2019 Journal of Community Bank Case Studies

University of Tennessee at Martin

THIRD PLACE:

This is beneficial as FirstBank’s balance sheet contains a large amount of MSRs, approximating $89 million at year-end 2018 (Gordon). The benefits from the simplification of these capital rules, specifically the treatment of MSRs, could prove favorable for FirstBank’s stock price and investor outlook. FirstBank approximates an $830 million impact on its balance sheet and a $27 million increase in net income by year-end 2019, assuming the full deployment of the excess capital created with the new CBLR into loans to customers (Durham). In April of 2019, it was announced that the Senate Banking Committee proposed setting the CBLR to 8% (ABA). This would significantly change FirstBank’s estimates, shown in Exhibit 10, related to the impact of the simplified capital rule by adding an additional $480 million to the balance sheet and an additional $16 million to net income (Durham.) B. Reclassification of Reciprocal Deposits Another provision proving to be beneficial to FirstBank is the reciprocal deposit reclassification. Historically, reciprocal deposits were considered brokered deposits by banking regulators. Brokered deposits are not generally attractive to FirstBank or the banking industry because of the effect on a bank’s regulatory risk profile. Although FirstBank has not previously utilized these deposits significantly, it began increasing its use of these deposits in the last half of 2018. FirstBank was willing and able to capitalize on the benefits of reciprocal deposits shortly after the passage of EGRRCPA and will continue to integrate their use to diversify

funding and provide additional protection to customers (Gordon). Reciprocal deposits will replace the true brokered certificate of deposits and Federal Home Loan Bank advances, resulting in an decrease of 85 basis points due to lower cost funding (Durham). FirstBank estimates receiving a $700 thousand increase in net income by year-end 2019 from the implementation and use of reciprocal deposits (see Exhibit 10). C. Volcker Rule Provision EGRRCPA relief regulations will allow smaller banks, like FirstBank, to remain competitive in an era of increased customers’ confidence and comfort in conducting banking business online. The exemption from the Volcker Rule allows FirstBank to capitalize on potential investment opportunities in FinTech companies and related investment funds. FinTech companies are online lenders and other tech providers that may lack FDIC-insured deposits and rely on

Another provision proving to be beneficial to FirstBank is the reciprocal deposit reclassification.

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