We can each make a difference. We support those who do.

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2 We can each make a difference. We support those who do. For more than 100 years, the Wilmington Trust corporate family has been privileged to work with, and support, individuals and organizations committed to providing quality of life and opportunities to all members of our communities. In our second century of serving clients, our commitment to improving the lives of our neighbors remains steadfast. We are proud to support the Delaware Bankers Association Wilmington Trust Corporation. Affiliates in California, Connecticut, Delaware, Florida, Georgia, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Pennsylvania, South Carolina, Vermont, Cayman Islands, Channel Islands, Dublin, Frankfurt, London, and Luxembourg.

3 The Delaware Bankers Association P.O. Box 781 Dover, DE (302) Fax: (302) Delaware Banker The Quarterly Publication of the Delaware Bankers Association P. 10 P. 20 Fall 2007 Vol. 3, Issue 4 BOARD OF DIRECTORS CHAIRMAN Keith W. Schuck President Chase Bank USA, N.A. P. 17 CHAIRMAN-ELECT Mark E. Huntley Chairman Delaware National Bank PAST CHAIRMAN Connie Bond Stuart President PNC Bank, Delaware Contents Robert V. A. Harra, Jr. President Wilmington Trust Company W. Edwin Kee Director/Chairman The Felton Bank James J. Kelly Chief Operating Officer ING DIRECT DIRECTORS Edward A. Reznick President & CEO Deutsche Bank Trust Co. Delaware Geoffrey M Rogers Managing Director The Glenmeade Trust Co., N.A. Richard K. Struthers Operations Executive Bank of America Card Services Mark A. Turner President & CEO WSFS Bank Richelle A. Vible President & CEO Citizens Bank (DE) View from the Chair... 4 President s Report... 7 What s New at the DBA... 8 Cover Story: Captive Insurance...10 Q&A with Richard F. Klumpp, JD, CPA...14 Still Opening Doors After 75 Years Our New Place in Cyberspace A Matter of Trust DBA Calendar of Events / Seminar Schedule Real Estate Law Update Clinton W. Walker Managing Director Barclays Bank Delaware President, CEO & Treasurer David G. Bakerian Editorial Disclaimer: The opinions expressed in articles by authors other than the Association staff and officers are the responsibility of the authors only and not necessarily those of the Delaware Bankers Association. Questions and comments should be addressed to the Editors. No part of this publication may be reproduced without the written permission of the Editors. Copyright 2005 by the Delaware Bankers Association. All Rights Reserved. Delaware Banker seeks to provide banking updates and other news of interest to the members of the Delaware Bankers Association. With the exception of official announcements, the Delaware Bankers Association disclaims responsibility for opinion and statements contained in Delaware Banker, and does not endorse any product or service. Delaware Banker is designed to provide accurate information on the subject matter covered. It is presented with the understanding the publisher is not engaged in rendering legal, accounting, or other professional services or advice. SUBMISSIONS Delaware Banker welcomes news items from members of the Delaware Bankers Association. The Editors reserve the right to refuse any advertising or editorial copy deemed unsuitable for publication. The Editors reserve the right to set the publication date in accordance with the Association s needs. Direct submissions to Susan Highfield at (302) or susan.highfield@debankers.com, or Greg Koseluk at (302) or greg.koseluk@debankers.com SUBSCRIPTIONS Delaware Banker is available free of charge to all officers, executives, management, and key personnel of DBA members. Paid subscriptions to Delaware Banker are available to all others at a rate of $20 per year. To be placed on the subscriber list, please Susan Highfield at susan.highfield@debankers.com. ADVERTISING Advertising inquiries should be directed to Greg Koseluk at (302) or greg.koseluk@debankers.com. Rates will be furnished upon request. Delaware Banker - Fall

4 View from the Chair by Keith W. Schuck President Chase Bank USA, N.A. Chairman Delaware Bankers Association DBA committee members are the experts in their fields, each with unique talents and strengths at their positions. 4 Delaware Banker - Fall 2007 Committees. The very mention of the word may send some of you running for cover. Committees, as any one who has ever served on one can attest, often get a bad rap. Sometimes that bad reputation is deserved, but mostly it is overstated, much like mother-in-law jokes. Milton Berle, speaking of jokesters, once said: a committee is a group that keeps minutes and loses hours. And while we could probably form a focus group to swap horror stories on committees (a sort of anti-committee committee), I m not here to bury committees, but to praise them...at least the committees of the Delaware Bankers Association. Before you accuse me of being the parent who believes their child is perfect, let me tell you something about the DBA committees and what makes them different. Because of our diverse group of banks, when the DBA forms its committees it s really like putting together an all-star team. DBA committee members are the experts in their fields, each with unique talents and strengths at their positions. The majority of the committees are made up of ten or more members who serve three-year terms. While committee membership is by invitation, attendance at most committee meetings is open to all DBA members, including Associate Members. What sort of topics do DBA committees cover? Here s a brief rundown of each. Education Committee: The DBA s Education Committee oversees a full range of educational opportunities for all of the Association s Members and the Community. Association members are given educational opportunities through on-line and correspondence courses, web seminars, various banker schools, and college degree programs. The Committee also oversees the DBA s financial education programs to the community including: Teach Children to Save Day; the Keys to Financial Success high school elective course; the ADVANCE Scholarship program; and, The Great Investo series of radio public service announcements. Attendance at Education Committee meetings is limited to members and invited guests. Government Affairs Committee: The mission of the Government Affairs Committee is to monitor, review and analyze state and federal legislation and regulatory actions affecting our members and to make appropriate position recommendations to the Board. The committee is comprised of the DBA Executive Committee members, and inhouse bank counsel who concentrate on legislation. Human Resources Committee: The Human Resources Committee (HRC) serves as a forum for our various human resource directors and their staffs to exchange and interpret human resources and related issues. The HRC also provides education and informational sharing opportunities in support of the DBA s principles, values, vision and mission. The HRC provides sources of human resources information and expertise to help members provide quality customer service for the ever changing needs of their employees. Meetings, which often feature guest speakers, are open to all members. Regulatory Compliance Committee: The Regulatory Compliance Committee

5 (RCC) meets to: exchange and interpret regulatory information; actively participate in the regulatory rulemaking process; and, provide education and informational sharing opportunities. The RCC is open to all DBA members, and has four subcommittees: The Rulemaking Subcommittee reviews proposed regulations and may make comment to the appropriate regulatory agency. The Regulatory Subcommittee reviews new regulations and makes recommendations for implementation. The Education Subcommittee reviews and recommends compliance related educational programs helpful to the Compliance group. The State Legislation Subcommittee monitors proposed and new banking legislation in other states to determine its impact on Delaware banks that do business in those states. Trust Committee: The DBA s newest committee, open to all members, promotes Delaware s trust industry while exchanging and interpreting information on both personal and corporate trust related issues. There are two subcommittees of the Trust Committee: Trust Education Subcommittee which oversees various trust related educational opportunities. This subcommittee also is responsible for the highly successful annual Delaware Trust Conference. Trust Legislation Subcommittee which helps monitor trust related Delaware legislation. As you can see, the DBA s committees provide invaluable opportunities for gathering and exchanging information on topics vital to our industry. I want to thank all those who serve to make our committees a success. I also encourage all the members of the DBA to take advantage of the resources available through the various committees. You can find information on committee activities in each issue of Delaware Banker in the What s New at the DBA feature on page 8, and in the Calendar of Events on page 24. You will also find more committee information by clicking on the Committee tab on the DBA s website ( TIMES HAVE EVOLVED. SO SHOULD YOUR APPROACH TO TRUST MANAGEMENT. Trust Management from Goldman Sachs You want a trustee who understands the strategies that have worked in the past, but is pragmatic, with the flexibility to adapt them to the present. The professionals at The Goldman Sachs Trust Company, N.A. consider each client individually. We take into account your assets and your needs to develop a customized trust investment strategy that delivers on your long-term goals. To learn more about our forward-thinking approach to trust management, contact Gee Smith, President, The Goldman Sachs Trust Company, N.A. at The Goldman Sachs Trust Company, N.A., All Rights Reserved. The Goldman Sachs Trust Company, N.A. is an affiliate of The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. Assets (1) are not insured by the FDIC or any other bank regulator (2) are not deposits or other obligations of, or guaranteed by, The Goldman Sachs Trust Company, N.A. or Goldman, Sachs & Co. or any of their affiliates, and (3) involve investment risks, including possible loss of the principal amount invested. The Goldman Sachs Trust Company, N.A. is not a member of SIPC or the FDIC.

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7 President s Report by David G. Bakerian President, CEO & Treasurer Delaware Bankers Association We may need to call upon you to help us explain to our elected officials that the banks are responsible business people... Although the main focus of the Delaware Bankers Association is what s going on in the First State, we do not operate in a vacuum. There are 50 other state bankers associations (Puerto Rico has one, too) that we communicate with on a regular basis. The American Bankers Association coordinates a monthly conference call amongst the states to discuss federal issues which impact us all. In addition, the ABA hosts a weekly state issues call which pinpoints specific state legislation that may be of concern. Among the recent hot topics that other associations are dealing with, stand outs include: file freezes; security breaches; and, identity theft. Fortunately, we have already dealt with each of these here in Delaware. Other issues our counterparts are grappling with include: credit card marketing bans; credit card disclosures; and, interchange fees. They also have bills mandating financial literacy, prohibiting outsourcing, and severely regulating ATM operations. We keep a close eye on these bills as they move about the country and the region. Here at home, we will be facing a variety of bills linked to the foreclosure issue when the legislature reconvenes in January of We already have a bill dealing with foreclosure consultants, and we anticipate others focusing on loan originators and the mortgage broker business. Although the intent of these bills is to curb fraud in the mortgage lending business, banks tend to get swept into the legislation. We need to insure that banks are separated from other lenders on this issue. We are also facing legislation geared toward tax refund anticipation loans, payday lenders, and gift cards. Again, the bills are so broadly written, either unintentionally, or on purpose, that our industry invariably get thrown into the mix. It is one of the primary functions of the DBA to make sure that the legislators in Dover understand the banks role in the wider financial services field. We may need to call upon you to help us explain to our elected officials that the banks are responsible business people, and that we shouldn t be grouped in with those who are simply preying on consumers for a quick return. We will also be in contact with our counterparts in the other state banking associations to find out how they are dealing with similar legislative trends. Our alliance with regional bankers associations such as those in New York, Maryland, New Jersey, and Pennsylvania, coupled with the other states and the American Bankers Association, provides us with a comprehensive communication network geared toward supplying a seamless stream of information on how to best serve the banking industry here in Delaware. We hope you are benefiting from the alliance, and, as always, we welcome your input and participation in the process. Thanks, Delaware Banker - Fall

8 What s New at the DBA by Susan J. Highfield, Esq. VP, Membership, Education & Adminstration Delaware Bankers Association The DBA continues to offer excellent opportunities for all Delaware bankers to expand their personal growth and development through its many committees and educational programs. 8 Delaware Banker - Fall 2007 MEMBERSHIP UPDATE The DBA welcomes the following new members: Financial Institution Member CHARLES SCHWAB BANK Thomas M. Forrest, CPA President, Personal Trust Services Div. 500 Delaware Avenue, Suite 730 Wilmington, DE Phone: Thomas.forrest@schwab.com Charles Schwab Bank, working through independent registered investment advisors, will offer personal trust administration services pending regulatory approval. Associate Member ING Financial Partners Michael Imperiale Investment Adviser Representative 3512 Silverside Road Suite 9, The Commons Wilmington, DE Phone: mimperiale@ingfp.com ING Financial Partners offer sound advice from financial professionals to establish a firm foundation for individual investors to assess their personal investment objectives whether to prepare for retirement, save for a college education, or start a new business. ING Financial Partners, Inc., is an ING company DELAWARE TRUST CONFERENCE Space at this year s Delaware Trust Conference (Wednesday, November 28 to Friday, November 30) at the Hotel du Pont in Wilmington, is filling quickly. Last year s event was sold out. Like last year, the conference, which will focus on the unique aspects of Delaware trusts, is open to trust professionals from all over the country. Guest speakers include Governor Ruth Ann Minner, Delaware Supreme Court Justice Myron Steele, Assistant Secretary of State Rick J. Geisenberger, and Delaware Bank Commissioner Robert Glen. Over 50 other trust professionals from various states and Europe as well as Delaware will present on why Delaware continues to lead the nation in trust activity. Sponsorship opportunities are still available. Go to our website at and click on the Trust Conference link for more information, a complete agenda, and registration form. DBA EVENTS DBA Fall Outing On the Friday after Labor Day almost 200 bankers traded their business clothes for golf attire to enjoy their favorite day of fun in the sun with golf during the day and dinner and dancing in the evening at the DBA Fall Outing at the Rehoboth Beach Country Club. The DBA extends its thanks to the many sponsors who contributed to help make this day even better! Professional Development Luncheon In October Robert H. Sitkoff, Professor of Law, John L. Gray Professor of Law at Harvard Law School presented Lawyers, Banks and Money: An Empirical Analysis of Perpetual Trusts, Asset Protection Trusts, and the Prudent Investor Rule. Professor Sitkoff presented some startling statistics that reflect the impact of these changes on trust assets around the country and particularly in Delaware. DBA SCHOOLS The three-day DBA Regulatory Compliance School was again held at the Bellmore Inn in Rehoboth Beach. This program provided up-to-date information on federal compliance regulations affecting the financial services industry to keep compliance professionals current on all the important changes in the regulations.

9 For the first time the DBA offered the week-long Cannon Personal Trust I School here in Delaware at Wesley College in New Castle with 20 personal trust professionals in attendance. Cannon s Fran DeMaris and Larry Divers taught the school. This is the first in the three-part Cannon Personal Trust series with Personal Trust II being offered by the DBA the week of March 3-7, 2008 with Personal Trust III and Personal Trust I being offered the week of October 6th to 10th. We are making arrangements for Cannon Corporate Trust I to also be offered next October so that trust professionals, personal and corporate, can gather and learn together at a convenient location in Delaware. On October 24-26, a sold-out group of almost 60 bankcard professionals attended the internationally acclaimed three-day Bank Card Management School program at the University and Whist Club that included an intensive bank card simulation program that was both challenging and fun. For those who couldn t attend, this same school is scheduled for April 9 11, COMMITTEE NEWS Education Committee The Education Committee, chaired by Fil Sherry of Wilmington Trust, met at Wesley College in September to review its on-going plans and projects that include, but are not limited to: Teach Children to Save Day; Keys to Financial Success; ADVANCE College Scholarship Program; The Great Investo; the wise use of credit for college freshmen; FDIC Alliance for Economic Inclusion; First State Saves with the Delaware Money School; Meaningful Economics & Entrepreneurship (ME) Competition with CEEE; Traditional AIB enrollment; Web Seminars; College Degree Programs; DBA Schools and Conferences; and, how to increase banker awareness of these various opportunities. Regulatory Compliance Committee (RCC) The August 1st program on Regulation Z was continued at the October 3rd RCC meeting at the Delaware Public Archives Building in Dover with Felonise Norwood of Delaware National Bank as host. RCC Chairman Scot Stetka continued the discussion on the proposed amendments to Regulation Z with many issues raised and identified. Trust Committee Wilmington Trust Company hosted the Trust Committee meeting on Friday, September 14th. Thomas R. Pulsifer, Esq.,. Partner, Morris, Nichols, Arsht and Tunnell, LLP, gave a comprehensive overview of the Delaware Decanting Statute. In addition, Richard Nenno, Esq., Managing Director & Trust Counsel, Wilmington Trust, along with David Bakerian of the DBA and Tom Pulsifer, gave a Delaware trust legislative update to the trust professionals in attendance. Partnering with Delaware banks since For more than 80 years, Stradley Ronon has helped Delaware banks build their businesses. With six offices throughout the Delaware Valley, we re proud to have helped many of the first state s banks manage their legal challenges, so they can focus on running their institutions. Stradley Ronon s Banking Practice Group: regulatory compliance and activities expansion corporate and securities compliance de novo bank formation executive and employee benefits employee relations initial public offerings mergers and acquisitions government affairs litigation defense Philadelphia Harrisburg Malvern Wilmington Cherry Hill Washington D.C. loan restructuring and creditors rights secured and unsecured lending

10 Cover Story Captive Insurance? What is it, and Why Should I Care? by Michael W. Teichman, Esq. Partner Parkowski, Guerke & Swayze, P.A. Delaware became a captive insurance domicile in 1984, when Senate Bill 527 was signed into law and created a new chapter, Chapter 69, of the Delaware Insurance Code. In 2005, Delaware completely revised Chapter 69 with the intention of developing Delaware as a preferred captive domicile. Shortly thereafter, the Delaware Captive Insurance Association was created and, in 2006, the Insurance Department created a new Captive Insurance unit under the directorship of William P. White, former captive insurance program director in the District of Columbia. Capping off two years of activity, this year the General Assembly passed House Bill 214, providing for Special Purpose Financial Captives. Wait a minute, I m a banker. What s captive insurance and why should I care? Simply put, a captive insurance company insures or reinsures the risks of its parent it is a form of self insurance. Captive insurers are typically formed in one of the following structures: Pure captive: This is a captive wholly owned by a single parent and is designed to insure only the risks of that parent and its affiliates. Association Captives: These are captive insurers formed by associations of persons or organizations with similar risks. Often, association captives are regulated under the federal Risk Retention Act, which limits the amount of state regulation over such entities. 10 Delaware Banker - Fall 2007

11 Industrial Insured Captives: Similar to Association Captives, these are captives held by large and sophisticated organizations all of which are in the same or similar business and share like risks. Protected Cell Captives: Often called rent-a-captive, these entities are designed to allow organizations that do not wish to expend the resources necessary to create and license their own captive to nonetheless participate in a captive but yet segregate, in a so called protected cell, their particular risks. Special Purpose Financial Captives: These entities are typically created by large life insurers and reinsurers and are designed to allow capital markets to participate in risk through securitizations. The captive insurance industry got its start in the 1950s and 1960s, and for years it was exclusively the province of offshore domiciles, particularly Bermuda. At one time, tax considerations were an important driver in the decision to form a captive and tax is indeed still relevant. However, other considerations have eclipsed tax as a driving rationale for the formation of a captive insurer. Nowadays, the primary motivation is often to obtain insurance coverages that are either not available through the traditional markets or too expensive. Entities participating in captive insurers may also enjoy a profit from coverages that can, in certain circumstances, be sold to non-affiliated third parties which are not participants in the captive. Overseas domiciles, including Bermuda, Guernsey, Cayman Islands, Luxembourg, Barbados, and Ireland, have long been preferred locations to organize captives, while U.S. jurisdictions, most notably Vermont, have experienced significant growth over the last 15 years or so, in part due to changes in the tax code that have reduced the tax benefits formerly resulting from an overseas domicile. Okay, you have explained what captive insurance is, but you haven t told me why I should care. By amending the statute, creating a special captives unit in the Insurance Department, and creating an industry association, Delaware is looking to capitalize on its well established reputation as a center for corporate and financial services. Although the new statute retains a number of features from its earlier form, the captives statute is, in fact, entirely rewritten. The following are some of its more noteworthy features: Flexibility as to corporate entity: As revised, Chapter 69 of Delaware s insurance code allows a captive to opt from a range of business organizations, i.e., corporation, limited liability company, partnership, limited partnership or statutory trust. 1 Non-Captive Business: The new statute preserves the unique ability of Delaware association and industrial insured captive insurers to write up to 50% of their business outside the association or industrial insured groups. 2 The only limitations are that such business be limited to entities in the same, related or similar business as the members of the industrial insured or association group and that the business be in the same or similar insurance lines as that written for group members. Permitted lines of business: Delaware captives are virtually unrestricted in the lines of business for which they can potentially obtain a certificate of authority, with the sole exception of workers compensation insurance. 3 As for workers compensation, Delaware captives are permitted to write so-called excess workers compensation insurance for parent and affiliated companies. 4 Captive investments and accounting: Delaware law previously extended great latitude to the ability of a pure or industrial insured captive to make investments of all types, and this has been retained. 5 However, under the new statute, Delaware captives of all types are expressly permitted to own the securities of, or interests in, another captive. 6 This allows a parent company or industrial insured group greater flexibility to segregate risks in multiple captives and to arrange those captives vertically in the corporate structure rather than horizontally. Protected cells This is one aspect of captive insurance where Delaware law clearly lagged behind that of other jurisdictions. Under the new statute, Delaware has adopted sponsored captive provisions much like those in place in other progressive domiciles. 7 Accordingly, Delaware captives may be organized to serve multiple members, each of which has the ability to segregate its risks in a protected cell that is insulated from the liabilities of other cells. Special Purpose Financial Captives This year s legislation 8 added cutting-edge provisions allowing for the formation of special purpose financial captive insurance companies that are designed to reinsure (i.e., assume insurance risk from another insurer) blocks of insurance business from a parent company and securitize that risk in one or more capital markets transactions. A thriving captive insurance industry will directly benefit the State, in terms of premium tax revenues, and will also indirectly benefit the State by fostering a service sector devoted to the needs of captives licensed in Delaware. The banking community can play a significant part in servicing the needs of captives. Delaware s captive insurance law provides a number of bricks and mortar requirements that provide opportunities for Delaware s banking community: (continued on p. 12) Delaware Banker - Fall

12 Captive Insurance (continued from p. 11) Captive insurers licensed in Delaware must keep their books and records in this state. 9 Captive insurers licensed in Delaware must maintain a principal place of business in Delaware. 10 Captive insurers licensed in Delaware must hold at least one board meeting each year in Delaware. 11 Captive insurers licensed in Delaware must maintain minimum capital and surplus (between $250,000 and $1,000,000 depending upon the type of captive) on deposit with a financial institution in Delaware, either in the form of cash, irrevocable letter of credit or securities approved by the Commissioner. 12 One member of the captive s governing body (board of directors, managing partner, statutory trust trustee, etc.), must have principal place of business in Delaware. 13 As is evident, most of these requirements lend themselves to banks that have the capability of providing services and facilities for captives, in much the same way that many Delaware banks have serviced the Delaware holding company industry here. Many captives will be formed by entities, associations or industries with no experience in the insurance field, and this provides an additional opportunity for Delaware banks that service captives to become captive insurance managers. A captive manager acts as a clearinghouse to obtain and coordinate services that a captive will need in order to conduct its business, including actuarial, accounting, investment management, and underwriting. One Delaware bank that is already heavily invested in this activity is Wilmington Trust. Brian Flinchum, Assistant Vice President Captive Management, describes Wilmington Trust s captive management business: Captive insurance is a natural extension of the bank s current entity management services. The main difference is that you must add staffing with insurance accounting knowledge as well as individuals with an understanding of the complex alternative/captive insurance market. Flinchum states that Wilmington Trust was attracted to this business because the captive insurance market is experiencing high growth, and our entrance into the market offers the bank a unique position as an institutional independent manager in the captive market. Currently, only 50% of Fortune 500 companies have captives, and as you move down to the Fortune 2000 companies, the number of firms with captives shrinks to 20%, so the market is still young enough to sustain many new entrants. When asked about the opportunities for Delaware banks in the captive management arena, Flinchum stated that in order to justify forming a single parent captive, the prospect will need at least a $1 million in premium. Regional and national banks are therefore best suited to offer captive management services since their client bases consist of many companies with gross revenues in excess of $250 million. Our Business is Picking Up......and Much More! Data Storage Mail Room Services Document Shredding Warehousing For over 50 years you've counted on us to deliver your documents, but did you know we provide the same quality in a full range of services? From storing data, to warehousing, handling your mail needs, to secure document shredding, Brooks can deliver for you!

13 In addition to servicing captives, local and regional banks may find a number of advantages in forming a captive insurer to insure their own risks. Insuring a bank s risks in a captive, as opposed to the conventional market, will allow a bank to structure its insurance programs to cover its unique exposures, rather than rely solely on the one-size-fits-all coverages available through traditional insurers. In this regard Flinchum points out that regional and community banks between $250 million to $10 billion in assets are good candidates to form a small property and casualty company because banks of this size may be able to take advantage of beneficial treatment under section 831(b) of the Internal Revenue Code. With the recent enhancements in Delaware s captive insurance laws, the creation of a dedicated captives unit in the Insurance Department, and the formation of the Delaware Captive Insurance Association, Delaware is poised to become a major player in this industry. Thus, while captive insurance might not seem an area of natural interest to bankers, if this growth occurs as is anticipated, Delaware banks will enjoy a significant opportunity to provide services to new Delaware captives. A Delaware captive may also prove to be an excellent vehicle for Delaware banks to improve and tailor their insurance and risk management programs to their unique risk management needs. DB MICHAEL W. TEICHMAN is a Director in the law firm of Parkowski, Guerke & Swayze, P.A.. Mr. Teichman practices in the areas of administrative and commercial law, with a concentration in the representation of insurance and financial institutions in regulatory matters, and commercial entities in matters involving Delaware environmental and land use regulation. Mr. Teichman also represents Delaware financial institutions and corporate trustees in transactional matters and in litigation relating to the reformation of trusts, and frequently serves as special Delaware counsel in the preparation of Delaware corporate opinions. He may be contacted via at: mteichman@pgslegal.com. Maximizing the value of membership In today s business world, long-term strategic partners are more critical than ever. Through a consultative relationship built around an understanding of your needs, FHLBank Pittsburgh is: Increasing your borrowing limits through expanded collateral. Maintaining our strong commitment to the MPF Program. Enhancing and adding advance products. Developing free analytical tools to help you project market value and earnings risk when funding assets with advances. Competitively pricing our correspondent banking services. We re your partner, and our mission remains constant: advancing your success now and in the future. Footnotes 1 18 Del. C Del. C. 6903(a)(2) (for association captives); 18 Del. C. 6903(a)(3) (for industrial insured captives) Del. C. 6903(a) Del. C. 6903(a)(8) Del. C. 6910(b). Association captives, risk retention groups and special purpose captives are still required to comply with investment requirements applicable to conventional insurers under Chapter 13 of the Delaware Insurance Code Del. C. 6910(d) Del. C House Bill 214, signed into law on July 18, Del. C Del. C. 6903(b)(3) Del. C. 6903(b)(2) Del. C. 6905(c) Del. C. 6906(f) Mortgage Partnership Finance and MPF are registered trademarks of the Federal Home Loan Bank of Chicago.

14 With: Richard F. Klumpp, JD, CPA President, CEO, and Division Manager, Wilmington Trust SP Services, Inc. President, Delaware Captive Insurance Association Subject: Captive Insurance Richard Klumpp is responsible for managing all administrative and business operations for Wilmington Trust SP Services, Inc. and its subsidiaries. These companies provide a wide array of nexus services to a variety of special purpose vehicles involved in either securitizations, structured finance transactions, corporate reorganizations, risk management, or financial planning strategies that take place domestically and in the Caribbean. Rich serves as director and officer for many high profile client companies. Rich joined Wilmington Trust SP Services in 1996 and spent four years leading Wilmington Trust s Las Vegas, Nevada office prior to his current position. He holds a Juris Doctor from Widener University School of Law and earned a bachelor s degree in Accounting, with a minor in Economics, from the University of Delaware. He received his Certified Public Accountant certificate in Delaware. Rich serves as a board member and president of the Delaware Captive Insurance Association and as a board member and treasurer of Ingleside Homes, Inc., a local nonprofit organization that provides various care levels of retirement living to senior citizens. He is a member of the American Institute of CPAs, the Delaware Society of CPAs, the American Bar Association JD Division, and is an associate member of the Nevada Society of CPAs. Delaware Banker: What is captive insurance? Richard Klumpp: Captive insurance is a form of self-insurance in which a company establishes and licenses a subsidiary to insure some of their risks rather than go to the traditional insurance market. The parent company pays its premiums to the captive insurance company not to a traditional insurer. DB: Does the captive company assume all the risk, or do they have to obtain reinsurance? RK: It would depend on what the coverage is as to how the parent wants to do it. They could decide to take the first $100,000 of risk, and their captive insurance company will do the next $1,000,000, and then add a reinsurance layer on top of that. They could do the reinsurance layer themselves, and go to the outside market for the first pieces. It varies depending on how a parent sees its program. A lot of companies will have traditional insurance, say for their directors and officers coverage. That might come into effect at a $2,000,000 deductible. So they might put the deductible in the captive. Or they might keep something to pay out of pocket, say the first $500,000, and then the next $1,500,000 in the captive, and then the traditional market on top of that. There are many variations. It just depends on the management s needs. DB: How have the recent revisions to Delaware s captive insurance laws made it more advantageous? RK: The initial revision completed in 2005 simplified things. It definitely simplified the tax structure at a straight 0.2 percent on the premiums, whereas in the past the number was much higher. 14 Delaware Banker - Fall 2007 Other states have a graduated scale that goes backwards, starting at a higher rate and going to a lower rate as the premium increased. Delaware law set it at 0.2 percent, which makes it easier for small captives. It doesn t penalize them for being small, unlike some other states. Also, the Delaware revisions cleared up some regulatory issues. The capital structures were reduced to make things more in line with the other domiciles. The statute itself was the first part of a three-legged program. First, a good statute was needed. On top of that a good regulator was needed, which was when Bill White (William P. White, administrator of Delaware s captive insurance program) came in. And finally the Delaware Captive Insurance Association became the marketing arm of the State s captive industry. Those three pieces together are what makes Delaware so strong. DB: How would a Delaware bank benefit from captive insurance? RK: The banks in Delaware could benefit in a couple of different ways, first from the service provider side. Captives need bank accounts, custodial accounts, there are wire transfers that go in and out that need to be done through a bank. There are trust services. The way a lot of captives are structured the capitalization piece requires what s called a Reg 114 Trust, and a bank could serve as the trustee in that regard. So there are a lot of ways for banks to sell services to captives. At the same time, banks can take advantage of a captive to insure their risks. There s a structure under the IRS code that allows an entity to set up an insurance company with up to $1.2 million in premiums to gain certain tax advantages. We at Wilmington Trust have helped other banks set up those types of structures. And in general, banks can take advantage of the basic benefit of a captive: instead of paying a premium to an insurance company, you re paying it to yourself. If you don t have any claims, you re getting the benefit of that

15 premium dollar, investing it, rather than the insurance company benefiting. DB: What are the risks for Delaware banks? RK: The risks to Delaware banks are similar to what any bank would face. The risk is that you actually have a large claim and don t experience the benefits of the captive for that insurance period. DB: How would a bank go about forming a captive insurance company? RK: There are a lot of risk consultants, or captive managers who help with feasibility studies. The first step would be conducting a feasibility study to determine: will this work for me, what kinds of coverages do I want to insure, where should I establish this capitve, and making sure that the pro forma financial statements as expected. After that step you would then go to formation, which would be submitting an application with the Department of Insurance. At the end of that process you d receive your certificate of authority to do business, and start to write the premium. DB: How stringent are the regulations on captive insurance, as opposed to those for banking? RK: Captive insurance regulations are less complicated as compared with what most banks have to go through. You first meet with the regulators who validate the captive s business plan and make an assessment of it s financial soundness. They make sure that what you re doing is insurance. After that and the initial licensing, you probably wouldn t meet with the regulators until the next year when its time to file the annual statements. There s a biannual audit of the captive that you would go through with the regulators. That s generally a one-person, desk audit situation. DB: And that s state regulation? RK: Yes, the State Department of Insurance. And when setting up a captive, that s something that people look at how the Department of Insurance is set up in Delaware. Many states will regulate captives as a commercial insurance company, which is a completely different set of rules and expectations. Delaware definitely views those two as separate and distinct, and the captive insurance business is regulated by a separate arm of the Department of Insurance. The regulatory process for a captive is less complicated than for a commercial insurance company. DB: Does setting up a captive insurance company allow easier entry into the re-insurance market, and what sort of savings does this provide? RK: Yes, you can go to reinsurance markets directly through a captive which is something you can t do as a non-insurance company. Just having that direct ability saves you money. You also can determine how much reinsurance you want and can shop continued on p. 16 Wesley College - Designed With You In Mind Wesley College New Castle is specifically designed to help working adults like you. Using smaller class sizes to its advantage, Wesley College combines personalized attention and flexibility with a quality education that is recognized and respected in the business community. Class one night a week One course at a time Small, lively classroom environment Full-time faculty or practitioners who work in the field they teach Most students earn their degree within two years Financial aid available to those who qualify Accelerated format Associate of Science in Business Bachelor of Business Administration Master of Business Administration COMING SPRING '08: Masters in Teaching Masters in Nursing Bachelor of Arts in Liberal Studies Certificate in Accounting Call Today! / AdultStudies@wesley.edu

16 continued from p. 15 the premium. So you can go out to the different reinsurance intermediaries and they will help guide you to the various reinsurance companies, and help negotiate the rates. DB: Can captive insurance companies accept third-party business, or are they bound exclusively to their parent? RK: A captive can write third-party business. There are a lot of captives set up in different industries auto dealers, for instance, do a lot of their warranty work through captives, and that s a thirdparty to the end buyer of the car. That extended warranty that a car buyer will purchase is done through a captive. One reason for a bank to set up a captive would be for Private Mortage Insurance (PMI). Instead of using a traditional carrier they could write the mortgage insurance through its captive. Workers compensation is another example of third-party business through a captive. DB: What cash flow benefits and actual reduction of insurance costs are available through captive insurance? RK: Your premiums are based on your loss history, versus the market s loss history. If you have a good loss history then you ll have lower premiums. So it will reduce your insurance costs from that perspective. From the cash flow perspective, you re paying yourself the premium. If you don t have claims, that money stays within your consolidated group. The investment income is credited to you, versus paying that premium to the insurance company and never seeing it again. DB: How can captive insurance programs improve risk management? RK: Since you re insuring yourself, and you benefit from that low claims history for not having claims, we actually see companies whose risk management is enhanced. They ll spend more time and effort to ensure there are no claims, rather than taking the attitude that: I have to pay the insurance company the money anyway. I ll never see it again. With captive insurance you are the insurance company. The fewer claims you have, the more money that stays within your group. DB: What are the tax advantages of captive insurance? RK: In a number of instances you can get immediate deductibility of the premium you pay. In cases where you self-insure you wouldn t get a tax deduction until the claims actually occurred. And then the 831(b) captive gives you the opportunity to insure up to $1.2 million in premium and get a federal tax deduction for that. DB Building Bridges between the Financial Services Industry and Government PGS ATTORNEYS PARKOWSKI, GUERKE & SWAYZE, P.A. AT LAW A business-focused law firm with emphasis in the areas of... Bank and Insurance Company Formation and Regulation Government Relations Environmental Regulation Commercial Real Estate and Land Use Corporate and Commerical Transactions Civil Litigation Dover - (302) Wilmington - (302) pgs@pgslegal.com

17 FHLB of Pittsburgh Still Opening Doors After 75 Years The Federal Home Loan Bank of Pittsburgh Continues to Serve Homebuyers and Members by John R. Price President & CEO Federal Home Loan Bank of Pittsburgh It was 1932, and The Great Depression was taking a heavy toll. More than a quarter of Americans were out of work. A quarter million homebuyers lost their mortgages. Nine million banking customers saw their savings accounts go up in smoke. And thousands of banks collapsed. Reacting, President Herbert Hoover first pushed for establishment of the Reconstruction Finance Corporation to shore up commercial credit at local financial institutions suffering a crisis of public confidence, and to bolster liquidity for railroads, agriculture, local government and other types of community infrastructure. Parallel to enactment of the RFC, Hoover began pressing Congress for action to reduce home loan foreclosures and support the reemergence of widespread homeownership. When Congress passed The Federal Home Loan Bank Act and chartered a network of region-responsive FHLBanks, it breathed new life into savings and loan associations and mutual savings banks, setting the stage for a constant stream of low-cost funding for mortgage lending. Providing ready, low-cost liquidity to our owner-member financial institutions in all economic cycles was, and is, the FHLBanks core mission. From the time we opened our doors in the fall of 1932 to 1989, when Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), FHLBank Pittsburgh and its eleven sister banks around the country supported a residential lending industry that served Americans through wartime, a postwar building boom, the Baby Boom and into the Internet Era. With enactment of FIRREA, Congress expanded the FHLBanks historic mission of ensuring funds for homeownership to include affordable housing and of equal importance allowed commercial banks to become FHLBank members. For FHLBank Pittsburgh, FIRREA signaled a new found ability to serve virtually every local lender across our footprint of Delaware, Pennsylvania and West Virginia, enabling us to progress from a $5 billion institution to one more than 16 times that size today. Post- FIRREA, a very large percentage of the banks eligible to belong to our cooperative decided to do so. As the Clinton Era drew to a close, Congress again expanded the mission of the FHLBanks, giving us the green light to help community lenders make small business loans bankable. Today, with more than 8,100 owner-members nationwide and $641 billion in low-cost loans (advances) at year-end 2006, the nation s FHLBanks provide financing that helps millions of homebuyers, small businesses and families realize their big dreams. (continued on p. 18) Delaware Banker - Fall

18 FHLB of Pittsburgh (continued from p. 17) What s Next? As FHLBank Pittsburgh and the entire System celebrate our 75 th Anniversary, we can look back on the past with satisfaction. For example, in the First State, we have provided more than $9.1 billion in low-cost liquidity to our local members, have extended more than 1,000 grants totaling approximately $4.6 million to lower-income first-time homebuyers, and contributed more than $6.6 million in Affordable Housing Program grants to help fund 1,073 units of low- and moderate-income housing encompassing 40 projects all in Delaware. More important, however, is the need to fix our eyes firmly on the future. For the fact is, just as the role of the FHLBanks has changed, so has competition across the banking industry. These days, success in the marketplace not only requires intricate knowledge of customers but a variety of customer retention tools, access to flexible funding options and an even stronger commitment to the community. How can FHLBank best help its Delaware members succeed in this challenging environment? This year, as we celebrate our founding, FHLBank Pittsburgh is taking the following actions in the First State to add even more value for our members. We are: Restructuring the pricing on our advances to make them even more market-competitive; Expanding the collateral that we accept for advances; Introducing Modicus, our free software to provide members with additional flexibility in analyzing various advance funding strategies helping them to better manage their risk, make more effective funding decisions, and engage in more informed use of our credit products; Gaining near-universal acceptance of a wide range of online transactions through our expanded members-only Web site, Bank4Banks.com; Continuing to offer a secondary mortgage market alternative via our Mortgage Partnership Finance Program; Extending $7 million this year through our very popular Banking On Business Program, providing much-needed capital for small business startups or expansion; and, Putting forth a record amount of grants as part of the System s Affordable Housing Program, an initiative that is the equivalent of the largest stand-alone housing foundation in the country. Special Announcement I am also pleased to use this opportunity to announce that FHLBank Pittsburgh will launch a new program in 2008 aimed at fostering sustainable economic development in a variety of Delaware s neighborhoods and counties. This new initiative, Blueprint Communities, will provide selected revitalization teams representing the public, private and nonprofit worlds with comprehensive training in leadership, capacity building and strategic planning underwritten by FHLBank, and setting the stage for these communities to get their second wind and qualify for additional funding and technical assistance through program partners. Blueprint Communities has proved adept at crystallizing revitalization plans in 32 communities in Pennsylvania and West Virginia. Now it is Delaware s turn. We stand ready to execute a firstrate economic development program on behalf of our Delaware members and the neighbors they serve. From bust to boom and from recession to downtown renaissance, the FHLBanks of America have demonstrated remarkable adaptability and resilience. By doing the work that Congress chartered us to do 75 years ago and building upon that important mission in new and exciting ways, we continue to play a unique role in meeting the needs of local lenders. It s a partnership that works, and one that works wonders for communities, too. Let s make our next 75 years together just as special. DB Mortgage Partnership Finance is a registered trademark of the Federal Home Loan Bank of Chicago. John Price is president and chief executive officer of the Federal Home Loan Bank of Pittsburgh. Mr. Price graduated from Grinnell College in Iowa, was named a Rhodes Scholar, earned advanced degrees in development economics and diplomatic history at Oxford University and received his law degree from Harvard Law School. During the first Nixon Administration, he served as special assistant to the President for urban affairs, working on welfare, health insurance and urban development. He then spent 29 years at what is now JP Morgan Chase in New York. Immediately prior to joining FHLBank, Mr. Price was senior advisor to the Institute of International Finance in Washington, DC, a global organization with some 340 banks and Central Banks as members. 18 Delaware Banker - Fall 2007

19 In Wilmington, Financial Partnerships Build Better Neighborhoods To see what some of the First State s neighborhoods might look like in the future as a result of their participation in the new Blueprint Communities initiative (see main article), one only needs to review the success of revitalization efforts in Wilmington s West End. Working with Cornerstone West a community development corporation established in 1999 in concert with West End Neighborhood House, St. Francis Hospital and other community leaders FHLBank and local members embraced Cornerstone s mission of revitalizing the West End by targeting substandard housing, blight and low rates of homeownership. By addressing these interrelated issues, Cornerstone and its partners created a quiet but very visible renaissance in community stability. One neighborhood Hilltop is a microcosm of Cornerstone s work. Over the past five years, Cornerstone and its financial partners FHLBank, Artisans Bank, Citizens Bank, Citicorp Trust Bank and Wilmington Trust have helped fund the rehabilitation or construction of dozens of affordable housing units, part of more than 80 units of affordable housing that Cornerstone has spearheaded. Eyesores were demolished, vacant lots brought to life, population density reduced and first-time, low-income homeownership opportunities created. (l. to r.) Gary Pollio, Executive Director, Interfaith Housing; Keith W. Schuck, President, Chase Bank USA, N.A.; Paul Calistro, Executive Director, West End Neighborhood House and Cornerstone West Community Development Corp.; Congressman Michael N. Castle; Senator Thomas R. Carper; Joel Schiller, CRA Officer, Artisans Bank; and, Dave Buches, Manager of Community Investment, FHLBank Pittsburgh, deliver some big checks to help revitalize Wilmington s underserved community. For the 55-block area known as Hilltop, the changes were both radical and welcome. The Hilltop Neighborhood Working Group, a community and government partnership endorsed by Mayor James Baker, cracked down on drug corners, filled potholes, collected trash and improved lighting, adding elements of community stability and making the neighborhood more appealing. As a result of successes in Hilltop and other West End locations, Cornerstone can point to some dramatic community improvements: Homeownership rates have soared to 100 percent in some locations, with the current increase in overall homeownership standing at 44 percent. Property values and the average sales price for homes in certain developments have risen by more than 100 percent. Hundreds of homebuyers have received valuable counseling on homeownership at West End Neighborhood House. Private developers have invested another $5.5 million in targeted areas. There is more to come - On September 24, 2007 Cornerstone West Executive Director Paul Calistro, Jr., announced that FHLBank is making another affordable housing grant in the West End, this one a $150,000 grant for much-needed owneroccupied residential rehabilitation in Hilltop, Little Italy and Cool Spring. Both elderly and disabled homeowners will benefit, and JPMorganChase is contributing another $100,000 to the effort. We simply cannot accomplish our mission without the support of a variety of public and private partners, said Calistro, a member of FHLBank s Affordable Housing Advisory Council. Long-range planning, expert know-how and the commitment of partners who believe in creating holistic change all drive a community s success. We believe what we have accomplished in the West End in a relatively short period is a model that other Delaware communities can follow.

20 On-Line Resources Our New Place in Cyberspace! The DBA Relaunches its Website While the original Delaware Bankers Association website ( com) may not have actually been hand chiseled on to stone tablets, at times, the staff was beginning to feel as if it had. Technologically the old site was a few steps ahead of Fred Flintstone s newspaper, but as the years went by, it became increasingly difficult to provide members with the latest information in a timely fashion. The first DBA website was created way back in the heady dot.com days of 1998, with an updating in While these sites served their purpose at the time, the greatest difficulty was that the control of a majority of the content rested, not in the hands of the DBA, but in their internet service provider (ISP). This meant that, except for a relatively few places on the site, any time the site needed to be updated, the ISP had to do so, and at a rather hefty cost. By 2006 the DBA staff realized that they needed a new website, particularly one that they could control...a case of being webmasters of their own domain name, so to speak. Susan Highfield, Margaret Cregan, and Greg Koseluk of the DBA worked closely with Eric Hutts, of Associate Member HostMySite.com. Eric recommended various software packages and generally was there to answer any questions to guide the DBA through the more unfamiliar regions of cyberspace. The new site went live in September, and is now available for your inspection, and hopefully your use. Some of the website s new feature are illustrated here. 20 Delaware Banker - Fall 2007