Category: Financial Institutions and Banking

How S corporation banks can qualify for the pass-through deduction

The Tax Cuts and Jobs Act created a new “pass-through” deduction (found in Internal Revenue Code Section 199A), which allows owners of S corporations and other pass-through entities to deduct up to 20% of their “qualified business income.” But Sec. 199A is subject to several restrictions and limitations. These include disallowance of the deduction with respect to specified service trades or businesses (SSTBs) for owners whose income exceeds certain thresholds.

SSTBs include financial services, brokerage services, investing and investment management, securities dealing, and several other services. So some S corporation banks have been uncertain about whether they’re eligible for the deduction. But recently finalized regulations provide welcome guidance, clarifying that “financial services” don’t include taking deposits or making loans. Further, originating loans for sale on the secondary market doesn’t fall under the “dealing in securities” umbrella.

Banks whose trust departments or wealth management advisors provide investment-related services or are involved in other SSTB activities may still qualify for the deduction, if either:

• These activities produce less than 5% of gross receipts (10% for banks with gross receipts under $25 million), or
• The bank is able to segregate its SSTB from its non-SSTB activities.

Homeowners Protection Act is on CFPB radar

In the Winter 2019 issue of its Supervisory Highlights report, the Consumer Financial Protection Bureau (CFPB) signaled a renewed focus on compliance with the Homeowners Protection Act (HPA). The HPA requires residential mortgage servicers to cancel private mortgage insurance (PMI) if certain conditions are met. The CFPB identified several deceptive practices among servicers, such as failing to properly disclose the reasons for denying PMI cancellations, providing inaccurate or incomplete reasons for such denials, and misleading consumers about the conditions for PMI removal.

You can find the full report at https://www.consumerfinance.gov/policy-compliance/guidance.

Guidance out on mortgage servicing rule

The CFPB has released several important implementation tools to help servicers comply with amendments to the mortgage servicing rules in Regulations X and Z. They include 1) a set of frequently asked questions regarding periodic billing statement requirements for borrowers in bankruptcy, 2) an updated small entity compliance guide that reflects the final amendments, and 3) an updated mortgage servicing coverage chart that incorporates the final amendments. You can find these tools at https://www.consumerfinance.gov/policy-compliance/guidance/mortserv.

© 2019

The Opportunity Zone program, created by the Tax Cuts and Jobs Act of 2017, provides investors with a powerful tax incentive to make long-term investments in state-designated economically distressed communities. The U.S. Treasury Department has certified approximately 9,000 Qualified Opportunity Zones (QOZs) in urban and rural areas across the country. Investors with capital gains can defer and, in some cases, exclude those gains from income by reinvesting them into an opportunity zone.

The benefits

What are the potential benefits for community banks? It’s unlikely that many banks will invest directly in opportunity zone projects, but some are creating funds to make equity investments in these projects.

But perhaps the most significant benefit for community banks is the opportunity to make loans in connection with development projects that might otherwise not be economically feasible — absent the tax breaks available in opportunity zones. And these loans may also help a bank meet Community Reinvestment Act requirements. (See “CRA compliance matters.”)

The way it works

It’s important to recognize that, to enjoy the tax benefits offered by the program, investors can’t simply write a check to the developer of a project in a QOZ. First, the investor must show recognized capital gains from other investments. Second, the investor must reinvest those gains, within 180 days, in a Qualified Opportunity Fund (QOF), which is a corporation or partnership formed for the purpose of investing in QOZs. Note that special rules apply to capital gains allocated from partnerships and other pass-through entities to their owners. Under those circumstances, investors should consult their tax advisors to determine when the 180-day period starts.

Virtually any individual or organization can create and manage a QOF, with a single investor or many investors. To qualify, at least 90% of the fund’s assets must be “QOZ property.” This includes tangible property that’s used by a trade or business within a QOZ and meets specific other requirements (QOZ business property). It also includes equity interests in qualifying corporations or partnerships (QOZ businesses), if substantially all of their tangible property is QOZ business property.

The tax benefits for investors in QOFs are attractive. First, the tax on reinvested capital gains is deferred until the end of 2026 or the date the QOF investment is disposed of, whichever comes first. Next, investors enjoy a 10% reduction in the amount of taxable capital gain if they hold the QOF investment for at least five years — and 15% if they hold the investment for at least seven years. Finally, investors who hold their QOF investments for at least 10 years avoid capital gains tax on the appreciation of the QOF investment itself.

An example

Consider this example: On September 1, 2019, Bill sells his interest in stock, generating $2 million in capital gain. Bill establishes a single-investor QOF for the purpose of acquiring and developing commercial real estate in a QOZ valued at $10 million. On December 1, Bill reinvests his entire $2 million gain into the QOF, which borrows the remaining $8 million needed to acquire the property from a community bank.

Bill holds the QOF investment until December 15, 2029. At the end of 2026, Bill has satisfied the seven-year holding period, so he’s taxed on only 85%, or $1.7 million, of the original $2 million gain. Now, suppose that the value of Bill’s interest in the QOF has grown to $7 million by the time he disposes of it on December 15, 2029. Because he’s met the 10-year holding period, the entire $5 million in appreciation is tax-free.

Timing is everything

If your bank is exploring ways to take advantage of the Opportunity Zone program, you should start as soon as possible. That’s because investors who wish to maximize the available tax benefits must invest in a QOF by the end of this year. Otherwise, they can’t meet the seven-year holding period that’s required for a 15% gain reduction by year-end 2026. Of course, investors can still enjoy a 10% gain reduction, which requires a five-year holding period. A requirement: They must invest by the end of 2021.

At press time, the IRS was continuing to fine-tune a complex set of proposed regulations on the QOZ program. So be sure to consult your tax advisors before getting involved in QOZ projects.

Sidebar: CRA compliance matters

One potential benefit of opportunity zones for community banks is that loans in those economically distressed areas may help banks meet their obligations under the Community Reinvestment Act (CRA). The CRA’s purpose is to encourage banks to help meet the credit needs of the communities in which they operate, including low- and moderate-income (LMI) neighborhoods. Of course, their activities must be consistent with safe and sound banking operations. In many cases, these LMI neighborhoods are located in, or coincide with, Qualified Opportunity Zones (QOZs) and are eligible for the tax benefits described in the main article.

The federal banking agencies periodically evaluate banks’ records in meeting their communities’ credit needs. And the agencies’ performance evaluations and CRA ratings are made available to the public. A positive rating can enhance a bank’s reputation in its community. And the agencies take a bank’s CRA record into account when considering requests to approve bank mergers or acquisitions, charters, branch openings or deposit facilities. Banks should consider these potential benefits as they evaluate opportunities in QOZs.

© 2019

CECL: Banking agencies offer regulatory capital relief

The federal bank regulatory agencies recently finalized a rule that offers banks relief from the regulatory capital impact of the new Current Expected Credit Loss (CECL) standard. CECL discards the traditional incurred-loss model for recognizing credit losses in favor of a forward-looking approach. That is, banks will recognize an immediate allowance for all expected losses over the life of loans and other financial assets covered by the standard.

For some banks, adoption of CECL will negatively affect regulatory capital. Although the actual impact depends on a bank’s particular circumstances, many banks will experience an increase in allowance levels and a reduction in the retained earnings component of equity. This combination will lower their common equity tier 1 capital.

The final rule gives banks the option to phase in the day-one adverse regulatory capital effects of implementing CECL over a three-year period.

A BYOD policy protects banks

These days, the vast majority of your employees have smartphones. Use of these devices to send and receive work-related emails and other communications, and to access the bank’s files and other network resources, can boost productivity. But the ensuing security concerns have led some banks to prohibit employees from using their own devices for bank business. Although an outright ban can be hard to enforce, setting a bring-your-own-device (BYOD) policy enabling the bank to control these devices and manage the risk may be a better approach.

A BYOD policy should, among other things:

• Provide for management approval and registration of all mobile devices that will access the bank’s servers,
• Require employees to maintain up-to-date virus protection, authentication and encryption software on mobile devices,
• Require employees to use strong passwords and other security controls to access mobile devices and the bank’s servers,
• Specify what type of information can be stored on or transmitted by mobile devices,
• Allow the bank to remotely wipe a device clean if it’s lost or stolen, and
• Require employees to provide written consent to comply with the written security procedures before using the device for bank business.

Consider using mobile device management (MDM) software to manage employees’ devices and implement controls to protect the bank’s information.

Regulators approve lengthened examination cycle

On January 17, the federal bank regulatory agencies finalized a rule expanding the availability of an 18-month, on-site examination cycle for qualifying banks with less than $3 billion in total assets (up from $1 billion). The agencies reserved the right to impose more frequent examinations if deemed “necessary or appropriate.”

© 2019

Abstract: The value of real estate collateral typically is fundamental to the value of many loan portfolios. So it’s important to stay on top of real estate value fluctuations and obtain periodic appraisals according to the rules. This article points out that lenders should understand interagency guidelines, maintain program independence, use selection criteria for valuators and become familiar with appraisal standards. The article suggests that, to ensure real estate collateral is sound, it’s important to set up an effective, efficient and comprehensive review program.

Staying ahead of the game

Review your real estate valuation program

The value of real estate collateral is likely fundamental to the value of your loan portfolios. So it’s important to stay on top of real estate value fluctuations and obtain periodic appraisals according to the rules. You also need to understand interagency guidelines, maintain program independence, use selection criteria for valuators and become familiar with appraisal standards. Doing all this can keep you ahead of the game.

What are the interagency guidelines?

Start your evaluation by revisiting the kingpin of any valuation program, the Interagency Appraisal and Evaluation Guidelines. They apply to appraisals and evaluations for all real estate–related financial transactions originated or purchased by regulated institutions, whether for the institutions’ own portfolios or as assets held for sale. The guidelines cover residential and commercial mortgages, capital markets groups, and asset securitization and sales units.

Most transactions valued at more than $250,000 require appraisals, though certain transactions — listed in Appendix A to the guidelines — are exempt. In addition to the exclusion for transactions at or below the $250,000 threshold, exceptions include:

• Business loans secured by real estate for less than $500,000 (the $500,000 limit for commercial loans took effect on April 9, 2018) whose source of repayment is from other than the rental income or sale of the real estate,
• Extensions of existing credits,
• Loans not secured by real estate, and
• Transactions guaranteed or insured by the U.S. government.

The exemptions are limited, so be sure to scrutinize transactions to determine whether risk factors or other circumstances make an appraisal necessary. Some exempt transactions require a less formal evaluation.

Is your program independent?

Your institution is responsible for developing an effective collateral valuation program. First, consider the independence of your program, which should be isolated from influence by your loan production staff. Individuals who order, review and accept appraisals or evaluations should have reporting lines independent of the production staff as well. Appraisers and individuals performing evaluations (“evaluators”) need to be independent of loan production and loan collection and obviously should have no interest in the transaction or property.
Special rules apply to smaller institutions that lack the staff needed to separate their collateral valuation programs from the production process. For mortgages and other loans secured by a principal dwelling, review amendments to Regulation Z that impose strict independence and conflict-of-interest requirements on appraisers.

What are the selection criteria for valuators?

Next consider how you select valuators. Set criteria for selecting, evaluating and monitoring appraisers and evaluators, and for documenting their credentials. Among other things, ensure that those selected are qualified, competent and independent and that appraisers hold appropriate state certifications or licenses.
Select and engage appraisers directly (though appraisals prepared for other institutions may be used if specific rigorous requirements are met). Approved appraiser lists are permitted, provided you establish safeguards to ensure that list members continue to be qualified, competent and independent.

What are the minimum appraisal standards?

Then make sure that your appraisals conform to the Uniform Standards of Professional Appraisal Practice, although safe and sound banking practices may call for stricter standards. Written reports should provide sufficient detail — according to the transaction’s risk, size and complexity — to support the credit decision.

Appraisers should analyze appropriate deductions and discounts (detailed in Appendix C of the guidelines) for proposed construction or renovation, partially leased buildings, non-market lease terms and tract developments with unsold units.

What are some other factors?

In addition to these touchstones, your program should facilitate credit decisions by ensuring the timely receipt and review of appraisal or evaluation reports. It also should provide criteria for determining whether existing appraisals or evaluations may be used to support subsequent transactions.

Moreover, your valuation program should have in place internal controls that promote compliance. And it should contain standards for monitoring collateral values and for handling transactions not otherwise covered by appraisal regulations.

If you outsource valuation functions, your institution remains responsible for all appraisals and evaluations. The interagency guidelines discuss the resources, expertise, controls and due diligence procedures your institution needs to identify, monitor and manage risks associated with these outsourcing arrangements.

Is it working?

The only way to ensure that your real estate collateral is sound is to set up an effective, efficient and comprehensive program. You’ll also need to review it regularly and adjust as needed to keep it on the right track.

© 2019

FinCEN creates exception to Beneficial Ownership Rule

As part of its efforts to combat money laundering and other fraudulent activity, the Financial Crimes Enforcement Network (FinCEN) issued its Beneficial Ownership Rule, effective for new accounts opened on or after May 11, 2018. The rule requires banks, as part of their customer identification programs, to verify the identity of the beneficial owners of certain legal entities. Beneficial owners include individuals who, directly or indirectly, own 25% or more of an entity, as well as any individual who has “significant responsibility to control, manage or direct the legal entity.”

In a September 7, 2018, ruling, FinCEN created an exception to the beneficial ownership rule for legal entities that open new accounts on or after the effective date as a result of:

• Rolling over a certificate of deposit,
• Renewing, modifying or extending a loan, commercial line of credit or credit card account that doesn’t require underwriting review and approval, or
• Renewing a safe deposit box rental.

The exception applies only to rollovers, renewals, modifications or extensions of the above product types that take place on or after May 11, 2018. It doesn’t apply to the initial opening of such accounts.

Banks considering use of alternative credit data

Some lenders are considering the use of alternative data to expand access to credit for people with thin credit histories or negative items on their credit reports. By developing innovative techniques for analyzing a borrower’s ability to repay, lenders can expand their pools of potential borrowers beyond those identified by traditional techniques.

Alternative data refers to information that may be used to evaluate creditworthiness but is not traditionally part of a credit report. Examples include rent payments, mobile phone payments, cable TV payments, and bank account information. This may also include education, occupation and even social media activities.

It may take some time before alternative data techniques catch on among community banks. In 2017, the Consumer Financial Protection Bureau (CFPB) released a “Request for Information” seeking information about alternative data and the modeling techniques used to analyze them. You can find the document, which discusses the benefits and risks associated with alternative data, at https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/archive-closed/request-information-regarding-use-alternative-data-and-modeling-techniques-credit-process.

Supervisory guidance isn’t the law

In a recent joint statement, the federal banking agencies clarified that supervisory guidance “does not have the force and effect of law.” Among other things, the agencies intend to limit the use of numerical thresholds or other “bright lines” in describing expectations, and examiners won’t criticize banks for “violations” of supervisory guidance.

© 2018

Every banker knows the importance of due diligence in determining whether to make a loan. But it’s easy to backslide and rely on just a few superficial financial markers that may, or may not, indicate creditworthiness. Here’s a reminder of some due diligence steps to take to help you dig deeper and ensure your bank’s loan portfolio is more secure.

Assessing risk from many angles

Start the due diligence process as an auditor would. That is, before you open a borrower’s financial statements, consider documenting the risks in the borrower’s industry, applicable economic conditions, sources of collateral and the borrower’s business operations.

This risk assessment identifies what’s most relevant and where your greatest exposure lies, what trends you expect in this year’s financials, and which bank products the customer might need. Risk assessments save time because you’re targeting due diligence on what matters most.

Evaluating reliability

Now tackle the financial statements, keeping in mind your risk assessment. First evaluate the reliability of the financial information. If it’s prepared by an in-house bookkeeper or accountant, consider his or her skill level and whether the statements conform to Generally Accepted Accounting Principles. If statements are CPA-prepared, consider the level of assurance: compilation, review or audit.

Comprehensive statements include a balance sheet, income statement, statement of cash flows and footnote disclosures. Make sure the balance sheet “balances” — that is, assets equal liabilities plus equity. You’d be surprised how often internally prepared financial statements are out of balance.

Statements that compare two (or more) years of financial performance are ideal. If they’re not comparative, pull out last year’s statements. Then, note any major swings in assets, liabilities or capital. Better yet, enter the data into a spreadsheet and highlight changes greater than 10% and $10,000 (a common materiality rule of thumb accountants use for private firms). You should also highlight changes that failed to meet the trends you identified in your risk assessment. For example, you expected something to change more than 10% but it did not.

Now ask yourself whether these changes make sense based on your preliminary risk assessment. Brainstorm possible explanations before asking the borrower. This allows you to apply professional skepticism when you hear borrowers’ explanations.

Keeping score

Use your risk assessment to create a scorecard for each borrower. It often helps to discuss your risk assessment with co-workers and to specialize in an industry niche.

One ratio that belongs on every scorecard is profit margin (net income / sales). Every lender wants to know whether borrowers are making money. But a profitability analysis shouldn’t stop at the top and bottom of the income statement. It’s useful to look at individual line items, such as returns, rent, payroll, owners’ compensation, travel and entertainment, interest and depreciation expense. This data can provide reams of information on your client’s financial health.

Other useful metrics include current ratio (current assets / current liabilities), which measures short-term liquidity or whether a company’s current assets (including cash, receivables and inventory) are sufficient to cover its current obligations (accrued expenses, payables, current debt maturities). High liquidity provides breathing room in volatile markets.

In addition, total asset turnover (sales / total assets) is an efficiency metric that tells how many dollars in sales a borrower generates from each dollar invested in assets. Again, more in-depth analysis — for example, receivables aging or inventory turnover — is necessary to better understand potential weaknesses and risks.

Finally, calculating the interest coverage ratio (earnings before interest and taxes / interest expense) provides a snapshot of a company’s ability to pay interest charges. The higher a borrower’s interest coverage ratio is, the better positioned it is to weather financial storms.

When applying these metrics, compare a company to itself over time and benchmark it against competitors, if possible. If customers’ explanations don’t make sense, consider recommending that they hire a CPA to perform an agreed-upon-procedures engagement, targeting specific high-risk areas.

Keeping aware of risk and reward

A healthy loan portfolio carries with it a certain amount of uncertainty. But, to minimize the potential for problems down the line, that uncertainty needs to be quantified, documented and analyzed. Taking these due diligence steps can help make your loans rewarding, rather than risky.

© 2018

Do you need a bank holding company?

For years, the vast majority of U.S. banks have used a bank holding company (BHC) structure. Recently, however, several prominent regional banks have elected to shed their BHCs by merging them into their subsidiary banks. This development has many community banks wondering whether the BHC model has become obsolete.

Pros and cons

The answer to this question: It depends (big surprise). Some banks may find that eliminating the BHC structure simplifies financial reporting, streamlines regulatory oversight and reduces administrative expenses. Others — particularly those that qualify as “small bank holding companies” — may find that the benefits of the BHC structure outweigh its costs.

It’s important to keep in mind that recent legislation expanded the definition of small BHC to include those with consolidated total assets of $3 billion or less (up from $1 billion). (See “Advantages of small BHC status.”) Here are some of the possible reasons for eliminating a holding company, along with a review of the continued benefits of the BHC structure.

Reasons for discarding your BHC

Potential advantages of eliminating a BHC include the following:

Reduced regulatory oversight. Banks without a holding company are no longer supervised by the Federal Reserve (the Fed) — except for Fed member banks. This can reduce compliance costs. The Fed strives to rely on an organization’s primary regulator and scales its supervisory approach depending on that organization’s complexity, risk and condition. So the cost savings from reduced regulatory oversight will likely be insubstantial for smaller organizations.

Lower administrative costs. Eliminating the BHC simplifies financial reporting and reduces costs associated with maintaining separate legal entities. These costs include additional taxes, fees, and accounting expenses; dual boards; and duplicative policies and procedures.

No need to deal with the SEC. Some BHCs must report to the SEC, but banks are generally exempt from the SEC’s registration and reporting requirements. However, it’s important to note that, in the absence of a BHC, some securities-related reporting requirements will shift to the bank’s primary regulator.

Benefits of BHC structure

Although the Dodd-Frank Act eliminated some earlier advantages of BHCs, most notably the inclusion of trust-preferred securities in Tier 1 capital, the BHC model continues to provide significant benefits for many banks, including:

Liquidity. BHCs have greater flexibility to repurchase stock. The ability of banks to create a market for their own stock is limited by state and federal law, and reducing capital usually requires prior approval.

M&A flexibility. BHCs (particularly small BHCs) have significant flexibility in structuring and financing M&A transactions. Plus, they can maintain acquired banks as separate institutions, allowing them to be integrated more deliberately with other subsidiary banks.

Increased permissible activities. BHCs may engage in specific business and investment activities that are off limits to banks. For example, a BHC may invest in up to 5% of any entity’s voting securities without prior regulatory approval.

Purchasing problem assets. BHCs can purchase problem assets from their subsidiary banks, helping them improve their capital ratios and otherwise strengthen their financial performance.

Dividend flexibility. BHCs have more flexibility than banks in paying dividends.

Leveraging debt. Small BHCs have the ability to use debt to raise capital for their subsidiary banks. (See “Advantages of small BHC status.”)

Long-term needs

If you’re considering eliminating your BHC, be sure to carefully weigh the potential cost-savings and other benefits compared with the benefits of maintaining the BHC structure. This is especially necessary if your organization has total consolidated assets of $3 billion or less. Also consider the costs and administrative burdens of merging your BHC into its subsidiary bank, including shareholder and regulatory approval, modification of contracts and policies, and advisory fees.

Even if you conclude the pros of eliminating the BHC outweigh the cons, evaluate your bank’s long-term needs. If there’s a possibility that a BHC structure will become advantageous down the road, it may be wise to retain it. Creating a new BHC when a need arises in the future may be difficult — if not impossible — and costly.

 

Sidebar: Advantages of small BHC status

Banks whose holding companies qualify as small bank holding companies (small BHCs) under the Fed’s small bank holding company policy statement enjoy significant advantages, especially when it comes to raising capital. And last year’s Economic Growth, Regulatory Relief and Consumer Protection Act expanded these advantages to a greater number of banks by raising the threshold for small BHC status from $1 billion to $3 billion in total consolidated assets.

Small BHCs can incur greater amounts of debt than other BHCs. Plus, they’re permitted to measure capital adequacy at the bank level only, without considering the BHC’s consolidated capital. This allows the BHC to borrow money — using virtually any type of debt instrument — and “downstream” the proceeds to a subsidiary bank in the form of capital.

Greater access to debt also gives small BHCs greater flexibility in structuring and financing M&A transactions.

© 2018

5 Tips for Boosting Core Deposits

As interest rates continue to rise, competition among banks for core deposits is heating up. This creates a challenge for community banks striving to grow their core deposits to fund lending activities. On the one hand, banks need to consider paying higher rates to attract deposits. On the other hand, increasing the cost of deposits cuts into their profit margins.

Take the right steps

Here are five tips for attracting core deposits while keeping costs under control:

1. Avoid short-term fixes. It’s important to recognize that building core deposits is a long-term strategy — there are no quick fixes. Offering above-market interest rates, for example, may attract new customers in the short term, but it’s unlikely to support sustainable deposit growth. That’s because customers who’re attracted to higher rates are more likely to abandon you when a better rate comes along. In the long run, it’s better to focus on customers who value service over interest rates.
2. Don’t underestimate the importance of branches. A recent J.D. Power banking satisfaction study offers insights into the value of branches. According to the study, although 28% of retail bank customers are now digital-only, they are among the least satisfied. The most satisfied customers are “branch-dependent digital customers” — those who take advantage of online or mobile banking but also visit a branch two or more times during a three-month period.

Interestingly, the satisfaction gap between branch-dependent customers and more “digital-centric” customers was most pronounced among Millennials and Generation Xers. This is a bit surprising, since it’s commonly thought that younger customers eschew branches. It’s still the case that the majority of customers, including younger generations, prefer to open accounts at a branch — with personalized guidance — because they find it confusing to do online.

3. Focus on service. According to J.D. Power, weaker performance in the areas of communication and advice, new account openings, and products and fees caused lower satisfaction levels among digital-only customers. To attract and retain engaged customers and grow core deposits, banks need to improve communications and provide quality, personalized advice and other services consistently. And it’s key to make these strides across both digital and branch channels.
4. Specialize. Community banks that specialize in particular industries or types of banking are often able to attract customers who value specialized services over interest rates. The right niche — whether it’s health care, professional services firms, hospitality, agriculture or some other industry — depends on the bank’s history and the needs of the community.
5. Consider reciprocal deposits. A provision of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 creates an opportunity for community banks to boost deposits by taking advantage of reciprocal deposits. These are deposits a bank receives through a deposit placement network in exchange for placing matching deposits at other banks in the network. One advantage of these networks is that they enable banks to attract large-dollar, stable, local depositors by offering them insured deposits beyond the $250,000 FDIC threshold. (Insurance coverage is increased by spreading deposits among several network banks.)

The act made it easier for banks to take advantage of reciprocal deposits by providing that these deposits (up to the lesser of 20% of total liabilities or $5 billion) won’t be considered “brokered deposits” if specific requirements are met. Brokered deposits are subject to a variety of rules and restrictions that make them more costly than traditional core deposits.

Develop a strategy

These days, it’s easy for customers to switch banks to obtain a higher interest rate. The key to attracting and retaining stable core deposits is to have a strategy for providing value (apart from interest) that makes customers want to stick around.

© 2018