Arizona Bankers Association - Issue, 1 2016

ISSUE 1 . 2016
113th Annual AzBA Annual Convention
The Enchantment Resort, Sedona, Arizona June 12-14, 2016
Register now at www.azbankers.org
Page 6
Inside:
4 | Arizona Shows Promising Progress in Economic and Personal Finance Education
12 | AzBA Banker Day at the Capital 2016
18 | What are the Benefits and Challenges of Model Validations for Banks?
We Are
Your Solution!
111 West Monroe, Suite 440
Phoenix, Arizona 85003
Phone: (602) 258-1200 • Fax: (602) 258-8980
AzBA BOARD OF DIRECTORS
2015-2016
Mike Thorell, Chairman
President
Pinnacle Bank
Toby Day, Chairman-Elect
Arizona President
Arizona Business Bank
Dave Ralston, Vice Chairman
CEO
Bank of Arizona
Whether your needs include financial/operational,
regulatory compliance, or trust audits, or a
compliance training partner, we are your solution!
Jan Anderson, CFSA
jan.anderson2@comcast.net
533 W. Guadalupe Rd., #2061 • Mesa, AZ 85210 • 480.633.9179
7151 Wright Terrace • Niles, IL 60714 • 847.983.8232
Jack Barry, Treasurer
Chairman & CEO, Arizona Region
Enterprise Bank & Trust
Dean Rennell
Regional President
Wells Fargo Bank
Annette Musa
Arizona Market President
Comerica
Brad Parker
Phoenix, CEO
BBVA Compass Bank
Curtis Reed
Market Manager - Arizona & Nevada
JPMorgan Chase Bank, N. A.
Brian Riley
President & CEO
Mohave State Bank
Pat Rourke
Arizona Market President
Bankers Trust
Brian Schwallie
Banking Equipment & Security Services
Bankers Bank of the West..................... Page 11
Arizona Market President
US Bank
Sherri Slayton
Executive Vice President
Alliance Bank of Arizona
Candace Wiest
Compliance and Internal Audit Services
Iversen & Anderson................................ Page 3
Law Firm
Zia Trust, Inc........................................... Page 9
Buchalter Nemer.................................. Page 11
Engelman Berger, PC............................... Page 2
Gust Rosenfeld..................................... Page 24
Ryley Carlock & Applewhite................. Page 23
Stinson Leonard Street......................... Page 22
President & CEO
West Valley National Bank
AzBA STAFF
Paul Hickman
President & CEO
Bill Ridenour
General Counsel
Steven Killian
Director of Government Relations
Theresa Kleinlein
Director of Marketing
Angelique Gerard
Executive Administrator
ISSUE 1 . 2016
3
Arizona Shows Promising Progress in
Economic and Personal Finance Education
2016 Survey of the States for our Nation’s Schools
S
COTTSDALE, AZ. FEBRUARY 4, 2016 – THE NATIONAL
COUNCIL FOR ECONOMIC EDUCATION HAS RELEASED
ITS BI-ANNUAL COMPREHENSIVE REVIEW OF K-12 ECONOMIC AND FINANCIAL EDUCATION IN THE UNITED
States. Arizona joins 14 other leading states which have
adopted mandatory standards spanning both economics and
personal finance from Kindergarten to 12th grade. Furthermore, a high school economics and personal finance course is
required for high school graduation.
At the end of 2007, when most of our country was still
unaware of the impending financial crisis, the worst since
the Great Depression, the Arizona Department of Education
and the Board of Education approved new economic and
financial education standards. Teachers are now required to
be highly qualified to teach high school economics. Arizona
has certainly come a long way, as demonstrated by the 2013
legislative mandate (SB1449) for financial literacy education.
“I definitely see the positive difference in my incoming freshmen college students because of the new financial literacy
mandate.” Debbie Henney, economics professor at Mesa
Community College.
According to the Center for Financial Security at the
University of Wisconsin-Madison, state standards matter and
those states which combine personal finance and economics, support teachers and hold students accountable give their
students the best chance to become sound financial managers
4
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Arizona Shows Promising Progress in Economic an
2016 Survey of the States for our N
and stewards of their own personal credit. Georgia, Texas
Scottsdale, AZ. February 4, 2016 – The national Council fo
and Idaho have shown student credit
scores are 8 to 17 points
its bi-annual comprehensive review of K-12 economic and
higher by age 22 for graduates who
have
metjoins
a fi14nancial
States.
Arizona
other leading states which have ad
both economics and personal finance from Kindergarten to
education requirement. Althoughschool
Arizona’s
economic and
economics and personal finance course is required f
financial education standards were implemented a few years
At the end of 2007, when most of our country was still una
later than those in Georgia, Texas
and Idaho, we hope to see
crisis, the worst since the Great Depression, the Arizona De
similar results. In comparison to Board
mathof education,
economic
Education approved
new economic and financial e
now so
required
to is
be highly
to teach high school eco
education is still a very new subject
there
muchqualified
to learn
long way, as demonstrated by the 2013 legislative mandate
about the optimal strategy in terms
of topics,
duration,
testing
education.
“I definitely
see the positive
difference in my inc
because of the new financial literacy mandate.” Debbie Hen
and grade levels.
Community College.
According
to the
Center for Financial
Security at the Unive
The 55th annual Financial Literacy
and
Economic
Educastandards matter and those states which combine personal
tion Conference will be held in Arizona
onhold
October
5-8, 2016
teachers and
students accountable
give their students
financial managers
stewards of
at the Renaissance Downtown Phoenix
Hotel, and
featuring
a their own personal cred
shown student credit scores are 8 to 17 points higher by age
diverse selection of professional development
on
financial educationworkshops
requirement. Although
Arizona’s econ
were implemented
a few years later than those in
economics and financial literacy. standards
K-12 teachers
from around
to see similar results. In comparison to math education, ec
the State and around the countrysubject
and the
world
will
be atso there
is much
to learn
about the optimal strategy
and grade
levels.to Arizona was
tending. The last time this conference
came
1963! w
The 55th annual Financial Literacy and Economic Educatio
on October 5-8, 2016 at the Renaissance Downtown Phoen
of professional
development
workshops on economics and
Please visit www.azecon.org for more information
on the
national conference
around the State and around the country and the world wil
and the survey of the states.
conference came to Arizona was 1963!
The Arizona Council on Economic Education
(ACEE)
is a 501(c)3 nonprofit
Please
visit www.azecon.org
for more information on the n
organization founded in 1973, dedicated the
to improving
economic and personal
states.
financial literacy in
The Arizona Council on Economic Education (ACEE) is a 5
founded
1973, dedicated
to improving economic and pe
Arizona. It is an affiliate of the national Council
forinEconomic
Education.
It is an affiliate
of the
national
Working with many partners, ACEE trains Arizona.
1,500 teachers
reaching
more
than Council for Econo
partners, ACEE trains 1,500 teachers reaching more than
200,000 students annually.
The Impact of Electronic Payments
By ELLEN RICHEY, Vice Chairman of Risk and Public Policy, Visa, Inc.
I
N BUSINESS WE OFTEN TALK ABOUT
DOING WELL BY DOING GOOD—FORTUNATELY AT VISA, THAT IS
ACTUALLY A REALITY. ONE OF THE
virtues of working in the payments
industry is that we have an opportunity
to contribute to society in an impactful
way. We can do a lot of good just by being good at what we do.
Being in the business of electronic
payments means helping the unbanked
gain access to the formal financial
system. It means bringing ordinary
consumers into the world of mobile
and digital commerce. It means helping
businesses connect with more customers, so they can expand their reach and
accelerate growth. It means helping
governments go cashless, allowing them
to more efficiently provide benefits and
gain more insight into commercial activity. In other words, by making electronic
payments easier and less expensive,
we are helping families and businesses
succeed and enabling countries to grow
their economies.
A recent study entitled “The Impact
of Electronic Payments on Economic
Growth” conducted by Moody’s Analytics and commissioned by Visa drives
home this point. Moody’s analyzed
the impact of electronic payments on
economic growth across 70 countries
between 2011 and 2015. Moody’s
found the increased use of electronic
payment products, including credit,
debit and prepaid cards, added US
$296B to GDP globally, while raising
consumption by an average of 0.18
percent per year. The 70 countries in
the study make up almost 95 percent of
global GDP.
Nearly all countries in the study
experienced growth from electronic
payments. During the five years studied,
emerging markets saw a bigger increase
in GDP than developed countries. In the
future, emerging markets can have an
even larger impact on GDP by increasing card penetration rates—for example,
by providing merchants more ways to
accept electronic payments.
What the Moody’s study suggests is a
simple but powerful pattern—a virtuous circle, whereby the increased use
of electronic payments reduces friction
in the overall economy and leads to
more spending on goods and services.
This results in greater consumption,
which in turn, translates into increased
production, more jobs, higher incomes,
and greater economic prosperity and
growth. We have seen this pattern play
out time and time again, and in virtually
every corner of the world.
In Chile for example, card usage increased by more than seven percent over
the last five years as more banks and
merchants became equipped to accept
electronic payments. That contributed
about $2.6 billion, or a 0.23% increase
to its GDP growth, according to the
Moody’s report. Even in more advanced
economies, like Singapore and the United States, where electronic payments are
the norm, the Moody’s analysis suggests
that increased card usage accounts for
a sizable amount of economic growth.
Although electronic payments in both
countries rose modestly, it contributed
about $1.17 billion, or 0.10% increase in
the GDP of Singapore, and about $81.55
billion, or a 0.12% rise in in the GDP in
the United States.
Of course, electronic payments are
just one component of a program to increase a country’s prosperity. Payments
function best within a well-developed
financial system and a healthy economy.
Countries around the world must
continue to strengthen their financial
infrastructure and make investments in
technology and innovations so that people can pay any way they choose. Lastly,
we must find ways for government and
the private sector to work more closely
to promote financial literacy and inclusion so that the gains from economic
growth accrue across the board.
Encouraging the adoption of electronic payments can provide an important
spark to the world’s economy. Every day,
we see the contribution they make to
consumption, economic activity and job
growth. That’s why Visa continues to invest in new technologies, new products
and services—doing our part to encourage electronic payments by providing
merchants and consumers a more secure
and convenient way to engage in commerce.
- See more at: http://goo.gl/e4bAbb w
ISSUE 1 . 2016
5
Join Us for the 2016 Annual Convention
at the Enchantment Resort June 12-14
S
URROUNDED BY THE TOWERING RED ROCK WALLS OF
BOYNTON CANYON IN SEDONA, ENCHANTMENT
RESORT COMBINES THE RUGGED GRANDEUR OF THE
SOUTHWEST WITH EQUAL PARTS LUXURY AND NATIVE
American culture. It’s a hideaway like no other. All guest
rooms and suites are within casitas that feature beautiful
hardwood floors, regional décor and magnificent views. All
accommodations have private decks, some offer kitchenettes
and include kiva fireplaces. The experience is complete in
every way; choose from more than 100 activities a week including hiking, mountain biking, tennis and swimming. Enjoy
dining at a variety of distinctive restaurants, all amid glorious
settings. Experience Mii amo, a destination spa at Enchantment which has recently be named #2 in the World by the
readers of Travel + Leisure, where life-enhancing treatments
leave you feeling nurtured and restored.
Adjacent Seven Canyons, Enchantment’s exclusive 18-hole
championship course, boasts of incredible scenery within
100,000 acres of pristine National Forest land and towering
red rock canyons. Designed by Tom Weiskopf, this par-70
course is situated at 4,600 feet which delivers mild temperatures year-round. A challenging, rewarding layout, it
measures 6,746 yards from the championship tees and has
subtle contours and small greens, narrow landing areas and
artfully placed bunkers and water features. Seven Canyons
has been acclaimed as one of America’s 50 Greatest Golf
Retreats by Golf Digest and is consistently ranked as one of
the best.
The property’s delicious cuisine at a choice of options,
all with breathtaking views is an added highlight at this
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canyon retreat. The signature restaurant, Che Ah Chi, features modern American cuisine using many Arizona-sourced
ingredients. Tii Gavo features Southwestern-inspired fare,
and View 180 offers small plates for sharing with wines by the
glass and specialty cocktails. The clubhouse at Seven Canyons offers a gastro-pub theme features upscale comfort food
in a sophisticated and contemporary atmosphere. The bar
features a library of bourbons, right in step with the spirit’s
renaissance, for tasting flights and classic cocktails with a
twist.
Complementing the diverse menu are several high end
barrel-strength bourbons plus an extensive selection of small
batch single-barrel bourbons. With some low-proof bourbon
for those who want an introduction to ‘America’s whiskey.’
Camp Coyote is Enchantment Resort’s program designed
to educate and entertain children ages 4 -12. Trained counselors guide camp-goers in exciting activities that explore the
region's culture and natural environment. Highlights include
nature walks, Native American influenced arts and crafts
include sand painting, beadwork or weaving dream catchers.
Mii amo, a Yuman word signifying "to continue one’s
path, moving forward, or journey," is a destination spa resort
located on the grounds o Enchantment Resort. Like many
Native American pueblos, the 24,000-square-foot, two-level
main building is nestled in the natural slope of the canyon
wall, maximizing views of the red rock canyon. Simple lines,
monumental forms, and pure materials—adobe brick, wood,
indigenous stone-- blend organically with the surrounding environment. Natural light and water are recurring themes, and
interior and exterior spaces flow into one another, making the
building easily adaptable to the seasons. The signature form
is a 172-foot-long horizontal spine from which rise 5 adobe
brick towers inspired by the cliff dwellings of the Anasazi.
Communal areas and pools are on the ground level; treatment
rooms are housed on the second floor. The design is at once
modern and ancient, representing a modern application of
many Anasazi ideas.
Nineteen spacious treatment rooms are located on the
second level with chapel-like privacy, and either windows
overlooking the canyon or natural light wells. Five outdoor
treatment areas, shaded by wooden trellises inspired by Native American "wikiups," provide secluded, hillside shelter
for outdoor massage, meditation and Watsu therapy. Guests
choose from three-, four- and seven-night programs, inclusive
of luxury accommodation, daily meals at Mii amo Café, spa
treatments, private consultation, fitness classes, lectures, and
use of spa facilities.
Full- 60- and 90-minute treatments include massage, Reiki,
Cranial Sacral, hydrotherapy baths, body treatments, Watsu,
Ayurvedic treatments, facials and spiritual sessions. Specially
trained therapists provide a number of restorative therapies
using Mii amo signature blends of oils and lotions, natural
ingredients and Native American traditional practices.
Ongoing fitness classes yoga, Pilates, Qigong, aqua aerobics, and outdoor walks. Other activities include mountain
biking, stargazing, cooking demonstrations, organic gardening, guest lectures, guided meditation and Native American
programs.
For meetings and gatherings of 10 to 400 the Meeting
Village comprises more than 13,000 square feet of indoor
meeting space, including 11 function rooms, an expansive
executive board room, three ballrooms with patios and floorto-ceiling windows, and versatile smaller function spaces.
An additional 20,000 sq. ft. of outdoor venue space offers
dramatic scenery, starry skies. w
Please visit enchantmentresort.com for more information or call
(855) 403-4921
ENCHANTMENT RESORT
Call now to reserve your room:
(855) 421-1088 Referred to by AzBA
Deadline May 13th
Register for Convention at www.azbankers.org
For Sponsorship info call (602) 684-9016
ISSUE 1 . 2016
7
COUNSELOR’S CORNER
conducted by the County Treasurer during the second following February after
the tax year. For example, taxes from
the 2014 tax year were sold this past
February of 2016.
The auction process in Maricopa
County and some other Arizona counties is now entirely on-line. Some
counties still retain a live auction. The
auctions are always in February. The
bidders are typically investors. Taxes
not sold at that auction are “struck off
to the state” and can be later purchased
“over the counter” from the Treasurer.
Lenders: Beware of Real
Estate Tax Liens
By CHRISTOPHER M. MCNICHOL
“N
OTHING IS CERTAIN
EXCEPT DEATH AND
TAXES.” THAT HOARY
EXPRESSION APPLIES
with special force to Arizona real property taxes. Because those taxes are a
senior priority lien on the real property,
ahead of essentially all other liens including any mortgage/deed of trust liens
securing loans, a lender’s failure to pay
attention to the taxes can lead to the
death of its lien.
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Property taxes are paid in arrears.
The first half of the calendar year tax,
from January 1 through June 30, is due
on September 1 of that same year, and
delinquent a month later, on October 1.
The second half of that calendar year’s
tax is due the following March 1, and
delinquent two months later, on May 1.
Unpaid taxes accrue interest at 16%
per annum. If the taxes, interest, and
the statutory penalty fees are not paid,
the tax liens are sold in an open auction
The auction is not a matter of bidding the price up, but rather bidding the
interest rate down. The successful bidder is the person who offers the lowest
interest rate that must be paid to redeem
the property from the tax sale, starting
at 16%. The bids go down from there.
Years ago, when there were fewer investors, the interest rates would often settle
out at 8-10%. But now, with so many
interested investors, especially large
funds bidding on blocks of tax liens, the
winning interest rates have dropped to
2-4% for most tax liens.
The successful bidder acquires what
is called commonly called a Certificate
of Purchase (CP). The winning bidder
does not own the property, only the CP.
After three years from the date of the
tax sale, if the taxes are not redeemed
by the owner of the property, a lienholder such as a secured lender, or the holder
of a CP from a different tax year (yes,
in some counties, there can be different
parties holding different CPs from different tax years on the same property),
then the holder may file a lawsuit to
foreclose all rights of redemption. The
CP holder must successfully prosecute
the tax lien foreclosure action, including
naming the lender as a defendant, and
then proceed to judgment.
CPs can be bought, sold and assigned. The person who successfully
bid for the CP at the tax sale may thus
not be the same person foreclosing the
CP three years later.
Until a final judgment is entered in
the foreclosure action, the taxes can
still be redeemed. But the price goes up.
After the filing of the foreclosure action,
the reasonable attorneys’ fees and costs
must also be paid in order to redeem the
property and dismiss the action.
Once the CP holder obtains a judgment in the foreclosure action, it applies
to the County Treasurer for a Treasurer’s Deed. It is this Deed which then
transfers the title to the property to the
grantee of the Deed.
As noted, the taxes and the tax lien,
including the CP, are senior to the
lender’s deed of trust lien on the property securing its loan. Completing the
foreclosure and obtaining judgment and
a Treasurer’s Deed will extinguish the
THE CP HOLDER MUST SUCCESSFULLY PROSECUTE
THE TAX LIEN FORECLOSURE ACTION, INCLUDING
NAMING THE LENDER AS A DEFENDANT, AND THEN
PROCEED TO JUDGMENT.
deed of trust, turning the lender’s loan
from secured to unsecured.
As statutorily required, prior to filing
the foreclosure action the CP holder
must send a notice letter to the owner of
the property and the County Treasurer
informing of the imminence of the foreclosure action. However, the CP holder
is not required to give notice to the
lender. If the lender has not previously
addressed the unpaid taxes, it may learn
of the foreclosure for the first time only
when it is served with the Complaint.
At that point, in addition to the taxes,
interest, and penalties, there would also
be due the attorneys’ fees and court
costs in order to redeem and dismiss the
action.
A borrower’s failure to pay taxes is
typically an event of default under the
loan documents. Those same documents almost always allow the lender to
advance money under the loan in order
to pay delinquent taxes. If the lender
wants to protect its lien position in the
property, it should advance money to
pay off the delinquent taxes far before
any final judgment of foreclosure. w
Zia Trust, Inc.
The Advisors’ Trust Company®
Announcing the opening of our new office.
We are honored to serve Arizona families!
11811 North Tatum Boulevard
Suite #1062
Paradise Village Office Park
Just north of East Shea Boulevard
•
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•
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alongside community bankers
www.ziatrust.com 602.633.7999
ISSUE 1 . 2016
9
Under the Copper Dome
Patent Troll
By STEVEN KILLIAN
T
ECHNOLOGY IS UPENDING THE WORKFLOW AND PROCESSES IN THE FINANCIAL SERVICES INDUSTRY. TASKS
ONCE HANDLED WITH PAPER MONEY, BULKY COMPUTERS, AND HUMAN INTERACTION ARE NOW BEING
COMPLETED ENTIRELY ON DIGITAL INTERFACES.
Almost every type financial activity-from banking to payments to wealth management can now be completed with a
few quick touches on your smart phone. By making services
like payments, lending, and deposits available on mobile platforms, banks have been able to grow their market base while
cutting costs at the same time.
While these new disruptive technologies have allowed
banks to reach customers they wouldn’t otherwise have access
too, these new technologies have also made banks a magnet
for patent trolls.
“Patent Trolling” is the process of filing a claim of patent
infringement against an entity, despite the fact that the claimant does not manufacture or supply the product or service in
question. The risk of abusive patent infringement claims impact nearly every industry, and is a serious concern for banks
of all sizes.
In an effort to stop patent trolling and incomprehensible demand letters, Congress in 2011 enacted the American invents
Act, which increased banks’ ability to challenge the validity
of existing patents through use of several new tools. These
tools can greatly reduce banks' costs to contest an infringement claim while expediting the resolution process, because
the patent office must rule on patent invalidity cases within 18
months.
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Yet, despite attempts by Congress to reform overly broad
business methods patents, patent trolls continue to threaten
litigation and make licensing fee demands.
To help stop this abusive business practice, the Arizona
Bankers Association with the help of the Arizona Attorney
General’s Office, The Arizona Tech Council, has proposed
legislation this session that would vest the Arizona Attorney General with enforcement authority under the Arizona
Consumer Protection Act to hold fraudulent patent trolls
accountable.
The Arizona Patent Troll Prevention Act is modeled after
legislation that has been enacted in 26 states. Under this act,
a person may not make assertions of patent infringement in
bad faith. An assertion of patent infringement in bad faith is
demonstrated when a person or business entity sends a demand threatening a target with litigation while asserting that
the target infringed a patent or that the target should obtain
a license in order to avoid litigation. Bad faith factors include;
a demand that does not contain specific information such as a
patent number, the name and address of the patent owner, or
facts relating to specific areas in how the target is infringing
the patent, or failing to provide the preceding information up
request.
In creating this legislation, the Association was particularly mindful not to stifle innovation or inventors' legitimate
property rights. The Association firmly believes that this
legislation will protect the legal rights of both Arizona banks
and Arizona business, while maintaining a fair and legitimate
operation for our intellectual property system that is so critical to the Arizona economy. w
RELIABILITY
providing our banking clients with
the best business solutions
Buchalter Nemer
a full service business law firm
www.buchalter.com
ISSUE 1 . 2016
11
AzBA Banker Day at
the Capital 2016
“T
HIS WAS THE MOST SUCCESSFUL BANKER DAY
WE HAVE HAD SINCE WE STARTED THIS
PROGRAM 5 YEARS AGO,” COMMENTED PAUL
HICKMAN, AzBA CEO. “WE HAD OVER 40
bankers join us for the day portion at the Capital. Lobbying
as a unified voice is the backbone of The AzBA and is imperative to the success of our industry.”
The day started with a meeting that included Arizona
Senator David Farnsworth, Chair of the Senate Committee
on Financial Institutions. The group then met with Deputy
Arizona Treasure, Mark Swenson, for a tour. Then it was
time for the regulatory panel which included representation
from the FDIC, Federal Reserve Bank of San Francisco, OCC,
and CFPB. After an in-depth session of “Q & A” the bankers
departed for a meeting with Attorney General, Mark Brnovich. The afternoon was comprised of key meeting and intense
lobbying against a bill that would create a state charted bank.
Led by AzBA Government Relations Director, Steven Killian,
the group attended and participated in a Senate Banking
Committee Hearing. He then facilitated meetings with Senate
Majority Leader, Steven Yarbrough; House Banking Committee Chair and Vice-Chair, Representative Kate Brophy McGee
and Representative Jeff Weninger; and Senate President Andy
Biggs.
The day concluded with an intimate and entertaining cocktail party and dinner at Lon’s at The Hermose Inn. “We were
thrilled to have a full room of legislators and public officials
joining our bankers for this annual event,” remarked Theresa
Kleinlein, AzBA Communication and Marketing Director.
The honored speakers were John Ryan, CEO of The Conference of State Bank Supervisors. To conclude the evening U.S.
Congressman David Schweikert delivered a committee report
from the Banking Committee. Paul Hickman summarized
the dinner with a smile, “The speakers were informative and
dynamic. Senator Schweikert is always as informative as he is
witty. Another successful Banker Day for The AzBA.” w
Banker Day Dinner Sponsors Dwight Alexander and Kevin Blackburn of Federal Home Loan Bank of San Francisco; Honored Speaker, Congressman David Schweikert
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www.azbankers.org
Theresa Kleinlein, AzBA; Kevin Blackburn, FHLB; Dwight Alexander, FHLB; Paul Hickman, CEO, AzBA; Kate Maynard, Alliance Bank of Arizona
Arizona Corporation Commissioner, Tom Forese; Marina DeWit, Arizona State
Treasurer Jeff Dewit; Ed Zito, President, Alliance Bank of Arizona
Craig Robb, Vice President, National Bank of Arizona; Carolyn Robb
Honored Speaker, John Ryan, CEO, Conference of State Bank Supervisors
AzBA General Counsel, William Ridenour, Fennemore Craig; Joey Ridenour
ISSUE 1 . 2016
13
Launch of Year Two of
PHX Startup Week Returns Spotlight to Entrepreneurs
Chase to Announce $400,000 in Grants to Nonprofits Assisting Small Businesses
•
PHOENIX – Year two of PHX
Startup Week kicks off on Monday,
Feb. 22, to bring together the Valley’s
entrepreneurs for five days of educational workshops and panels, inspirational
keynotes and networking at no cost to
participants. There will be myriad of
happenings that will be held from Phoenix to Chandler, Scottsdale and Tempe.
• The kick-off will be held Monday, Feb. 22 at 8:45 a.m. at
Chase Basecamp, the epicenter
for Monday’s activities, 111
W. Monroe St. – 19th Floor,
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www.azbankers.org
Phoenix.
EMBARGOED UNTIL MONDAY, FEB. 22, 9 a.m.: At the
kick-off, JPMorgan Chase &
Co. will announce $400,000
total in philanthropic grants $100,000 each to four Valley
nonprofit organizations that
assist small businesses and have
strong programs for women and
minority entrepreneurs. Executives from these nonprofits will
provide information about how
their programs can help entrepreneurs.
Representing the organizations at the
kickoff event will be:
o Gonzalo A. de la Melena,
Jr., President/CEO of the
o
o
o
•
Arizona Hispanic Chamber of
Commerce
David Adame, President/CEO
of Chicanos Por La Causa
Courtney Klein, Co-Founder
and CEO of SEED SPOT
Roberto Valdez-Beltran,
Market Manager for Accion
Arizona
To help entrepreneurs find local
resources, the Phoenix Source
Finder, an online database and
print guide created by U.S.
Sourcelink, will be unveiled.
Sponsored by Chase, the easyto-read visual illustration of
key entrepreneurial resources
will be distributed at PHX
Startup Week, and the website
phoenixsourcefinder.com will go
live on Feb. 22.
Chase returns as the presenting
sponsor of PHX Startup Week, which
premiered last year to celebrate everything entrepreneurial during the
week-long series of events focused on
connecting, inspiring and strengthening
entrepreneurs. Several years ago, Chase
began its sponsorship of Startup Weeks
in Denver and has been expanding its
sponsorship to include more cities. In
addition to Phoenix and Denver, Chase
is sponsoring Startup Weeks in Seattle,
Tampa, Dallas, Columbus, and for the
first time in Detroit.
“When startups thrive, our community thrives,” said Noreen Bishop,
Chase’s regional manager for Business
Banking. “Startups are innovators and
job creators and they contribute to
the local economy. Through Chase’s
sponsorship of Phoenix Startup Week
and our philanthropic contributions, we
want to help grow this ecosystem to its
full potential.”
**The following grant information is
EMBARGOED until Monday, Feb. 22,
at 9 a.m.**
$100,000 grants each to four Valley
nonprofit organizations will help
entrepreneurs, small businesses
•
JPMorgan Chase will announce
philanthropic grants to the following
nonprofit organizations:
• Accion. The grant helps fund
the organization’s staff efforts
to ensure that entrepreneurs in
Arizona have better access to the
financial education and credit
that Accion provides. Accion
helps entrepreneurs with the
tools they need to operate, grow
or start their business, and offers
small business loans and other
resources.
• Arizona Hispanic Chamber of
Commerce. This grant supports
the Chamber’s minority business
enterprise and women’s busi-
•
ness enterprise initiatives with
workshops, outreach, cohort
trainings, networking events
and conferences. The Chamber
operates the Phoenix Minority
Business Development Agency
Business Center, which is one of
40 centers nationwide and was
recognized by the U.S. Department of Commerce as the No. 1
such business center in the nation
for 2014-2015. The Hispanic
Chamber promotes the success
of Hispanic-owned and small
businesses.
Chicanos Por La Causa, Inc.,
for its subsidiary, Prestamos.
The grant supports the efforts
of Prestamos to provide access
to capital to small businesses
in low-income communities to
create jobs and revitalize communities. Through Prestamos,
CPLC has provided more than
$43.8 million in loans to small
businesses in the last five years,
creating more 1,900 jobs. CPLC
is a community organization
dedicated to building stronger
and healthier communities.
SEED SPOT. The grant supports
the following SEED SPOT programs: the Latino Entrepreneur
Program, which partners with
the Univision television station
in Phoenix for a “casting-call”
for entrepreneurs to participate
in a boot camp; the Women’s
Entrepreneur Program, targeting
women entrepreneurs who have
an idea, prototype or existing
business they are looking to
scale; and the Cohort Capital
Training Program, which helps
graduates of SEED SPOT’s accelerator program raise capital.
SEED SPOT is dedicated to
educating, accelerating and
investing in entrepreneurs who
are creating solutions to social
problems. w
About Chase
Chase is the U.S. consumer and commercial
banking business of JPMorgan Chase & Co. (NYSE:
JPM), a leading global financial services firm with
assets of $2.4 trillion and operations worldwide.
Chase serves nearly half of America’s households
with a broad range of financial services, including
personal banking, credit cards, mortgages, auto
financing, investment advice, small business loans
and payment processing. Customers can choose
how and where they want to bank: 5,400 branches,
17,000 ATMs, mobile, online and by phone. For
more information, go to Chase.com.
About PHX Startup Week
PHX Startup Week is an annual week-long,
Valley-wide showcase and celebration of Arizona’s
entrepreneur community. Launched in 2015, the
shared mission is to serve current and future
entrepreneurs with quality content and meaningful
connections. The vision is to foster the world’s
most generous community for entrepreneurs.
Register free to attend or get involved by visiting
phxstartupweek.com.
ISSUE 1 . 2016
15
The Rise of Phoenix’s Financial
Services Sector
CHRIS CAMACHO, PRESIDENT & CEO OF THE GREATER PHOENIX ECONOMIC COUNCIL
G
REATER PHOENIX IS ON TRACK
TO BECOMING A NATIONAL
LEADER IN THE FINANCIAL SERVICES INDUSTRY. OVER THE NEXT
10 years, financial services jobs in the
Greater Phoenix region are projected to
grow by 14 percent, compared to eight
percent nationally. This above average
growth reflects the region’s popularity as an alternative to other legacy
markets – such as New York City, San
Francisco, Los Angeles and Chicago
– and positions Greater Phoenix as a
place where financial services businesses
can optimize their strategic growth,
while keeping up with consumer demands.
16
www.azbankers.org
The region’s appeal is broad: competitive labor costs, a diverse, skilled
workforce, access to western and
international markets, reliable transportation infrastructure, a supportive
startup climate for scaling up FinTech
companies and a culture that encourages collaboration and creativity. During
the economic downturn, many financial
services sub-industries contracted their
banking, lending and mortgage operations, in an attempt to lean out cost and
improve the revenue position against
total headcount. Now that these jobs
are returning nationally, businesses are
choosing Greater Phoenix for the consolidation of these shared services. The
highly regulated reality of the
While the reasons for locating a
financial services business to Greater
Phoenix vary, there are common themes
cited by company CEOs, including
the availability of a skilled financial
services workforce, which provides
employers with a strong talent pool
from which to hire. The presence of
major higher educational institutions,
such as Arizona State University, Grand
Canyon University and the Maricopa
County Community Colleges, provide a
constant stream of talent into the local
workforce. Also, Arizona’s public universities conferred 552 finance degrees
in 2014 alone.
ALSO, ARIZONA’S PUBLIC UNIVERSITIES
CONFERRED 552 FINANCE DEGREES IN
2014 ALONE.
post-recession economy has heightened the need for businesses to develop
alternative, strategic cost solutions in
market where they can scale up quickly.
The financial services industry in
Greater Phoenix is anchored by Wells
Fargo, JPMorgan Chase & Co., Bank
of America, American Express and Alliance Bank, for example, who combined
have more than 40,410 employees
working in the region. The presence of
these major players has helped to attract
like businesses to the area, resulting
in a concentration of financial services
in Greater Phoenix that is 59 percent
greater than the national average. The
financial services sector in Greater
Phoenix currently employs more than
130,000 people, with no signs of slowing down over the next decade. In fact,
by 2025, it is projected than the industry will produce more than 150,000
jobs—a 14 percent growth.
Since 2013, more than 20 financial
services companies--including Northern
Trust, Silicon Valley Bank, Asurion and
Santander Bank--have located all or
part of their operations to the Greater
Phoenix region. The investment these
businesses make by locating to the
region brings thousands of high-wage
jobs and has a direct, positive impact on
the surrounding communities and businesses they support.
In addition to the opportunity to
draw from a diverse, skilled workforce,
employers recognize the region’s relative affordability—particularly in the
housing market—creates opportunities
for mid-level employees not available
in markets such as San Francisco or
New York. Not only do employees
enjoy a higher quality of life overall,
but businesses also benefit from lower
operational and labor costs.
Today's workers strive to find a
solid work-life balance, seeking access
to community amenities such as art
festivals and cultural events, diverse
food choices and craft beer options, and
a solid local music scene. Increasingly,
Greater Phoenix is being recognized as a
place people want to live, work and play.
Featuring a strong entrepreneurial community, the Greater Phoenix
region is where new ideas are cultivated. Increased innovation in FinTech
is breathing new life into the financial
services market and providing alternatives to businesses and consumers. As a
young, diverse region, Greater Phoenix
provides a platform for new technology,
products and ideas to thrive.
Greater Phoenix’s financial service
sector is poised to continue its unprecedented growth for years to come,
contributing to the growth of a sustainable economy. w
ISSUE 1 . 2016
17
What are the Benefits and Challenges
of Model Validations for Banks?
BY DR. ERIC GOLLA
T
HE ARIZONA DEPARTMENT OF FINANCIAL INSTITUTIONS
(AZDFI) MONITORS AND FOLLOWS THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), THE FEDERAL
RESERVE BANK (FRB), AND THE OFFICE OF THE
Comptroller of the Currency (OCC) auditing and examination trends (Examination, n.d.). Reviewing the validation
of internally developed and vendor models deployed at large
banks is an FDIC and OCC priority. A strong belief exists
that regulators will begin model validation reviews at midsize banks.
Model Validation
Model validations help reduce model misuse and accuracy
risk that can result in financial losses and reputation damage.
A model validation should identify data, design, development, testing, deployment, and monitoring risks (Supervisory,
2011). The validation may not reveal that a model is optimal.
However, a thorough validation will result in actionable, riskreducing, recommendations.
Components of model validations include conceptual
soundness, data quality and timeliness, design and development processes, outcome analysis, and monitoring. Executive
and detailed validation reports contain a critical evaluation of
each component (Burns, 2005). Leaders should be able to read
and understand validation documents without an interpreter
or a statistics book.
18
www.azbankers.org
Benefits
Financial regulators require that banks use external auditing resources (External Audit, 1996). Outside resources or
internal groups, separate from the model development team,
can perform the model validations and create the documents
for regulatory review. Passing regulatory reviews is not the
only reason to perform model validations. Other benefits
of model validations include 1) gaining executive trust, 2)
understanding data source risks, 3) identifying fair lending
issues, 4) monitoring disparate impact, and 5) identifying
model optimization opportunities. More than one banking
leader has questioned their models’ accuracy and business
value. Easy to understand validation reports that contain an
overview, results, and recommendations can reduce the trust
gap. Validations help discover prohibitive model inputs such
as race, religion, sex, and gender. Using prohibitive inputs to
influence decisions is illegal and can result in fines and reputation damage.
As fair lending monitoring increased, banks increased the
use of model driven, automated decisions. Even with automated decisions, disparate impacts can exist. Documenting
adverse decisions via reason codes can help reduce disparate
impact risk. Model validations should identify issues and
provide recommendations that can resolve compliance issues,
enhance models, and create best practices.
MODEL VALIDATIONS SHOULD IDENTIFY ISSUES AND
PROVIDE RECOMMENDATIONS THAT CAN RESOLVE
COMPLIANCE ISSUES, ENHANCE MODELS, AND CREATE
BEST PRACTICES.
Challenges
Conclusion
Chief executive officers (CEOs) of national banks received The Supervisory
Guidance on Model Risk Management
document in 2011 from the Federal
Reserve and OCC (Supervisory, 2011).
Banks created or enhanced their model
risk management groups, but model
validations still failed examinations.
Model validation challenges for banks
include 1) knowledge gaps, 2) limited
resources, 3) inconsistent line-of-business development processes, and 4)
proper documentation. Identifying and
obtaining resources that contain the
experience and knowledge to connect
the dots between business units, compliance, legal, technology, and modeling
groups is difficult. Inconsistent documentation across an organization's
functional units requires additional
resources and time to validate models
and resolve audit issues.
Model validations can appear to
be a daunting, time-consuming task.
However, the necessary information
to create the validation documents
should be readily available. First,
technology should have documentation that includes the data sources,
controls, processes, and service level
agreements. Next, internal model
development should follow documented
model design, development, testing, and
deployment processes. Finally, results
from judgmental and model driven
decisions should be available to understand the business impact. If the above
information is available, the validation
time decreases. If the information is not
available, the model validation documents can be used to reduce the bank’s
information gaps.
Model validation documentation
presents other problems. First, interpreting guidelines requires resources
that can decipher and communicate the
guidelines to leadership, compliance,
modeling, and line of business teams.
Second, modelers are normally not
the optimal choice to write validation
documents. Modelers have a tendency
to write documentation for statisticians.
Finally, leaders may prefer a particular
documentation framework that does
not pass a regulatory exam.
The good news is that after the first
model validation is complete, leveraging
the validation process and documentation framework will reduce validation
time and resources. The reduced time
will allow banks to expedite model
validations and use the valuable results
and recommendations as inputs into
profitable business strategies.
Dr. Eric Golla is an Innovation and
Data Science advisor for TechMileage. TechMileage is a Phoenix Metro
Area, AZ-based software development, advanced analytics and model
validation company with extensive
experience in developing enterprise
solutions and products. TechMileage
specializes in providing end-to-end
software solutions, modeling, model
validations, and business intelligence.
For more information, contact, Rajesh
Kumar at (602) 334-9964 or rajesh.
kumar@techmileage.com.
Burns, R. L. (2005). Supervisory
Insights. Retrieved from https://www.
fdic.gov/regulations/examinations/
supervisory/insights/siwin05/article01_
model_governance.html
External Audit (June 24, 1996).
Statement of Policy Regarding Independent External Auditing Programs
of State NonMember Banks. Retrieved from http://www.azdfi.gov/
LawsRulesPolicy/SPS%20Links/
DFI-AD-PO-BA-SUB_POL_STATEFDIC_Attachment_BA-1-062496ver1.
pdf
Examination, (n.d.). Bank Examinations. Retrieved from http://azdfi.gov/
Licensing/Licensing-FinInst/Banks/
BanksExamination.html.
Supervisory. (April 4, 2011). Supervisory Guidance on Model Risk
Management. Retrieved from http://
www.federalreserve.gov/bankinforeg/
srletters/sr1107a1.pdf. w
ISSUE 1 . 2016
19
Guarantors’ “Lost Profits” Completely
Offset Lender’s Deficiency Claim
By BEN REEVES
B
ELIEVE IT OR NOT, LENDERS CAN
BREACH LOAN AGREEMENTS
TOO…AND WHEN THEY DO,
THERE CAN BE SIGNIFICANT
consequences. In Great Western Bank
v. LJC Dev., LLC, 726 Ariz. Adv. Rep.
21 (Ariz. Ct. App. Nov. 10, 2015), the
Arizona Court of Appeals affirmed that
guarantors’ “lost profits” resulting from
the lender’s breach of a loan agreement
completely offsets the amount owed
under a guaranty. Much can be learned
from this unusual outcome.
The Loan Agreements
In Great Western Bank, the bank’s
predecessor entered into an acquisition and development loan (the “A&D
Loan”) with Cedar Ridge Investments,
20
www.azbankers.org
LLC (“Borrower”) in May 2007 to
allow Borrower to acquire a fiftyhome subdivision in Flagstaff, AZ. In
January 2008, Borrower entered into a
second agreement with the bank to fund
the actual construction of homes (the
“Agreement”). The Agreement expired
on December 1, 2008.
The Bank Decides to Cease Funding
Construction Loans
In July 2008, the bank made an
internal decision to cease all construction financing in Arizona. Accordingly,
the bank advised Borrower that it “was
withdrawing from the Agreement.”
Id. at ¶ 4. The Borrower attempted
to obtain alternative financing but, as
will come to no surprise to those who
lived through the Great Recession, was
unable to do so. The bank ultimately
foreclosed.
The Litigation
The bank sued the guarantors for an
approximate $2.6 million deficiency,
but the guarantors counterclaimed,
asserting that the bank’s refusal to
fund the Agreement constituted an
anticipatory repudiation of the contract,
breached the covenant of good faith and
fair dealing, and gave rise to damages
for lost profits.
The Evidence at Trial Establishes
Breach of Contract
At trial, the bank argued that the
Agreement did not obligate it to fund
THE BORROWER ATTEMPTED TO OBTAIN ALTERNATIVE
FINANCING BUT, AS WILL COME TO NO SURPRISE TO
THOSE WHO LIVED THROUGH THE GREAT RECESSION, WAS
UNABLE TO DO SO.
the construction of homes. Rather, it contended that the
Agreement was merely a “guidance line” that left the decision of whether to fund, or not fund, the construction of any
individual home up to the bank’s discretion. Although the
language of the Agreement did set some conditions on funding, the Court of Appeals held that “the Agreement was as
much a loan agreement, i.e., a contract binding on its signatories to the lending and borrowing of money, as any loan
agreement ever written, notwithstanding Borrower’s obligation to provide certain information to [the bank] before it
could make a draw.” Id. at ¶ 14. Thus, the bank’s unilateral
decision to “withdraw” from the Agreement without analyzing each individual draw request breached the Agreement. Id.
at ¶ 13.
Because the lost profits exceeded the amount of the asserted
deficiency, the trial court declined to enter any judgment
against the guarantors and awarded them their attorneys’ fees
and costs. On appeal, the bank argued that the lost profits
were, at best, speculative, but the Court of Appeals declined
to disturb the trial court’s findings of fact. Thus, the Court of
Appeals affirmed and – again – awarded the guarantors their
fees and costs.
The Evidence at Trial Establishes Lost Profits
Conclusion
The guarantors2 went on to prove that the breach caused
them damages in the form of lost profits. The following three
factual findings established lost profits:
• First, notwithstanding the bank’s termination of the
Agreement in July 2008, Borrower remained current
until October 2008. The bank’s own records showed
that Borrower’s progress on construction in August
2008 was “acceptable.” Id. at ¶ 26. Thus, the trial
court found that the Borrower would have performed
but for the bank’s withdrawal.
• Second, notwithstanding the automatic expiration of
the Agreement in December 2008, the trial court determined that the bank would have extended the loan
as it would have been in the bank’s economic interest
to do so. With extra time, the trial court determined
that Borrower would have sold all the homes but for
the bank’s withdrawal. Id. at 30.
• Third, the bank’s own appraiser offered evidence that
home sales in Flagstaff remained consistent throughout 2009, which would have allowed the Borrower to
sell homes at a rate sufficient to service the loan and
There are a couple of interesting things to learn from this
decision. First, the case provides a stark reminder to banks
to perform a thorough review of their loan documents before
asserting a breach. Second, although the notion that anyone
could have made a profit by developing homes in Arizona
in 2008-2009 is somewhat counterintuitive, the trial court’s
conclusion was supported by evidence (from the bank’s own
appraiser) – and therefore very unlikely to be disturbed on
appeal. See id. at ¶ 38. It appears that the bank attempted
to rebut the evidence by arguing that “the loss was more
likely caused by a declining economy rather than a breach of
the Agreement.” Id. at ¶ 38. Although this argument seems
accurate, banks should remember to confront every defense,
even if it seems incredible, with specific evidence. w
make Borrower a profit. Id. at ¶ 38. Thus, the trial
court concluded that the Borrower would have made a
profit in the aggregate amount of somewhere between
$2,808,000 and $3,500,000. Id. at ¶ 37.
Guarantors Prevail at Trial and on Appeal
Ben Reeves is a partner in the Bankruptcy, Reorganization, and Insolvency
Group at Snell & Wilmer, L.L.P.
2The trial court ruled that Restatement (First) of Security § 133 (1941) allowed
the guarantors to assert Borrower’s offset, and neither party contested this
ruling on appeal.
ISSUE 1 . 2016
21
Alisa Lacey » 602.212.8628
alisa.lacey@stinson.com
Bob Monroe » 816.691.3351
bob.monroe@stinson.com
Ernie Panasci » 303.376.8402
ernie.panasci@stinson.com
Deborah Bayles » 303.376.8401
deborah.bayles@stinson.com
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