Week in Review: Sept. 20, 2013

Financial markets were treated [last] week to what may have been the best head-fake anyone has ever seen, but it wasn’t seen on ESPN. Federal Reserve quarterback Ben Bernanke deftly performed the move on Wednesday afternoon following the regularly scheduled huddle by the FOMC. At the post-game press conference, Mr. Bernanke announced that there would be no tapering in the volume of the central bank’s $85B monthly bond purchases. After the surprising play call, market participants came dangerously close to being flagged for “excessive celebration” as both credit and equity markets experienced heady rallies, secure in the knowledge that the Quantitative Easing Bowl was headed into overtime. Almost lost in all the hub-bub were Bernanke’s comments about future policy being linked to an unemployment rate “substantially below” the 6.5% level... Read more in the Baker Market Update.

2013 BOCB Winners

Congratulations to the 2013 award honorees for IBAT's Best of Community Banking Awards program.  Nine banks received the Gold Eagle Award, with Best of Show honors going to Alliance Bank in Sulphur Springs for their innovative marketing plan.  All of the Gold Eagle Awards will be presented during the IBAT Convention's Best of Community Banking Awards luncheon on Monday, September 23, at the Westin La Cantera Resort in San Antonio and all of the entries will be on display at the Convention. 

For a list of all awards, click here.  Special thanks to this year's sponsors.

Join Team Kay! 1

At IBAT’s 39th Annual Convention, Senator Kay Bailey Hutchison accepted the role of honorary chair of the IBAT Education Foundation. Hutchison, who retired from the U.S. Senate this past January and now serves as senior counsel at Bracewell & Giuliani, has been a supporter and friend of IBAT since her time in the Texas Legislature. In this new role, she will help promote the Education Foundation, which is the philanthropic arm of IBAT that funds initiatives to help community bankers actively create a more secure financial future for all Texans.

“I hope my service as honorary chair of the IBAT Education Foundation will be a catalyst to help adequately fund the unfunded mandate given by the Texas Legislature to provide a solid foundation of financial education for every child in Texas,” Hutchison said.

“We couldn’t be more pleased or humbled to welcome former U.S. Senator Kay Bailey Hutchison to the IBAT Education Foundation,” Chris Williston, IBAT president and chief executive officer, said. “Her commitment to bettering Texas, paired with her exceptional leadership and her innate knowledge about the importance of financial literacy, make her the ideal person to help IBAT take the Education Foundation to the next level.”

In addition to developing and hosting the IBAT Teach the Teacher Program which has already impacted over 40,000 students in Texas, the IBAT Education Foundation recognizes Texas teachers who excel in teaching financial literacy concepts, and encourages banker support of the Senior Housing Crime Prevention Foundation.

Join Senator Hutchison in supporting the IBAT Education Foundation.

New CFPB Bulletin

The CFPB published CFPB Bulletin 2013-10 reminding employers that they cannot require their employees to receive wages on payroll cards. The bulletin also explains some of the federal consumer protections that apply to payroll cards, such as fee disclosure, access to account history, limited liability for unauthorized use, and error resolution rights. Under Reg. E, an employer can require employees to receive their wages electronically, but the employer can't dictate the financial institution used by the employee. An employer may offer a payroll card at a financial institution of the employer's choosing as long as the employer gives its employees other options for receiving their wages.

Exhibit Hall Silent Auction

Final preparations are underway for IBAT's 39th Annual Convention, September 21-24 at the Westin La Cantera Resort in San Antonio.  In addition to the excellent keynote speakers, learning labs and entertainment, this year’s event will also feature a first-time opportunity for bankers to participate in a silent auction during exhibit hall hours.

Support the IBAT PAC while competing with other bankers to buy:

• A Dell XPS 18 desktop computer, donated by Dell (booth #4);
• A spa package at the Westin La Cantera Hill Country Resort Castle Rock Spa, donated by Deluxe (booth #2);
• An iPad mini, donated by Bank on Hold (booth #40);
• Dallas Cowboys Tickets, donated by Accusource Solutions (booths #22); and more!

Click here to see the full lineup of exhibitors participating in the auction.

Special Baker Market Update 9.18.13

Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable... Read full announcement.

39th Annual Convention

Hundreds of IBAT members are registered to attend next week's 39th Annual Convention in San Antonio, a celebration of True Texas Community Banks - Texas's Superheroes.

The event, which "kicks off" on Saturday with a Chairman's tailgate party, also features a tremendous lineup from nationally acclaimed speakers and industry insiders including:

  • Richard Fisher - President of the Federal Reserve Bank of Dallas;
  • Joe Calloway - Author of Be the Best at What Matters Most; and
  • Jason Dorsey - "The Gen Y Guy" and Chief Strategy Officer at The Center for Generational Kinetics.

Additionally, the 39th Annual Convention includes learning labs, banker to banker roundtables, product demonstrations and a great lineup of entertainment.

Can't make it to San Antonio? Follow along with all of the action on Twitter by searching for #ibat2013.

Week in Review: Sept. 13, 2013

There's been a lot of talk in the news lately about lines being crossed. After the yield on the Treasury's Ten Year Note tip-toed up to the 3% line late last week, many observers thought that this would be the week when that line would be crossed and negative consequences would be felt. Well, that didn't happen. Not this week, anyway. As a matter of fact, one might speculate that it was the prospect of those negative consequences that kept the sell-off in check and prevented the dreaded crossing of that red line yield. Others might think that it was because this was a week filled with lackluster economic news on the heels of last Friday's lackluster jobs report. More luster is definitely in order... Read more in the Baker Market Update.

Flags Ordered to Half-Staff

The President has issued an order lowering the flags to half-staff immediately.  All state agencies should display the US and Texas flags at half-staff through sunset on Friday, September 20, 2013.  Other agencies, businesses and individuals are encouraged to do the same.  Flags should return to full-staff the next day.  A copy of the President's proclamation appears below.


Office of the Press Secretary

For Immediate Release September 16, 2013



- - - - - - -



As a mark of respect for the victims of the senseless acts of violence perpetrated on September 16, 2013, at the Washington Navy Yard, by the authority vested in me as President of the United States by the Constitution and the laws of the United States of America, I hereby order that the flag of the United States shall be flown at half-staff at the White House and upon all public buildings and grounds, at all military posts and naval stations, and on all naval vessels of the Federal Government in the District of Columbia and throughout the United States and its Territories and possessions until sunset, September 20, 2013. I also direct that the flag shall be flown at half-staff for the same length of time at all United States embassies, legations, consular offices, and other facilities abroad, including all military facilities and naval vessels and stations.

IN WITNESS WHEREOF, I have hereunto set my hand this sixteenth day of September, in the year of our Lord two thousand thirteen, and of the Independence of the United States of America the two hundred and thirty-eighth.


Associate Member Information Exchange

WHAT:  The IBAT Associate Member Council - made up of IBAT Associate Members - would like to help you get involved at Convention, answer your questions, get your feedback, and share tips for success working with IBAT member banks.  So please come early to join them for an exchange of information on how to make the most of your IBAT experience.


  • Live, interactive survey
  • Interactive discussion based on audience feedback[from survey] of needs which may include the following:
    • What’s in it for me?  What are the benefits of involvement in IBAT for you and your company?  What opportunities are available and how will they help you? What can I expect at Convention?
    • What is the best way to get the bankers’ attention and interest?
    • Highlights [what to attend, hot topics] of Convention and other IBAT Events.
  • Q&A.  An opportunity to have your questions answered “live” as well as hearing from others.  This is also a time to make suggestions to the Council regarding things that may enhance your IBAT experience..

WHEN:  Sunday, September 22, 2013.  Gather for networking at 10:30 a.m.; the informal meeting will be from 10:45 a.m. -11:45 pm. with time to network and ask questions following the meeting.

WHERE:  Westin La Cantera Resort in San Antonio in the Palo Duro Pavillion.

WHO: Open to all current associate members, exhibitors, and those companies supporting community bankers.  Hosted by the Associate Member Advisory Council.

WHY:  A great opportunity to learn and network with fellow associate members and companies in the financial institution industry.

We are asking that you register online at so that we may get a head count as we prepare for this event.  There is no charge to attend the Information Exchange

Trends in Compensation

The article below was originally published in the July/August 2013 edition of The Texas Independent Banker Magazine.

Trends in Compensation – 2013 and Beyond

By Kelly W. Earls and Kathy Orr Smith

As a result of the upheaval in the financial industry dating back to 2007-09, and as with most of the subsequent legislation, the community bank market has taken the brunt of the unintended consequences.  This is no different in the area of compensation.

Beginning with: (i) Internal Revenue Code Section 409A effective January 1, 2005; (ii) the Troubled Asset Relief Program Standards for Compensation and Corporate Governance, as amended, originally published as an Interim Final Rule by Treasury on October 20, 2008; (iii) Securities and Exchange Commission Proxy Disclosure Enhancements effective February 28, 2010; (iv) Interagency Guidance on Sound Incentive Compensation Policies enacted on June 25, 2010 (“Interagency Compensation Guidance”); and ending with: (v) the Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) signed into law on July 21, 2010; the federal government has promulgated a flood of laws, regulation, and rules relating to the delivery of compensation within companies, but more directly within financial institutions.

Incentive Compensation

What is interesting is that there was a time when incentive compensation within the banking industry was considered by regulators as superior and a means to curtail fixed compensation costs (aka “salary creep”) in banks.  Banks were, shall we say, encouraged to consider adopting some form of incentive compensation and move away from a structure of salary and discretionary bonus that typically amounted to one month’s salary.  While compensation practices and payments have always had to fall within safe and sound banking practices, incentives, improperly structured, brought on problems.

Some banks learned by doing this, during the mid-1990s, that incentive compensation structured only to promote growth, particularly growth in the loan portfolio, was dangerous, especially if the incentive payment was immediate or shortly after year-end.  Some banks had the privilege of paying out very large incentives during the first couple of years of implementation, but then later having to terminate the personnel for adding what turned out to be bad loans to the bank’s portfolio.  Another issue that banks had to deal with was the moral issues that cropped up if the bank felt the need to change the incentive structure.  Participants often would come away feeling that their employer only made changes because the bank decided that the incentive ended up creating too much benefit and needed to be diluted.

As a result, for a time after the mid-1990’s, many banks were reluctant to delve into incentive compensation.  As we have worked with banks since that time, more and more have been open to implementing annual incentives and deferred incentives so long as the structure implemented addresses four key issues:

  1. Be flexible so that the incentives can/will be changed to address the current needs of the bank;
  2. Address both short-term and intermediate-term risk associated with the incentive;
  3. Mitigate, as much as possible, any potential negative moral effect to the participants should adjustments be required; and
  4. Be compliant from a regulatory standpoint

For a bank to have an incentive structure that provides flexibility, it is paramount to establish strong communication with the participants that emphasizes incentives and goals are annual in nature and that at implementation as well as each year thereafter, the participant should understand that the incentives absolutely will change based upon the environment the bank is operating in and the current needs of the bank.  Banks can communicate this by the old adage: “tell ‘em what you are going to tell ‘em; tell ‘em; and tell ‘em what you told ‘em.”  Having a group meeting to generally convey the parameters of the program and the expectations participants should have is the first step.  That meeting should be followed up with individual meetings with communication pieces that set forth each individual’s specific incentives; and, in that meeting reiterate that the incentives will likely be different a year from now.

Risk with incentives has really been a hot topic with the regulators over the last 6-7 years.  It began with TARP where everything from bonuses to stock options was prohibited so long as TARP funds had not been repaid.  The Interagency Compensation Guidance then conceptually mandated that reward should be “matched-up” to the risks the incentives might promote.  Generally, the guidance set forth the expectation to have some incentive compensation “at risk” to the participant.  Included in the guidance was the recommendation that incentive compensation be subject to claw-back should loss occur from the incentive.  Additionally, some of the incentive should be subject to deferral.

As a result of the guidance, many of our clients that want to maintain utilizing incentive compensation request that we assist in modifying their incentive compensation program.  In doing so, we first examine each job eligible for incentives to determine what quality control measures may need to be added.  Once that is completed, we also look to add a short-term deferral feature to the existing program.  Again, communication of these changes to the participants is key.  We mitigate the negative connotation of the changes by explaining that the Incentive Compensation Guidance as well as the passage of Dodd-Frank requires the synchronization of the risk vs. reward of incentives.  Further, while a portion of the incentive is deferred, often it will earn a favorable rate of return which is established by the compensation committee and approved by the board of the bank.

However, with the advent of the Mortgage Lending Compensation rules under Dodd-Frank, another issue cropped up.  As you know, Dodd-Frank has mandated that for those who are involved in making a consumer loan secured by a dwelling there are really only two avenues to compensate based upon that activity.  One method of compensating directly from the activity is to pay some incentive based only upon the dollar volume of loans.  The other method is to compensate based upon the volume of transactions performed.  The issue that became apparent last year was that if those individuals were incentivized generally from the overall performance of the bank outside of a contribution to the bank’s qualified plan (i.e. a profit-sharing contribution), then these individuals would be found to violate the mortgage lending compensation rules through a proxy analysis.  The logic goes something like this:  paying an individual, who was involved in the mortgage activity, on the overall performance of the bank was paying them based upon the profits of the mortgage loans which are a part of the overall profitability and performance of the bank.  As one can see, this is a very broad interpretation of the mortgage lending compensation rules.  In order to comply, what seems to have alleviated the problem is to make one of the following adjustments:

  1. Separate out mortgage revenue from the overall bank performance.
  2. Do step 1 and use one of the two methods that are appropriate to pay on mortgages mentioned above.
  3. Revert to discretionary compensation to disconnect any incentive from the mortgage activity.
  4. Fall within the limited activity exception (either: (a) annual benefit less than 10 % of compensation; or (b) less than 10 mortgage loans a year).

Even without the new regulations, it seems more banks are looking to short-term deferrals for the purpose of retention as pay for performance has become a more significant component of compensation packages of key hires.

Deferred Compensation

While deferred compensation for key personnel has existed for decades now, how that deferred compensation is being structured has changed a fair amount.  During the boom years of the mid-1990s to the mid-2000s, individual defined benefit arrangements for key employees were probably the most widely instituted.  These plans were commonly known as Supplemental Executive Retirement Plans (SERPs) or Salary Continuation Plans (SCPs).

However, since the financial crisis, many banks are looking to other alternatives when it comes time to include the next crop of executives into some sort of deferred compensation program.  In addition to still utilizing SERPs or SCPs, some banks are exploring using defined contribution structures.  The reason for this is simple.  With a defined benefit program, the bank is required to make liability accruals every year to the balance sheet for the SERP or SCP, which has with it a corresponding expense as well.  Since the banking industry has recently gone through a period of struggle, being required to make deferred compensation accruals in a year where the bank may not be performing as accustomed has been difficult.  So, by having a program that defines the contribution, the bank can have better control of determining when an accrual to the deferred compensation program occurs.

While there is more regulation to comply with following the financial crisis, if structured properly, banks can still implement creative and customized compensation programs unique to their institution to achieve retention, recruiting and rewarding of their key employees that help the bank be successful.

Kelly W. Earls J.D. C.P.A is Principal and Kathy Orr Smith is President of Bank Compensation Consulting, Inc.

First Data: Bank Technology

On August 29, 2005, a little wind and a whole lot of water swept over New Orleans and a large section of the Gulf Coast in the form of hurricane Katrina. Businesses along the coast and further inland were devastated for weeks, including banks. Within a year’s time, regulation was in place requiring new policies for Disaster Recovery and the term “Business Continuity” became prevalent. This singular event began a chain reaction of movement from in-house systems to outsourcing. The increased regulatory demand to have redundant capability had driven the cost and complexity of technology through the roof! Banks responded by signing large “Mega-Contracts” to give as much of their technology as possible over into the hands of data center providers who would then have to face and respond to the regulatory burden. Data centers, in kind, raced to enhance their product offerings so that banks could sign a single contract which would provide for all its major software needs. This approach soon came to be known as the “One Throat to Choke” philosophy.

Signing Mega Contracts offered the bank several advantages. Solutions became easier to implement, and required fewer resources because little was actually being installed at the bank. Finger pointing was minimized (though, humorously, still happened) because a single company was responsible for the entire project, and integration was maximized. Heavy pricing incentives were offered to consolidate with a single provider, and often products were included with no perceived billing, though proper emphasis might be on the word “perceived”.  However, Mega Contracts also came with some distinct downside! Shortly after signing, banks realized they had largely lost the ability to play one vendor against another. Pricing for add-on products and services began to escalate sharply. Gone too was the ability to take a ‘best of breed’ approach to technology. The bank was limited to the offering from their technology partner, good or bad. Because product offerings were genericized, community banks struggled to distinguish themselves in the eyes of the community. Worst of all, as the Mega Contracts came up for renewal and banks began to review options, they realized that the cost to make a change was astronomical. Even relatively small banks ($100-200Mil) were faced with six figure de-conversion fees. OUCH!  In short, many banks felt stuck.

An interesting alternative to the One-Throat-to-Choke philosophy is the logical separation between back room and customer facing applications. Both are offered in the outsourced (or SAAS) environment that minimizes liability for regulatory compliance. Adding one or two technology partners greatly increases the banks negotiating position with each while keeping finger-pointing and integration issues to a minimum. It also allows the bank to better differentiate through Best of Breed; creating a customer experience unique to itself. Most importantly, when change is required the impact to bank employees and customers is greatly reduced (along with the price). This new approach, however, is not without challenges. As mentioned above, data center providers have raised the stakes for making a change.

So where do we begin?  Several factors come into play to effect a change in the banks view of technology. First is a compelling vision of the customer experience the bank wants to provide. As long as ‘good-enough’ is the prevailing attitude, there is little drive for change.  Second, some good old fashioned resolve is needed to compel data center providers to accommodate the banks interest over their own. Last, but not least, competing vendors must stand ready to provide a compelling value proposition that addresses cost and integration with existing software as well as enhanced capabilities.

Online Banking is a perfect place to start. For almost a decade, IBAT has endorsed the Online Banking solution from First Data (formerly FundsXpress). Over 32% of all banking transactions now happen online, even exceeding the trusty ATM. Generations X, Y, Z (and whatever comes after that) show a marked preference for online comparison of goods and services so Online Banking is also the banks largest marketing tool. It defines the public’s perception of the bank. Online banking is itself a “sticky” product, and the launching point for even more sticky products like: Mobile Banking, Personal Financial Management, and Mobile Check Deposit. First Data Online Banking (FDOLB) offers all the best of breed technology mentioned above along with flexible pricing and installation options to meet the differing needs of each bank. Integrated with every major core provider, FDOLB creates a homogeneous customer experience regardless of back-room applications and when change is called for, it is largely invisible to the consumer or small business. With ever changing market dynamics and increased competition, banks are constantly searching for ways to improve customer service while keeping costs and operational efficiency in line. Separating the customer experience from back room applications is an excellent strategy and First Data, in coordination with IBAT, is ready to help.

Tim Miller
Director Strategic Alliances
First Data Online Banking

2013 Bank Operations Institute

We are a few weeks away from embarking on the 33rd Annual IBAT Bank Operations Institute.  We are pleased to report that we have 40 level one registrants confirmed to attend.  We do have some space left to accept a few more and don't want your key operations staff to miss out.  Why?  In the recent Examination Survey from Sageworks, 2013 Findings: Sageworks Bank & Credit Union Examination Survey, bankers were asked the question:  What advice would you share with other institutions about management?

"FDIC-examined institutions that said management was an area discussed in their exams urged cross-training, succession planning and other contingency planning.  They also recommended hiring quality staff and making sure the team isn't made up of people who have the same type of personality."

"Institutions examined  by other regulatory bodies recommended that management should keep an open dialogue with regulators and the directors must be kept informed and involved."

The BOI advisory board is comprised of all representatives from each of the regulatory agencies.  Most of the sessions at BOI are taught by the regulatory staff that oversees the examination process.  What better way to encourage and illustrate to your operations staff you are invested in their future of community banking, and want to establish the relationships now that will assist them throughout their careers?

We encourage you to make the investment in your staff and your bank's relationship with regulators by sending an attendee to Bank Operations Institute.

Support the IBAT PAC

Final preparations are underway for IBAT's 39th Annual Convention, September 21-24 at the Westin La Cantera Resort in San Antonio.  In addition to the excellent keynote speakers, learning labs and entertainment, this year’s event will also feature a first-time opportunity for bankers to participate in a silent auction during exhibit hall hours.

Support the IBAT PAC while competing with other bankers to buy:

• A Dell XPS 18 desktop computer, donated by Dell (booth #4);
• A spa package at the Westin La Cantera Hill Country Resort Castle Rock Spa, donated by Deluxe (booth #2);
• An iPad mini, donated by Bank on Hold (booth #40);
• Dallas Cowboys Tickets, donated by Accusource Solutions (booths #22); and more!

Click here to see the full lineup of exhibitors participating in the auction.