Alpine Capital Bank Newsletter                                     October 2010
In This Issue
Meet the People
U.S. Financial Reform
Dodd-Frank
Commodities
Estate Planning
Prime KO

Meet the People

Alpine is pleased to introduce Shari Weissman, Assistant Vice President, Compliance Officer. You may know Shari as the cheerful person who assisted with the opening of a new account, processed a funds transfer, or dealt with a particularly difficult bank issue. After completing the HSBC management training program, Shari began working at Alpine Capital Bank in November 2003. She spent nearly two years working in the loan department as a loan officer. After some time spent working at another bank, Shari decided to return to Alpine's greener pastures. 

Currently, Ms. Weissman's role as AVP, Compliance Officer requires her to review and update policies regarding compliance issues, and liaise with FDIC and auditing officials to ensure that Alpine Capital Bank remains compliant. A true team player, Shari also works closely with Tashana Smith, Account Officer, assisting with customer service issues, and Lorraine Trivone, Operations Manager/Assistant Controller, helping with operational protocol.

 

Born and raised in Connecticut, Shari now lives in New Jersey with her husband and two children. When not caring for her infant Emma and chasing her toddler Reid, Shari enjoys releasing stress in boot camp training classes held at her local gym.

President's Corner

In May 2010, we at Alpine moved from our previous home on the 15th floor to our new and vastly improved office space on the 7th Floor at 680 Fifth Avenue. We worked with Gensler, a global architecture, design, planning, and consulting firm, to formulate and implement a seamlessly designed workplace to benefit both our employees and valued clients. In addition to the new space, we also teamed with Gensler to complete a comprehensive re-branding effort, featuring a fresh and modern logo.  
 

We focused on designing the new offices to support vital workplace activities that promote success, such as collaboration, learning, and focus. Facilitating meetings and group work, the new space features a large conference room that seats twelve, and two small conference rooms that each seat five comfortably. The central area of the office houses an 'open' plan workspace with half-walled cubicles, which encourages a more collaborative culture with increased communication levels. Should you find yourself in the neighborhood, we welcome you to visit us for a first-hand look at our new space.

 

In our Autumn 2010 newsletter, you will find practical and insightful articles that make sense of the Dodd-Frank Wall Street Reform and Consumer Protection Act, plus helpful hints concerning commodities investing and estate planning. Thanks again to all of our wonderful contributors!

 

 Stay tuned for Alpine's next marketing effort--a re-imagined and completely  re-designed website!

 

 

 
David M. Aboodi

President and CEO

 

The Impact of U.S. Financial Regulatory Reform 

Some consider The Dodd-Frank Wall Street Reform and Consumer Protection Act--signed into law by President Obama on July 21, 2010--the most sweeping set of rules for banks and Wall Street since the Great Depression. With the goal of significantly enhancing consumer financial protections, this comprehensive legislative overhaul established a new Consumer Financial Protection Agency to regulate products like mortgages, loans and credit cards.

The Dodd-Frank Act raises the current standard maximum deposit insurance amount (SMDIA) to $250,000. Previously, the SMDIA of $100,000 had been temporarily raised to $250,000 until December 31, 2013.  FDIC insurance covers deposits to insured banks, including checking accounts, negotiable order of withdrawal (NOW) accounts, savings accounts, money market deposit accounts (MMDA), or time deposits, such as a certificate of deposit (CD). The coverage limit applies per depositor, per insured depository institution for each account ownership category. Beginning Mid-year 2011, the Act will allow financial institutions to pay interest on corporate transaction accounts.

The Act also extends the FDIC's Transaction Account Guarantee (TAG) Program through the end of 2012, with some exceptions. Through December 31, 2010 under the TAG Program, the FDIC provides unlimited coverage for noninterest-bearing transaction accounts, as well as for NOW accounts (where the interest rate is contractually limited to no more than 0.25%). Beginning in 2011 through 2012, the extra coverage provided by the Dodd-Frank Act will only include transaction accounts that pay zero interest; it will not include any interest-bearing NOW accounts.

 

As an FDIC-insured bank, Alpine Capital Bank is in full compliance with the new regulatory bill, effective immediately.

 
Quick Links
Dodd-Frank: The CliffsNotes Version 
By: Ivan Serchuk, Partner at Todtman, Nachamie, Spizz & Johns, P.C.
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act became law this past July.  Synthesizing its 2300 pages in a short article makes Hercules' effort to cleanse the Augean stable look like a walk in the park.  Therefore, reader beware, what follows does not purport to be the whole picture; it only reflects the writer's subjective judgment as to the primarily banking related high points.
 
This piece will be broken into three sections. The first, which I've called "The Big Stuff", presents an overview of the provisions designed to stabilize our national economy and control the risks related to the "too big to fail" guys.  The second section, which I've called "Ms. Warren Comes to Washington", addresses the creation of a Bureau of Consumer Financial Protection.  And the third section, which I've called "David Cares", deals with the provisions that most affect "community banks" like Alpine Capital Bank. 

 

The Big Stuff

  The Act creates a Financial Stability Oversight Council whose principal responsibilities include analysis of the economy and the need to regulate previously unregulated sectors of the financial services industry.  The council is charged with identifying and responding to emerging risks, recommending enhanced prudential standards to the Federal Reserve Board, and designating certain nonbank financial companies (defined as companies in which at least 85% of consolidated annual gross revenues are derived from activities that are "financial in nature") as "systematically important" and, therefore, subject to regulation by the Federal Reserve Board.

 

   Bank holding companies with at least $50 billion in assets, which received TARP money under the Emergency Economic Stabilization Act will be unable to avoid Federal Reserve Board supervision by divesting themselves of their bank subsidiaries.

 

  Bank holding companies with at least $50 billion in assets and Federal Reserve Board supervised nonbank financial companies (see definition above) must report on their credit exposure to other financial institutions and other institutions' credit exposure to them, and such exposure will be limited to 25% of capital stock and surplus.

 

  Bank holding companies must meet the same capital standards as those that are applicable to banks.

 

  The Federal Reserve Board will regularly stress test regulated institutions to determine whether they have adequate capital to absorb potential losses.

 

  The ability of commercial banks to invest in hedge funds and private equity funds will be limited to an aggregate of 3 percent of the bank's Tier 1 capital. Their ability to engage in proprietary trading will also limited.  These provisions, which roll back authorizations enacted by the Gramm-Leach-Bliley Act in 1999 (which in turn rolled back Glass-Steagall that had been the law since 1933), are known as the "Volcker Rule".  They become effective in two years.

 

 The Act provides for the creation of a Federal Insurance Office, presumably in anticipation of future federal involvement in the regulation of insurance.

 

Ms. Warren Comes To Washington

Elizabeth Warren, a Harvard Law School Professor who chairs the Congressional Oversight Panel-- created to oversee implementation of the Emergency Economic Stabilization Act--has been a high profile proponent of the need for a separate federal agency to deal with consumer protection issues, a position that has not endeared her to certain interests in the financial services industry.  Dodd-Frank creates such a regulator, the Bureau of Consumer Financial Protection, charged with regulating the offering and provision of financial products and services for personal, family and household purposes.  Speculation inside the Beltway was that the President wanted to name Professor Warren the first Director of the Bureau, but that, because she had become a lightening rod, Senate confirmation was unlikely.  The President finessed the issue by naming her as his Assistant and Special Advisor to the Secretary of Treasury on the Consumer Financial Protection Bureau.  In that capacity, she becomes the lead player in getting the Bureau of Consumer Financial Protection off the ground, and the agency is likely to be quite aggressive in pursuing its mission.
 

    The Bureau will be housed within and funded by the Federal Reserve System, and its Director will serve a five year term.  The Bureau has the authority to implement and enforce existing consumer financial laws and regulations and may also promulgate new rules and regulations.  It is noteworthy that rules established by the Bureau may be overturned by the Financial Stability Oversight Council if found to pose a risk to the safety or stability of the national financial system.

 

   The Act requires the Bureau to conduct studies on the following specific issues: (a) reverse mortgage transactions; (b) credit score dissemination practices; (c) like-kind exchange practices; and (d) mandatory arbitration provisions in consumer financial products and services agreements. 

 

   The Act provides that it does not preempt any state law except to the extent that the state law is inconsistent with the Act and states are, therefore, authorized to enact greater protection for their citizens.

 

   The Bureau is given exclusive authority to require reports and conduct examinations of banks with assets of over $10 billion regarding consumer protection matters.  While the Bureau may not independently examine banks falling below that threshold, it may include staff representation in examinations of such institutions by their primary regulators in order to assess compliance on consumer protection issues.

 

    The Bureau will have subpoena power, may conduct investigations and hearings, and may institute proceedings to enforce consumer protection laws that could result in the issuance of cease and desist orders.  The Bureau is also authorized to bring suits in the federal courts with exposure to the charged institution for violations ranging from $5,000 a day to $25,000 a day for reckless violations up to $1 million a day for knowing violations.

 

David Cares

    The Act amends the interstate branching provisions of the Riegle-Neal Act of 1994 to authorize banks to open de novo branches in other states if the law of the state where the branch is to be located would permit its own state chartered banks to open such a branch.  Previously, if Alpine Capital Bank wanted to open a branch office in New Jersey, for example, it could do so only if New Jersey permitted a New York bank to establish a de novo branch and, in fact, New Jersey allows an out-of-state institution initial entry only by purchasing an existing branch office from another institution.
 

    The Act mitigates the competitive advantage that federally chartered banks have had in the past over state chartered institutions by limiting federal bank regulators' rulings regarding federal preemption of state consumer protection laws so that such preemption will only be applicable if: (a) it will have a discriminatory effect on federally chartered banks; (b) the state law is preempted by a provision of federal law other than the National Bank Act; or (c) state law "prevents or significantly interferes" with a federally chartered bank's exercise of its powers.

 

   The Act amends certain mortgage loan origination standards and prohibits a lender from making a residential mortgage loan absent a finding that the borrower has the reasonable ability to repay the loan.

 

   The Act permanently increases the FDIC deposit insurance coverage limit to $250,000.  It also extends the unlimited guarantee of non interest bearing transaction accounts until year-end 2012.

 

   The Act will permit banks to pay interest on business checking accounts beginning mid-year 2011. 

 

    The Act changes the way the FDIC will calculate deposit insurance premiums so that assessments will be based upon the bank's total consolidated assets minus average tangible net worth.  Previously, assessments were based on the amount of a bank's insured deposits.

 

Mr. Serchuk chairs the Banking and Financial Institutions Group at the New York law firm of Todtman, Nachamie, Spizz & Johns, P.C. During the course of his distinguished career, he has served as law clerk to a federal judge, Deputy Superintendent and Counsel to the New York State Banking Department, Special Counsel to the New York State Senate Banks Committee and member of the Board of Directors of several banks. Mr. Serchuk specializes in bank regulatory matters, but also has extensive experience in the mergers and acquisitions, corporate, employment and commercial lending areas.

 

Investing in Commodities

By: Justin Frankel and Jeremy Berman, Wavecrest Asset Management

 

As global population growth increases and the standard of living in emerging markets around the world rises, the global demand for raw materials will also increase. Competition for scarce resources such as water and farmland should push agrarian based commodity prices higher. As emerging markets expand, their manufacturing capabilities--demand for energy and metal commodities--will also rise. Finally, despite softness over the past 2 years, consumption in developed nations is likely to rebound, placing more demand on finite resources around the world. These long-term trends should create significant tailwinds for commodities as an asset class, and underscore the need for most investors to have some exposure in their portfolios.

When discussing commodities as an investment, it is important to understand some of the basic market forces that influence pricing.  The spot price is where a commodity is trading for physical delivery.  Most investors (or speculators, in commodity lingo) use futures contracts to gain exposure to this market.  To maintain exposure to the chosen commodity, an investor must roll into a new futures contract as an old one expires.  As a result, the "shape" or direction of the futures curve has an important effect on an investor's return.  Contango, an upward sloping forward curve, describes a market in which distant maturities cost more than near-dated ones, or in which the price of a commodity for future delivery is higher than the spot price. Interest rates, shipping costs, and storage charges all contribute to this effect. The opposite of contango is backwardation, or a forward curve that is downward sloped. Generally, backwardation occurs when there is heightened immediate demand for the physical commodity (i.e.  refineries need oil to process, bread makers need wheat to make bread).  The shape of the forward curve is a key determinant to investment performance when considering an investment in which the rolling of commodity futures occurs.  If a commodity is in contango, the rolling effect will be negative, and if it is backwardated, the effect will be positive.

Historically, commodity pricing has been a factor of aggregate industrial supply and demand.  Financial innovations over the past decade have made it easier to gain exposure to commodities as an asset class.  While some sophisticated investors invest directly through futures, a larger number have been able to invest in commodities through a variety of products like exchange traded funds (ETFs), closed-end mutual funds, structured investments and actively traded commodity pools.  These products can provide both broad exposure to commodities as well as sector or even single commodity exposure.   One downside of this increased commodity appetite is a supply/demand imbalance which may be contributing to higher commodity prices. In addition, this new demand has increased volatility while eroding the correlation benefit that make commodities an attractive diversification tool. 

A risk managed approach to commodities can provide diversification benefits while mitigating some of structural risk described above.  By using options to mitigate volatility, investors can establish zones of downside protection, create areas of upside enhancement, and build diversified baskets of commodities.  As with other asset classes, a passive approach to investing is not always the best one.  Adding a structural component may be worthwhile when investing in an asset class as complex as commodities.  A more dynamic approach can provide the benefits that investors seek while limiting some of the inherent risks normally associated with commodities. 

Justin Frankel & Jeremy Berman have over 20 years of combined institutional experience trading, building, and marketing structured investments and equity derivatives. They are the founders and managing partners of Wavecrest Asset Management, and recently managed different components of the structured investments business at Morgan Stanley. They believe a disciplined approach to risk-managed investing leads to smoother returns and less volatility, and manage both a hedge fund and separate accounts based on this investment philosophy.

 

Estate Planning 
By: Joshua Weiss, Sullivan & Worcester LLP

 Estate Tax in 2010.  There is no federal estate tax for individuals who die this year.  A federal tax return may still be required to be filed in certain instances to provide information for the administration of the new basis rules, described below.  The return is to be filed with the decedent's final income tax return. 
 

Income Tax Basis in 2010.  The tax cost basis of property owned by an individual who dies in 2010 is not automatically "stepped-up" for income tax purposes to its value as of the individual's date of death.  Instead, the executor can allocate up to $1.3 million in basis step-up to any appreciated assets, and an additional $3 million in basis step-up to appreciated assets that pass to a surviving spouse (or in a certain type of trust for a surviving spouse). 

 

Gift and GST Tax in 2010.   In 2010, each individual continues to have a $1 million lifetime gift tax exemption but the maximum tax rate on taxable gifts made in 2010 is reduced from 45% to 35%.  The annual gift tax exclusion for gifts up to $13,000 to any individual remains unchanged.  As of January 1, 2010, there is no generation skipping transfer ("GST") tax on transfers made in 2010 to grandchildren and more remote descendants.

 

Grantor Retained Annuity Trust.  A GRAT, which was discussed in the November 2009 Alpine Capital Bank Newsletter, is an irrevocable trust created during lifetime for a specified term in which one can contribute assets which are expected to appreciate in excess of a prescribed interest rate.  However, the grantor must survive the trust term for this estate planning technique to be effective.  To increase the mortality risk, Congress has proposed legislation requiring a GRAT to have a minimum term of ten years.  Other bills have been  proposed to eliminate the popular "zeroed-out" GRAT. 

 

2011.  In 2011, under existing law, the estate tax, gift tax and GST tax will revert to 2001 levels, with reduced estate tax and GST tax exemptions ($1 million each) and higher maximum tax rates (55% for the estate tax, GST tax and gift tax).  The lifetime gift tax exemption remains at $1 million.  With the return of the estate tax, the former basis step-up rules would again apply.  It is possible that Congress may enact new estate and GST tax legislation before year end, which may or may not apply retroactively to January 1, 2010. 

 

Year End Planning Considerations For 2010

Gifting OpportunitiesMaking taxable gifts is less expensive in 2010 because the maximum federal gift tax rate on such gifts is 35%, compared to the rate of 55% scheduled to return in 2011.  Notably, because the GST tax has also lapsed in 2010, it may be an ideal time to make taxable gifts to grandchildren (i.e. gifts in excess of $13,000).  Last year, if one were to make a taxable gift to a grandchild (above the GST exemption amount), it would have been taxed at an effective combined tax rate of 74%. This year the same gift would only be subject to a 35% gift tax, although it should be noted that there is some risk of the GST tax being reinstated retroactively.

 

There is some uncertainty with regard to gifts to a trust for the benefit of grandchildren because of the inability to allocate the GST exemption in 2010.  Future distributions from such a trust could be subject to GST tax to the extent attributable to any contributions made this year. 

 

Short Term GRAT.  Because one must survive the trust term for this strategy to work, the next few months may be a good time to establish a GRAT before the pending legislation requiring a ten year minimum term and/or disallowing zeroed-out GRATs is enacted by Congress.  If the assets in the GRAT appreciate at a rate greater than the "7520 rate" (currently at an extremely low rate of 2.4% for September 2010) then that appreciation can pass to one's children at the end of the trust term with no gift tax. 

 

Life Insurance.  If Congress does not act and the estate tax exemption amount reverts to its 2001 level ($1 million), or if a different exemption amount is enacted, purchasing life insurance through an insurance trust can provide beneficiaries additional funds to help replace money that is used to pay estate taxes in future years.  Further, if one's estate is illiquid, an insurance trust can be used to purchase estate assets to help raise cash that can then be used to pay taxes and other estate expenses.  Term insurance is often inexpensive and may be cancelled when it is no longer needed

 

Conclusion

Before making any significant estate planning decisions, it is necessary to consider the possibility that Congress may retroactively reinstate the federal estate and GST taxes, and enact less favorable GRAT rules.  Contact your estate planning attorney to review your own particular estate plan.

 
Joshua Weiss is and Associate in the Trusts and Estates Department at the law firm Sullivan & Worcester LLP, which has offices in New York, Boston, and Washington DC. Joshua has over 10 years of experience as a trusts and estates lawyer. He is a graduate of Rutgers University, the University of Pennsylvania Law School, and he has an LLM from New York University.
Prime KO

Prime KO, located on the Upper West Side, completes the trifecta of New York City restaurants managed by Prime Hospitality Group, which also includes The Prime Grill and Solo. Blending modern and authentic cuisines from Executive Chef Makoto Kameyama's native Japan, Prime KO offers delectable steaks with an Asian twist, and dishes highlighting distinct flavors from the region. The two story restaurant designed by architect Warren Ashworth blends comfort with chic dining, defining it as a true neighborhood restaurant. Seating 66 people, the upstairs offers a fine dining, yet comfortable experience, while downstairs one can find a bar, lounge, sushi bar and dining options that seat up to 100 people. In addition, the downstairs boasts great music and a DJ on many nights.