A growing business may think a national or large regional bank would best serve their business needs, but in reality, it is easy to get lost in the shuffle. As big banks tend to cater to big business, community banks offer many advantages as a dedicated business partner.

A local bank is knowledgeable about the community in which a business operates and can make quicker decisions from a local perspective instead of relying on decision-makers in another city or state. Business owners many times are able to talk directly to the head of lending or the president about their business.  

“When considering where to bank, look no further than around the corner. Community banks only thrive when their customers and communities do the same, so taking care of their customers and looking out for the best interest of their community is inherent in the way community banks conduct business,” says Gene Lovell, CEO and president of First State Bank.

Smart Business spoke with Lovell about why community banks might be the best place for your corporate and personal banking.

Why are community banks important?

A community bank understands firsthand that businesses are the backbone of a local economy. If a community bank is to succeed, local businesses must do the same. Local bankers take time to listen and understand a business owner’s vision because small businesses are the bank’s mainstay.

Large banks are not tethered to the places they operate. Too many times, the deposits that national banks collect from local residents and institutions leave the state to be invested in distant communities, countries, or on Wall Street, far removed from local account holders’ interests.

By banking with a community bank, money is put to work in the surrounding area in the form of loans to residents and business owners. In addition, by banking locally, consumers and businesses ultimately invest in their hometown by stimulating the economy and creating growth.

How else are community banks different from national banks?

The ownership of the bank — and board of directors — is generally made up of individuals who live and work in the communities they serve. They are business leaders who are deeply ingrained in the community and are more likely to serve on other local boards, attend community functions and know area business leaders.

Their local knowledge of the market area provides a significant advantage for the bank and its customers. Because they are so involved locally, they can spot needs and talk to clients before they even walk into the bank. At the same time, business owners have better access to management. Bank decision-makers make personal visits and really get to know their customers. Staff doesn’t rotate to other locations or departments; when you walk in, you see the same people with whom you have already established a relationship.

Community banks also tend to heavily participate in U.S. Small Business Administration loan programs.

How else do community banks help small businesses?

The largest 20 banks account for 57 percent of all bank assets, but only 18 percent of their commercial loans went to small businesses, according to the Federal Deposit Insurance Corporation. While small and midsize banks, which together account for 22 percent of all bank assets, lent 56 and 33 percent, respectively, to small businesses. In addition, smaller institutions continued to lend to small businesses at a steady rate during the recession, when big banks abandoned the market.

What makes a community bank a better place to do business?

The majority of community banks remain among the most financially sound in the country, because of conservative management practices. Where the federal government was quick to bail out ‘too big to fail’ banks during the economic crisis, most community banks were left to fend for themselves and came through the crisis as stronger banks. Most community banks were loyal and continued to lend to customers when many big banks did not. The community bank can be a safe haven from impersonal bank practices.

Eugene Lovell is president and CEO at First State Bank. Reach him at (586) 775-5000 or glovell@thefsb.com.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit

If your employees have a company retirement plan, then you have a fiduciary responsibility to them. The days of ignoring this responsibility are over. Some of the settlements linked to charges of negligence or mismanagement can be painful for businesses big and small.

In 2010, a California Fortune 500 engineering firm settled $18.5 million with two employees after a class action case claimed it was making an insufficient effort to reduce 401(k) account fees.

The Department of Labor (DOL) recovered more than $117,000 in unremitted employer contributions and associated lost opportunity costs for two Wisconsin employee benefit plans with 25 active participants. The owner had to pay nearly $23,000 of that court judgment.

“With the increased responsibilities facing 401(k) plan fiduciaries, it is crucial that a sound administrative process is in place,” says Phil Ruggeri, an investment executive at Cetera Investment Services, located at First State Bank

Smart Business spoke with Ruggeri, who used material from MarketingLibrary.Net Inc., about recent changes to the fiduciary responsibilities.

What are some key issues with 401(k) fiduciary responsibility?

Fiduciaries are issuing a detailed breakdown of account fees and expenses to plan participants because of new DOL regulations. In addition, plan sponsors must give out investment instructions that follow strict DOL guidelines.

Every employer-sponsored retirement plan must name a fiduciary, but function also determines fiduciaries. Although someone may not be named as a fiduciary, if he or she participates in the management or administration of the plan or hires a service provider, the DOL considers those fiduciary functions.

In addition, the plan sponsor should document all investment processes, so it has proof that the plan is operating according to stated procedure. You need to follow a written summary plan description and investment policy statement. The investment policy statement defines the plan’s investment program and establishes formal standards for monitoring, benchmarking and assessing performance results of various investment options over time. It’s critical to have input from your registered investment adviser with this.

How should plan sponsors educate their participants?

To keep your retirement plan from being undervalued and underutilized, your company needs to have an effective employee education program. Employees must understand the investment options the plan presents, as well as the fees and risk associated with each one. Don’t give it the short shrift for legal reasons alone. 

You should regularly call in an investment professional to help explain the choices and the potential role the plan plays in an employee’s overall retirement savings effort.

What else is necessary to comply with your fiduciary obligations?

Most administrators of workplace retirement plans — those with 100 or more plan participants — are required by the IRS to annually file a Form 5500. This disclosure is then made available to the DOL and the Pension Benefit Guaranty Corporation.

You should carefully oversee your plan providers, as you don’t want the wrong kinds of investments creeping into the plan. Watch for changes in how the plan provider is compensated, changes in the fees that affect plan participants and anything else that seems unusual.

This is just the beginning of fiduciary responsibility. With so much to watch over in the typical employer-sponsored retirement plan, you certainly can miss details, which may lead to big headaches for your business. 

Don’t open the door to liability. Do the right thing, the smart thing: Turn to an experienced, professional adviser who can help play a fiduciary role and ensure you adequately fulfill your obligations.

Phil Ruggeri is an investment executive at Cetera Investment Services, located at First State Bank. Reach him at (586) 445-4769 or pruggeri@ceterais.com.

Securities and insurance products are offered by licensed agents of Cetera Investment Services located at First State Bank. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither Cetera Investment Services nor any of its representatives can provide legal or tax advice. Securities products are not a deposit, not FDIC insured, not insured by any federal government agency, not bank guaranteed and may lose value.

Insights Banking & Finance is brought to you by First State Bank




Published in Detroit

Remote deposit capture is a treasury management service that allows your company to deposit checks immediately upon receipt by using an electronic scanner, without the need to visit a bank. It saves time, increases productivity and lets employees focus on areas that most benefit the business, using resources in the most cost-effective manner.

“Remote deposit capture reduces your transportation needs substantially. A courier may only need to travel to the bank once per week, as very few items need to go to the bank in paper form — an 80 percent reduction in transportation,” says Kerri Werschky, retail sales manager at First State Bank.

Smart Business spoke with Werschky about how remote deposit capture enhances your banking and business.

How can remote deposit capture improve your operations with time and cost savings? 

By using remote deposit capture, substantial savings come from reducing your transportation expenses and allowing employees to focus on other tasks. Most items can be captured, with just a few that must be deposited in paper form at a bank. According to remotedepositcapture.com, a business depositing 10 checks daily to a bank 5 miles away, could save $722 on mileage, $3,930 on recovered labor, $393 on increased productivity and improve cash flow acceleration annually by using remote deposit capture.

This banking service also provides quality control when your accounting system directly receives the data. With this, businesses can access copies of prior transactions, save time and paper because deposit tickets aren’t needed, and still print reports identifying the day’s deposit.

How does remote deposit capture accelerate the collection process?

As payment technology evolves, remote deposit capture has become a fundamental part of the collection process that businesses should be using. Checks sitting in a drawer don’t help cash flow and availability of funds, especially if you are unable to drive to the bank daily to make deposits. You need to quickly process checks through the system for collection.

Remote deposit capture allows extended deposit cutoff times for same-day ledger credit and more flexibility. With the convenience of scanning and depositing checks electronically from your office, employees can easily incorporate the service into your daily business processes. No more rushing to the bank at the end of the day to beat the closing time. In addition, a company with several locations can consolidate banking relationships, even if a bank is not in the same geographic area.

How are remote transfers tracked?

Just by handling transactions through remote capture banking at your own office, you increase accuracy and control. As transactions occur and are finalized, you can keep a close watch on them through online banking. This secure information is convenient, which gives flexibility when transferring money and making payments.

You can make deposits from multiple and/or remote locations, and then centrally track deposit reporting and reconciliation. This consolidation gives businesses a chance to vastly improve payment reconciliation management and the ability to research prior deposits.

What has been done to reduce fraud with remote deposit capture?

Banks work hard to mitigate and manage the fraud risks related to check processing. Remote deposit capture reduces this risk, though, as returned check deposits can be recognized earlier with accelerated clearing.

However, it is vital that businesses also take precautions on their end. Put strong, effective control measures in place around remote deposit capture and check processing to limit exposure. Have written policies and procedures for employees to regularly follow, as well as established security measures for handling checks after scanning.

By utilizing a cost-effective remote deposit capture service in your business, you stand to gain a wide-range of benefits — accelerated clearings, improved availability, enhanced cash flow with better cash management, reduced return item risk, transportation savings and convenience, and the ability to consolidate deposits from multiple and/or remote locations — that all translates to better operations and more profitability.

Kerri Werschky is a retail sales manager at First State Bank. Reach her at (586) 863-9485 or kwerschky@thefsb.com.


Find out more about remote deposit.


Insights Banking & Finance is brought to you by First State Bank


Published in Detroit

When business owners decide to borrow funds from a bank, one of their major decisions is whether to take a fixed rate or a variable rate of interest.

“There really is no correct answer, whether to choose a fixed rate or a variable rate when borrowing,” says Alfred DeFlaviis, chief lending officer and senior vice president and Gabe Makhlouf, first vice president of commercial lending, both at First State Bank.

Studies have found the borrower is likely to pay less interest overall with a variable rate loan versus a fixed rate loan. But, that doesn’t take into account that the longer the amortization period of a loan, the greater the impact a change in interest rates will have on payments. However, by asking a few questions, borrowers can make their final decision easier.

Smart Business spoke with DeFlaviis and Makhlouf about what you should take into account when deciding on a fixed or variable rate of interest.

What is the purpose of the loan?

Companies borrow for many different reasons, but the funds can be classified into two categories — short-term or long-term financing.

Short-term loans can be for, but are not limited to, payroll and accounts payables. Borrowers typically use a line of credit and repay the funds advanced as they collect their accounts receivable. Because you borrow the funds short term, borrowers typically elect a variable rate of interest. The variable rate is less than a fixed rate. Borrowers also repay the funds quickly so there’s a lower risk of interest rate fluctuations.

Examples of long-term borrowing could include equipment purchases, plant/office expansions, real estate purchases and business acquisitions. Borrowers typically need a loan term of three to 10 years or a real estate mortgage loan, usually amortized over 15 to 20 years. In this scenario, the funds are based on a longer repayment program, so you usually choose a fixed rate of interest. The repayment comes from cash flow generated from business operations. So, a fixed principal and interest payment amount factors into your company’s budget, and therefore is not subject to interest rate variations.

What is the current and projected interest rate environment?

When deciding between fixed and variable interest rates, you should take the current and projected interest rate environment into consideration.

For example, if interest rates are currently low and projected to stay that way for 12 to 24 months and you are considering a three- to five-year loan, a variable rate of interest could work. In this case, the fixed rate of interest offered will be higher initially so the variable rate option would be better. And should rates rise, if your cash flow allows, you can always accelerate the repayment by making additional principal payments to reduce the risk and the principal outstanding.

However, if interest rates are projected to rise, you might want to borrow on a fixed rate because you will have the security of a fixed monthly payment, whether rates rise or not.

Keep in mind that virtually all fixed rate loans come with a ‘prepayment penalty,’ which is enforced if the loan is paid off early.

What is your current financial position?

As with any obligation, borrowers must consider their ability to repay loans should interest rates rise dramatically, or even slightly.

If you have the financial ability to weather a spike in interest rates over the course of the loan, a variable rate might be the best option. Again, the initial rate of a variable interest rate will be less than a fixed rate and, therefore, the borrower will incur less interest cost.

If you have projected the repayment of the loan based on future revenues, rather than current, a fixed rate loan would be a better option. This reduces the risk of rates rising, which allows business owners to always know exactly what they will be billed monthly.

There really is no correct answer whether to choose a fixed rate or a variable rate when borrowing. The decision is based on so many variables that there is no fixed solution.

Alfred DeFlaviis is a chief lending officer and senior vice president at First State Bank. Reach him at (586) 775-5000 or Adeflaviis@thefsb.com.

Gabe Makhlouf is a first vice president, commercial lending, at First State Bank. Reach him at (586) 445-4856 or Gmakhlouf@thefsb.com.


Website: To compare business loans at First State Bank, visit www.thefsb.com/businessloans.


Insights Banking & Finance is brought to you by First State Bank


Published in Detroit

As businesses face the real risk of payment fraud, a 2012 Association for Financial Professionals survey shed light on the nature and frequency:

• Two-thirds of respondents were targets of attempted or actual fraud, while 28 percent reported increased fraud attempts.

•  Fraudulent checks were used most often, then automated clearing house (ACH).

•  The typical loss was $19,200 in 2011.

Kerri Werschky, retail and sales manager at First State Bank, relays the story of a business customer that had a former employee create bogus payroll checks on its account.

“Thankfully they were enrolled in Positive Pay and the system was able to recognize that the checks presented were fraudulent,” she says. “The checks totaled $35,000, which would have had a huge impact on our customer’s account and daily operations.”

Smart Business spoke with Werschky about ways to prevent check and ACH fraud.

Why are fraud losses on the rise?

Desktop publishing has made counterfeiting checks cheap and easy. The Internet has made it easy to commit fraud from international posts, often with organized rings in uncooperative counties. Cyber criminals can compromise large quantities of data with millions of potential victims for fraudulent checks with lottery scams, job postings and work-at-home opportunities. Faster check clearing has decreased the time it takes to identify and return checks.

What is your liability for check fraud?

Laws provide a negligence standard when determining loss liability, which means banks are not 100 percent responsible for the loss. Businesses have an obligation to inform the bank on a timely basis and limit the exposure. Your company must implement reasonable and adequate controls over bookkeeping processes, such as:

•  Maintaining sufficient controls for check storage, issuance and reconciliation.

•  Reviewing bank statements and reconciling accounts in a timely manner.

•  Using standard fraud protection offerings such as Positive Pay.

What is ACH debit fraud?

ACH debit fraud is a transaction initiated or altered in an attempt to misdirect or misappropriate funds. Any ACH may debit post to your account, with no authorization, if fraud prevention measures aren’t in place. One critical element of this fraud is that account and routing numbers can be obtained from any check.

What are some fraud prevention tools?

Work with your bank to prevent the sizable risk of payment fraud. Some tools are:

•  Positive Pay, which gives the ability to make pay or return decisions on checks presented against an account that doesn’t match. Check issuers provide a data file containing check amounts and numbers on a daily basis, and then receive a report detailing discrepant checks. Fraud is reduced through tighter controls and the ability to authorize payment or return the check prior to the return deadline.

Protection can also be extended to the teller line itself. If a check is not in the company’s Positive Pay file, the presenter is asked to contact the check originator.

ACH debit blocking service guards corporate accounts against unauthorized ACH debit transactions. Benefits include added security and fraud protection by eliminating outside access to your account, as well as staff spending less time reconciling and investigating debit transactions. Your company also can use filtering criteria, such as blocking all debits, blocking all over a certain dollar threshold, or blocking or allowing all except from specific originators.

How can you prevent check fraud?

Convert as many payments as possible to electronic delivery, while implementing fraud prevention tools. Use online reporting and services for faster reconcilement. Provide training to employees, along with segregated duties and a limited number of official signers. Update account and bank records as staff changes, and screen new employees. Control your check stock, while enforcing procedures. Use separate accounts for collection and disbursement activity and payroll and accounts payable disbursements, along with monitoring high-volume accounts and low-volume petty cash or emergency payments. Finally, know who you do business with, whether vendors, customers or maintenance staff.

Kerri Werschky is retail and sales manager at First State Bank. Reach her at (586) 863-9485 or kwerschky@thefsb.com.

For more information on First State Bank’s Positive Pay and ACH debit blocking, visit http://www.thefsb.com/cashmanagement.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit

Many businesses, at one time or another, have cash flow deficiencies. These can stem from a large account falling behind in payments to a seasonal increase/decrease in sales, among other reasons.

Even if a company manages its cash flow appropriately today, no one can predict the circumstances the company may find itself in a few months from now.  The best thing to do is to conserve capital for these unexpected events, but the second best thing is to obtain working capital line of credit.

“A company does not need to anticipate cash flow issues to apply for a line of credit,” says Al DeFlaviis, chief lending officer at First State Bank. “Instead, think of it as an insurance policy that doesn’t need to be paid until you need it. But the time to talk to your bank about a line of credit is before you experience a working capital deficiency.”

A line of credit gives a company the opportunity to borrow on a short-term basis for payroll, to take advantage of inventory discounts and to pay other fixed overhead expenses that are due prior to accounts receivable collections.

Smart Business spoke with DeFlaviis about how to use a line of credit to meet your company’s needs for working capital.

How does a line of credit work?

Interest is charged on the outstanding balance, not on the unused portion of the line. Interest rates are almost always variable and are tied to an index such as the prime rate or LIBOR indices. Once you have established a line of credit, your company can usually advance and repay the line as often as necessary. Lines of credit are usually renewed annually at a time when the your company’s annual financial statements have been completed.

How can a business determine what its line of credit should be?

To begin the process, you should first meet with your financial adviser or CPA before arranging a meeting with your banker. Preparing beforehand and gathering your information will allow the banker to better understand your business and determine your capital needs. If those needs are short term, a line of credit may be the appropriate solution, as a line of credit should not be any more than an amount that can be repaid through revenue production within 30 to 90 days.

However, if those needs are longer term, another type of loan may provide a better solution. Term loans are used primarily for long-term capital expenditures such as purchasing equipment, buildings, building improvements, etc., and are made for periods of three to 10 years.

How do banks determine what credit line they’re willing to extend?

With a line of credit, the way funds are used is left to the discretion of the borrower, so the bank carries more risk. As a result, a company must have a good business credit rating and a solid company financial history; it is unlikely a lender will approve lines of credit for start-ups or businesses without a track record of financial success.

Lenders generally also require collateral to secure a line of credit, which is nearly always asset-based, with equipment and facilities backing the line. However, credit lines can also be secured by receivables, inventory and by the owner’s personal assets, and it is not unusual for the bank to require a business owner to personally guarantee repayment of the line of credit.

When entering credit discussions with your bank, be as open as possible about the financial picture of your company. Be prepared to provide financial documentation including profit and loss statements, balance sheets and company tax returns.

Having an inside look at the business not only provides your banker with the confidence to recommend the loan package, but he or she is more likely to lobby on your behalf when the line comes up for approval.

How can a business identify a suitable bank to partner with?

Ultimately, you want to be able to lean on your banking relationship to help your business in good times and in bad, so begin by examining your existing relationship. Has your bank been responsive to your needs, acting not just as a lender but as a partner? If not, it may be time to find another bank.

Look for a banking partner that is the right size and complexity for your needs. For example, a national bank may use an automated scoring system to determine credit. Regional banks are often compartmentalized by market share and industry, and when a business changes or evolves, a different banker is assigned.

Community banks, on the other hand, usually have one person, a commercial relationship manager, who coordinates products and services. That person will understand the needs of your business and create a package of products and services that meets those needs.

Select a banker who understands your industry, as well as your marketplace. You will not only benefit from a line of credit but from your banker’s experience, industry insight and solutions to your company’s financing needs.

Alfred DeFlaviis is chief lending officer and senior vice president of First State Bank. Reach him at (586) 445-6615 or adeflaviis@thefsb.com.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit

Philanthropy can do more than make you feel good. In fact, recent studies show it can improve financial performance, enhance brand image and reputation, drive sales and customer loyalty, and increase a business’s ability to attract and retain employees. Additionally, research has shown when price and quality are equal, more than 75 percent of consumers would switch brands when a company is associated with a good cause.

“Businesses have many ways to establish a charitable giving program, oftentimes choosing to support causes that touch an organization or that their employees feel strongly about,” says Kathleen Zenisek, marketing director with First State Bank. “This may entail supporting national or global causes, which make the nation and the world a better place, but dollars locally spent can have a profound impact on your world and direct marketplace.”

Smart Business spoke with Zenisek about how to localize your philanthropic efforts and support causes that help those in your community.

How can a business learn more about the needs in its local community?

In metropolitan Detroit, there are three programs — Leadership Detroit, Macomb and Oakland — that help local leaders expand their knowledge about the assets and issues in their respective counties and surrounding region.

The nine-month program, which starts in September, requires participants to meet once a month for a day to learn about a specific topic that affects the county, including government, education, health and human services, arts, religion, business, justice, the environment and more. With unique learning experiences, exclusive field trips and tours, and access to a variety of proven leaders, graduates emerge from their experience eager to make a difference.

With so many overwhelming needs, how can a business decide between national or local charities?

Giving locally makes sense because you know where and how your dollars are being spent. Local charities and nonprofit organizations understand the interests and values of the community. They typically have fewer layers of administration, so more of your money is likely to go directly to the cause.

See if your community has a food bank, soup kitchen or children’s home. Think about what you can do in your community to make a difference and think about your passions. With local donations, you don’t even have to donate money; your time can be just as valuable. For example, First State Bank works with a county food bank that supplies food for 55 neighborhood food pantries and every year organizes a Thanksgiving food drive, which engages customers, as well.

What should a company consider if it wants to align its business with a charity?

Many businesses align their community involvement with their strategic business goals. For instance, an ad agency might support its industry by providing an annual scholarship to an aspiring graphic arts student or donating art supplies to needy schools. Construction companies might consider donating time and materials to organizations that rebuild their own communities. Consider your industry and how your talents and resources can help solve a particular social problem.

As a community bank, First State Bank sees declining property values and resultant foreclosures as one of the biggest issues impacting our community. Despite efforts to keep people in their homes, sometimes houses are reverted to the bank, as with one recent homeowner. We then gave the home to a local school district to begin a hands-on building renovation program, and while the framing and drywall were going up, so was the outlook — and housing value — in the neighborhood.

How can businesses consider developing products that help to better the community?

Sometimes it’s as simple and immediate as offering discounted products or services to veterans or seniors. Other times, the effects are felt later on.

For example, the Detroit regional area has been hit hard with foreclosures. With growing interest in ‘purchase-renovation-sale’ as a means to maximize investment dollars and to improve neighborhood home values, First State Bank developed a short-term loan program for people who personally transform injured or distressed properties, then sell. With this program, vacancies can drop in hard-hit areas, tax revenue can return and real estate agencies are able to aggressively market homes with missing parts. From the buyer to seller to next-door neighbor, it’s a win-win situation for the community. We also recognize that some customers truly need help. Partnering with GreenPath Debt Solutions, a local and respected not-for-profit money management organization, customers are offered debt and credit counseling at no cost.

Not all volunteer and philanthropic opportunities need to have clear-cut business goals. The real goal is to find a local cause or two that you can be passionate about and then support them in a variety of ways. Your sincere, enthusiastic involvement will go a long way toward helping your community and business.

How can being a good corporate citizen benefit businesses?

Perception means a lot to consumers. A recent study showed 80 percent of Americans have a more positive image of businesses that support a cause they care about. Two-thirds said they’re more likely to trust businesses that are aligned with social issues.

Participating in or sponsoring an event may persuade consumers to do business with you. Community events that used to be free to residents are now being re-evaluated, presenting opportunities for businesses to step up. Saving the community’s fireworks, tree lighting ceremony, or movies or concerts in the park from cancellation can make your business a hero.

Giving closer to home can improve quality of life and build a stronger local community.

Kathleen Zenisek is the marketing director with First State Bank. Reach her at (586) 445-6717 or kzenisek@thefsb.com.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit

Recently a popular chef at a local restaurant died in a car accident and business began to fall off sharply. Were it not for key man life policy, which enabled the owners to use the death benefit to secure the services of another top-rated chef, the restaurant likely would have gone out of business.

What would happen if a key employee suddenly died? Do you have a plan in case of the sudden death of a key employee, whose loss would be catastrophic to your company’s profitability or survival? With the right insurance that is properly structured, your equity in the business can be enhanced, as the insurance provides financial protection, says Phil Ruggeri, Cetera investment executive at First State Bank.

“Key man insurance is suitable for businesses of all sizes, from small to large, but it is more important for small- or medium-sized businesses to have it because of their limited financial resources,” says Ruggeri. “Unlike a large company, small- and medium-sized businesses have less flexibility and fewer resources to cover the devastating loss of an employee.”

However, the IRS rules and requirements surrounding key man insurance make it a dangerous area to tread alone. You should work with a qualified tax and insurance professional to structure a program to suit your needs.

Smart Business spoke with Ruggeri about how key man life insurance can protect your business when managed correctly.

How does key man life insurance work?

Key man life insurance is company-owned life insurance (COLI) on an employee who provides a significant contribution to the success of the business. This creates an insurable interest and a company, as the beneficiary of the policy, is able to acquire a life insurance policy in which both term and permanent policies can be used. In addition, companies can use COLI to offset the cost of providing employee benefits and retirement benefits.

What should employers consider when purchasing COLI?

There are two important concerns — the tax deductibility of the annual premium and the tax treatment of the death benefit. As an employer, you need to make sure you follow IRS guidelines to get the maximum tax benefit from key man life insurance.

Generally, the death benefit of a life insurance policy is tax free when the premium is paid with after-tax dollars, although premiums are not deductible. However, under COLI, the deductibility of annual life insurance premiums depends on the purpose of the life insurance. Current tax laws are  unclear on this, especially relating to COLI for the purpose of a buy/sell agreement that is funded with life insurance, split dollar arrangements and instances in which a part of the death benefit is not paid to the company. Consult with a qualified tax professional to determine the tax deductibility of COLI premiums.

How can employers plan for favorable tax treatment of a death benefit?

Before obtaining the policy, the board of directors must authorize the purchase and record it in the board minutes, and the employee to be covered must be notified in writing and give written consent and acknowledge that the employer is the sole beneficiary of all death benefit proceeds. It is very important that this be done before the policy is issued. If written notice and consent are given after the policy is issued, the death benefit of the life insurance policy will be taxable. To satisfy the notification requirements, the insurance industry has created a standard IRS-approved form called a ‘Notice and Acknowledgement of Consent to Life Insurance’ that can be provided to the employee at the time of the application for key man COLI. In addition, other IRS conditions and restrictions may apply.

If you fail to meet IRS guidelines, this will limit the amount of death proceeds the company as beneficiary can receive income tax free. For COLI issued after Aug. 17, 2006, the company only can exclude from income the amount not exceeding the total of premiums and other amounts paid on the policy up to that point. Any excess death benefits received over those amounts must be reported, and taxed, as gross income.

In addition, the IRS requires that a company file Form 8925 (Report of Employer-Owned Life Insurance Contracts). This form requires information including the number of employees at year end, the number of employees who are under a COLI arrangement, the total amount of insurance in force and a sworn statement certifying that employee consent and acknowledgement were properly obtained.

In what other ways can COLI help a business?

Many companies view COLI as a financial arrangement in which they can be reimbursed for employee benefit expenses. It is not uncommon for a company to secure COLI on key employees, pay premiums on the policy — even after termination of employment — and receive the death benefit after the death of the insured.

A company could also structure a retirement benefits package for a key employee and fund it with COLI. Upon the death of the insured, the company receives the death benefit to offset the cost of retirement benefits it has paid to the employee. For example, this arrangement may help a smaller company attract talented employees by promising to make a life payment of $10,000 per month in retirement payments for five years after normal retirement age and the company will then be reimbursed through the COLI when the employee dies.

As a business owner, CFO or board member, you have a responsibility to your company to make sure that your business risk is minimized, and COLI may help you accomplish that.

Insurance products are offered by licensed agents of Cetera Investment Services, located at First State Bank. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither PrimeVest nor any of its representatives can provide legal or tax advice. Securities and Insurance Products are Not a Deposit — Not FDIC Insured – Not Insured by Any Federal Government Agency — Not Bank Guaranteed — May Lose Value.


Phil Ruggeri is an investment executive. Reach him at (586) 445-4769 or pruggeri@ceterais.com.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit

While most companies pay their employees electronically, when it comes to their own bills, many are still writing checks. Although personal credit cards are commonplace among American consumers, many companies strictly use credit cards for employee travel and entertainment expenses and do not take advantage of business credit cards to pay for things such as utilities and supplies and to settle accounts payable.

“Corporate credit cards are a useful tool for companies both large and small and should be an important part of any cash management plan,” says Kerri Werschky, treasury management specialist at First State Bank. “Companies can simplify cash flow, lower costs, earn rewards and discounts from credit card companies, all the while protecting themselves through banks’ strong security controls.”

Smart Business spoke with Werschky about how companies large and small can take advantage of corporate credit cards.

How do businesses pay their bills currently?

Checks are still the most common form of payment for bills. Some companies are hesitant to use company credit cards because they fear a loss of control over spending and/or they do not quite trust employees to carry company cards. Just 4 percent of small businesses actively use business credit cards as a primary form of payment while 65 percent still use checks. Today, however, companies are looking for efficient ways to spend and are expanding their use of credit cards. A recent MasterCard study reports that more than half of small businesses in the United States now use a credit card for financing.

What are the benefits associated with a business credit card?

Business credit cards can drive automation and efficiency by simplifying the payment cycle and improving cash flow and forecasting. The use of business credit cards can also reduce the expenses incurred from paper.

Larger companies can integrate business credit card expense data into enterprise resource planning systems and use tools to analyze spending patterns. This information could identify key suppliers, thus creating an opportunity to negotiate better terms for high-volume purchases. Credit card companies also typically provide a year-end statement summary with transactions itemized.

Many credit card companies also offer rewards and rebates that can add up to meaningful savings and discounts on business services. Reward programs, specifically frequent flyer miles, have become a major factor in the decision of businesses to use credit cards. Other reasons included no annual fee, the ability to separate business and personal expenses, special discounts, rebates or cash back programs.

What are some other benefits?

Ease of use also wins over many companies. Credit cards are accepted worldwide and can be tied to automatic bill payments for utilities, subscriptions, and other business services. Goods can be delivered more quickly because payment is expedited, credit cards can help businesses maintain a clean divide between personal and business spending.

Business credit card use increases control, tracking and security of payments through zero liability policies, fraud protection services, extended warranties, travel assistance and 24/7 customer service, and programs can be tailored to set employee spending limits, vendor restrictions and other expense controls.

What should companies consider when choosing a credit card program?

Many credit card programs offer special benefits, including rewards tied to office business travel or rebates that help with business cash flow including special programs that make it easier to track expenses. It’s important to match business needs with credit card features.

Here are the most common features and benefits to consider.

  • Expense tracking reports that are divided into categories make it easy to track spending and report expenses for taxes. This information can also be imported into your accounting and tax software.

  • Higher spending limits than a personal card can help with monthly cash flow.

  • Avoids co-mingling of personal and business transactions which otherwise can create potential tax and money management problems.

  • Multiple cards for employees with pre-set spending limits build business credibility and simplify expense tracking and travel reimbursement.

  • Having a card can build your business credit record and improve your profile when applying for loans and lines of credit.

  • Travel insurance and auto rental insurance may be available.

  • Special perks may offer airport lounge memberships, concierge services and other benefits.

  • Other benefits may include rewards programs, cash rebates, airline miles or discounts on travel.

What are some ways to effectively manage business credit cards?

Apply the same level of responsibility as the rest of your business to credit card management. For example, consider applying for business credit cards at your existing financial institution, which may aid with approval. Limit the number of types of cards, as card hopping can have a negative impact on your credit rating. Take advantage of the 21-day grace period on most business credit cards before paying. Save time by paying online. Don’t use the cash advance feature that can lead to credit card fees and interest costs. Finally, pay on time to avoid late payments that result in fees and higher interest rates.

A comprehensive cash management strategy should integrate a business credit card program which can help save time, money, earn benefits and empower employees.

Kerri Werschky is a treasury management specialist at First State Bank. Reach her at (586) 863-9485 or kwerschky@thefsb.com.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit
Monday, 30 April 2012 20:00

How to mitigate cyber security threats

Is your information at risk for a security breach? Emphatically, yes.

Any business that is connected to the Internet is at risk, and the only way to escape is to unplug your computer and turtle away from the outside world. In today’s business environment, where information and systems are the lifeblood of an organization, it will only take one security breach to put your company out of business or do irreparable damage to your reputation.

Consider the successful attacks and breaches that affected the CIA and Zappos. Small businesses are not immune to these attacks, just less publicized.

It isn’t a question of whether you will be attacked but when. So instead of panicking, companies need to look at it as an opportunity to take the necessary steps to survive and mitigate an attack and potential breach, says Tristan Smith, information technology manager for First State Bank.

Smart Business spoke with Smith about how to identify and mitigate the cyber security threats that can harm your business.

What steps can businesses take to lower their risk of a security breach?

Here are some tips to help any business from the garage to the enterprise minimize their risk of attack and survive a breach:

  • Test web-facing servers often and thoroughly. How often is often? Hackers have probably discovered 10 new ways to exploit your server as you read this sentence. Initiate automated scans and manually scan your web servers at least monthly. Use multi-layered scanning – don’t use the same scan utility over and over. Scan from inside and outside your network. You never know where a hacker may be sitting.

  • Patch anything and everything. Keep in mind that your secure environment from a month ago is now wide open thanks to Patch Tuesday — the second Tuesday of each month when Microsoft releases security patches.  Some months there are in excess of 30 patches released. That’s 30 potential vulnerabilities. Miss a month ... 60 ... two months ... 120. Hackers are always finding new attack holes and methods into system software. Patches and new versions of system software are frequently released to fix these newfound problems. Hackers are a close knit community and they are more than willing to share your network’s flaws with their neighbors.

  • Increase your awareness. Subscribe to newsletters, blogs, twitter feeds, etc. that educate businesses on how to protect your network. There is no such thing as being too educated when it comes to securing your systems and network.

  • Train, train and retrain. Retrain your employees every few months. Remind them about the damage that can be done by opening unsolicited e-mails/attachments, loading software programs brought in from the outside and not protecting their passwords.

  • Find out what and who is on your network. Is it just your equipment that is attached to your network? Network scans are great but don’t underestimate the benefits of physical walk-thru of your location. Look for anything suspicious or out of place. Physical key-loggers can be disguised as harmless mouse or keyboard adapters. We often check out employee backgrounds but what about everyone else who has access to your premises? Cleaning personnel, utility vendors and delivery persons are often ignored. Don’t think for a moment that hackers/social engineers aren’t aware of this.

  • Monitor anti-virus and anti-malware software.  Ensure the automatic update feature is enabled. Spot check the software often to ensure that the program is running and that the updates are current. There are more than 55,000 new viruses each day.

This short list is just a starting point and is no way comprehensive. Breaches may take place even if best practices were followed.

Are personal devices posing a security challenge to IT departments?

You need to know which employees use their own devices — smartphones, tablets, laptops — to access corporate resources, e-mail, applications, and file sharing, especially when sensitive information is involved. What happens if one of those devices is lost or stolen, or an employee leaves the organization?

Every organization needs to look at how it uses technology within the organization and make decisions about what is going to be permitted and what is not. It goes back to assessing risk and developing policies and procedures around that.

What should executives do if they discover they are compromised?

The first step is to take a deep breath. Take the time and determine exactly what type of breach was perpetrated and what exactly was compromised. It is critical that you have an Incident Response Plan in place and that you know where to find it. Sometimes we aren’t thinking clearly in an emergency and it helps to have a checklist accompanied with guidelines as to how to handle the incident.  There are three things that must be included on your list — an accurate inventory, a review of your system logs to determine how the breach occurred and what information was compromised, and a quick repair of the systems.

Cybercrime is similar to traditional crime. Law enforcement agencies appreciate the collection and preservation of evidence if an investigation is conducted. Don’t just focus on the infected systems. Initiate virus and vulnerability scans on the entire network to help mediate secondary infections. Contact your insurance company too, preferably before an incident to ensure that you’re covered for computer-based fraud or damage

If you do not have the capability to do this in-house, utilize the services of a professional computer forensics company. Do not be afraid to ask for assistance from a professional, as these types of attacks can be very fast and expensive and can reoccur if not handled appropriately. Partner with an organization that specializes in protecting your system and have a security response agreement signed and implemented.

This will ensure they are on premise within hours of a breach and to help fight the good fight.

Tristan Smith is the information technology manager for First State Bank. Reach him at (586) 445-0049 or tsmith@thefsb.com.

Insights Banking & Finance is brought to you by First State Bank

Published in Detroit
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