risk profile – for the subject company. The advantage in doing so is that the appraiser can directly tune the calculation for the subject company. The analyst will look at the earnings stream of the company and apply the discount rate in order to develop the overall value. www.vabankers.org

While not required to rely on all of those approaches, by reviewing each the analyst is able to best triangulate fair market value. A good analyst will be able to select the best approach and model for the subject company to develop a fair market value.

Perhaps the most common pitfall in valuing businesses in concert with SBA lending is understanding which assets and liabilities are conveying to the purchaser. (This also happens to be an area that can derail deals when buyers and sellers do not clearly convey expectations.) For example: is the seller retaining accounts receivable and accounts payable? Or is the buyer purchasing? How about real estate rental deposits? Or prepaid expenses? Accrued vacation?

Identifying which assets and liabilities will be part of the “NewCo” balance sheet early will help both the analyst properly prepare a valuation, as well as

ensure buyer and seller are on the same sheet of music at closing time.

WHERE CAN LENDERS GO FOR MORE INFORMATION? The SBA SOP 50-10 5(b) recently added more extensive business valuation requirements to ensure that lenders are utilizing qualified and compliant valuation analysts. Lenders may also consult the websites of The National Association of Certified Valuators and Analysts and the American Society of Appraisers for more in-depth information on the valuation process, such as IRS Business Valuation Guidelines and an International Glossary of Business Valuation Terms.

Dan Doran, CVA, is principal of Quantive Business Valuations, a professional business valuation practice specializing in small to medium-sized closely held and family owned businesses.

BOB BYE, YOUR VIRGINIA BOLI EXPERT Bob Bye has developed numerous Executive Benefit Programs funded with BOLI with Virginia and Midwestern Banks.

For more information or to schedule a meeting, call 540-777-5025.

Robert Bye CLU®, ChFC®, CEBS, AEP® Senior Financial Representative (540) 777-5025 bob-bye.com

05-4002 © 2015 Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, WI (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries.

Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser, and member of FINRA and SIPC. Robert Cameron Bye, Insurance Agent(s) of NM. Robert Cameron Bye, Registered Representative(s) of NMIS.

January/February 2016 | Virginia Banking 17

Move

Bankers on the

Are your bankers on the move? Email submissions to cowdom@vabankers.org.

Rana

Witt

Carter

Barnes

Canada

Bank of Lancaster Susan S. Pittman, Chief Lending Officer Bank of the James Hope Rana, Vice President and Commercial Relationship Manager Jason Witt, Vice President and Consumer/Mortgage Loan Officer Blue Ridge Bank Jonathan Comer, Market President for Harrisonburg Kelly Potter, Market President for Charlottesville First Bank and Trust Co. Charles Carter, Vice President and Manager, Trust and Wealth Management Division Justin Barnes, Vice President and Commercial Lender First National Bank Patricia Canada, Assistant Vice President, Branch Manager

Griffin

King

Vaughan

Walker

Wallace

Aldridge

Tammie Griffin, Ecommerce Sales Representative Ann King, Assistant Vice President, Branch Manager George Vaughan, Vice President, Commercial Officer Jeffrey Walker, Assistant Vice President, Branch Manager Penny Wallace, Vice President, Commercial Officer First Tennessee Bank Hattie Hamlin, Senior Vice President, Commercial Relationship Manager Jane Fortune, Senior Vice President, Private Client Relationship Manager Rebecca Crump, Client Specialist Trevor Wall, Portfolio Manager HomeTown Mortgage Tammie Aldridge, Senior Mortgage Banker Old Point National Bank Melinda J. Matthews, Commercial Relationship Manager

VBA Guide to Record Retention: New version now available!

Banks pay the price for keeping records that should have been disposed of many years before. The nightmare and costs of unneeded litigation are topped only by the inability to find the records in a timely and efficient manner.

Does your bank follow current retention guidelines set forth by the federal government?

Take the guesswork out of storing customer information. Order your own copy of the Record Retention Guide today.

To order your copy of the new VBA Record Retention Guide (federal rules), simply contact Amy Binns at abinns@vabankers.org or 804-819-4726.

Get your copy of the VBA Guide to Record Retention for only $99.00 (+ 5.3% Tax + $2.95 S/H)! *Please note that this guide is only available in a hard copy format.

Questions? Contact Amy Binns at abinns@vabankers.org or 804-819-4726.

18 Virginia Banking | January/February 2016

www.vabankers.org

CommitteePalooza Program

Commit Yourself to Becoming Involved.

Committee involvement is an integral part of the success of the Virginia Bankers Association!

The VBA has a number of committees in which member bankers from across the Commonwealth participate. The purpose of the committees is to provide input to the VBA on matters affecting the banking industry and the committee’s functional area of banking, provide input to VBA’s education and training department on the training needs of their functional area, provide a forum for exchange of ideas and for networking that will benefit each committee member and his/her bank, and identify possible legislative and/or regulatory issues on which the VBA should focus as the banking industry’s advocate.

Our Committees: •CFO Committee •Compliance Committee •Enterprise Risk Management Committee •Government Relations Committee •HR Committee •Leadership Division Steering Committee •Legal Affairs Committee •Legislative Executives Committee •Lending Executives Committee

•Marketing Committee •Mortgage Executives Committee •Operations & Technology Committee •Retail Executives Committee •Security Committee •Training Committee •Trust & Wealth Management Committee

Join a Committee: If you have enthusiasm and creative ideas, we would like to hear from you. Please take the time to visit our website at www.vabankers.org and click “Get to Know the VBA” and fill out the form under “VBA Boards and Committees”. Your form will be reviewed by the VBA, and your appointment to a committee will be subject to availability and approval by the VBA Chairman. Committee meetings vary by group, but most hold one meeting per quarter, whether in-person or via conference call. If you have any questions about committees or committee service, please contact Bobbi Weimer at bweimer@vabankers. org or 804-819-4725. Committee placements will be made in June, with first meetings held in September. Committee members are asked to serve for one year, but may be reappointed.

We hope you will consider joining us on a committee this year!

Ba

VBA

am og r Pr •

d

Sponsored by the VBA Education Foundation and the VBA Leadership Division

ou nd atio n

VIRGINIA BANKERS ASSOCIATION BANK DAY SCHOLARSHIP PROGRAM

•

e sor Spon

CALLING ALL BANKERS! PARTICIPATE IN THE VBA BANK DAY SCHOLARSHIP PROGRAM!

ay Scholarshi D p nk

by nF the o i t VBA Educa

The third Tuesday in March was declared Bank Day by the Virginia General Assembly in 1991. On this day, high school seniors spend a day in banks across the Commonwealth shadowing a banker in their daily duties. The purpose of this experience is for the students to learn about banking, financial services, and the vital role banks play in their communities.

From their experience, the students are required to write an essay on their Day. Seven scholarships (six regional and one statewide) will be awarded on the basis of the essays. There will also be six honorable mention scholarships of $1,000 this year (one in each of the six regions).

Bank Day will take place on Tuesday, March 15, and the VBA Leadership Division will participate in, lead and help promote the program.

Participation Criteria: High school senior Cumulative GPA of 3.0 or higher Teacher sponsor New Scholarship Amounts: Scholarship Amounts Have Been Increased by $7,000 This Year - $26,000 total! $1,000 Each for Six Honorable Mention Scholarships $2,500 Each for Six Regional Winners $5,000 Statewide Winner ($7,500 total since all candidates will also be regional winners) Deadlines & Important Dates: Mar. 11, 2016: Deadline for students to sign-up for the program.

Mar. 15, 2016*: Bank Day! Shadowing takes place.

Apr. 8, 2016: Student essays due by 5 pm. Essays submitted directly to VBA via email.

May 2, 2016: Regional winners notified. Regional winners will be entered into the statewide contest for an additional $4,000 scholarship. Honorable mention winners are also notified.

May 13, 2016: State winner notified.

Dates TBD: VBA representative and/or bank representative present scholarships to all winning students at their respective schools’ awards assembly, or equivalent (subject to school approval and banker availability).

Please contact Chandler Owdom at cowdom@vabankers.org with questions. *You may hold your Bank Day on a different day than March 15, but please keep the deadlines in mind and allow the student adequate time to write his or her essay after your day.