New Jersey Banker 3Q 2018 Fall

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JERSEY

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NJBankers Board of Directors John Borelli, Jr. President/CEO Newfield National Bank

Douglas L. Kennedy President/CEO Peapack-Gladstone Bank

Christopher D. Maher Chairman/President/CEO OceanFirst Bank

Kevin B. Peterson* President/CEO Haddon Savings Bank

Nicholas J. Tedesco Jr. President/CEO GSL Savings Bank

Louis Anthony Costantino Jr.* Managing Director, Industry Manager JPMorgan Chase Bank

Steven Klein President/CEO Northfield Bank

Paula Mandell Senior Vice President/Area Executive M&T Bank

Preston D. Pinkett, III Chairman/CEO City National Bank of New Jersey

Gregory White Northern NJ Region Bank President Wells Fargo Bank, N.A.

Detlef H. Felschow President/CEO Roselle Savings Bank

Anthony Labozzetta President/CEO SB One Bank

Christopher Martin Chairman/President/CEO Provident Bank

Robert Rey President/CEO NVE Bank

Dianne M. Grenz Senior Executive Vice President/Chief Consumer Banking Officer Valley National Bank

Thomas Lupo President/CEO Regal Bank

Michael P. O’Brien Senior Vice President/Market Manager Bank of America, Merrill Lynch

Patrick L. Ryan President/CEO First Bank

Immediate Former Chairman* James S. Vaccaro Chairman/President/CEO Manasquan Bank

Larry C. Schmidt* President/CEO 1st Bank of Sea Isle City

NJBankers Officers

NJBankers Staff John E. McWeeney Jr. President and CEO ext. 627 jmcweeney@njbankers.com Michael P. Affuso, Esq. Executive Vice President and Director of Government Relations ext. 628 maffuso@njbankers.com

Claire Anello Office Manager, Database and Website Manager ext. 631 canello@njbankers.com

Jenn Zorn Senior Vice President and Director of Education & Business Development ext. 611 jzorn@njbankers.com

Lauren Barraza Executive Assistant ext. 618 lbarraza@njbankers.com

Emily T. DeMasi Vice President and Director of Communications ext. 610 edemasi@njbankers.com Jessica Furino Vice President and Manager of Member Experiences ext. 641 jfurino@njbankers.com Wendy C. Mandelbaum Controller ext. 603 wmandelbaum@njbankers.com

Contributing Editor Emily T. DeMasi

Former Chairwoman Angela Snyder Chairwoman/CEO Fulton Bank of New Jersey

Cynthia M. Zaccaro Administrative Assistant II/ Senior Administrative Assistant ext. 632 czaccaro@njbankers.com Erin Suckiel Assistant to the Director of Communications ext. 629 esuckiel@njbankers.com Diane Starr Administrative Assistant to Education Department ext. 600 dstarr@njbankers.com

William D. Moss * Chairman President/CEO Two River Community Bank

Thomas J. Shara * Second Vice Chairman President/CEO Lakeland Bank

Thomas J. Kemly * First Vice Chairman President/CEO Columbia Bank

John E. McWeeney Jr. President/CEO New Jersey Bankers Association *Executive Committee

Counsel Michael M. Horn, Esq. McCarter & English, LLP Mary Kay Roberts, Esq. Riker, Danzig, Scherer, Hyland, Perretti LLP

Contact New Jersey Bankers Association www.njbankers.com 411 North Avenue East Cranford, NJ 07016-2436 Phone: 908-272-8500 Fax: 908-272-6626

American Business Media Design / Production / Advertising

345 North Main Street, Suite 313 West Hartford, CT 06117 (860) 719-1991 www.ambizmedia.com

Published continually as a quarterly publication by the New Jersey Bankers Association from 1929 to Winter 1986. Revived as a quarterly publication by NJBankers and The Warren Group in 1998 under the name New Jersey Bank & Thrift and continued as New Jersey Banker in 2002. Combined with The League Leader, published by the New Jersey League of Community Bankers, in December 2008 and continued as New Jersey Banker.

Fall 2018 New Jersey Banker

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Table of Contents

Cover Story

16

The New Jersey Diane B. Allen Equal Pay Act: The Strongest and Most Complicated Equal Pay Act in the Country

Departments 5 Chairman’s Platform 8 Behind the Teller Line Get Engaged

M&T Bank

26

NJBankers Activities

6 From the President’s Office Great Expectations

10 Politics & Policy

Do It All

29 Meet Our Endorsed Service Providers Promontory Interfinancial Network & Strategic Resource Management Inc.

6 Upcoming Events

23 New Associate Members

30 Bank Notes

31

Bank Shots

Features

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4

Directors’ Corner 7 Things Bank Boards Should Focus on in the Year Ahead

20 Feature

How to Find the Remarkable Value Hiding

in CECL Compliance Data

12 Cybersecurity

What You Need to Know About

Your Bank's Risks

22 Feature

Stable Funds are More

Important than Core Funds

14 Feature

Why Auto Financing Needs a

Digital Revolution

24 Feature

Vulnerability Scanning

vs Penetration Testing

New Jersey Banker

28 Feature

Reduce your Costs and Expand Your

Employee Benefit Program

Fall 2018

Chairman’s Platform

Get Engaged

By William D. Moss

W

e’ve heard it throughout our lives, “there’s strength in numbers”. This certainly applies to us as members of NJBankers. Your Association, representing the banking industry in the Garden State, has more influence and power than any one bank.

NJBankers connects us to legislators, regulators, the media and the public. It connects us to each other.

All this is exWilliam D. Moss tremely important Chairman when doing busiPresident/CEO Two River Community Bank ness in a regulated industry.

Dozens of benefits can be outlined from my engagement in NJBankers. I am active in the Association because having a dedicated team to advocate on my bank’s behalf, provide immediate access to news and developments, and make diverse professional development opportunities

conferences, seminars, web-based learning and roundtables. Participating in a COES conference call lets us hear directly from regulators and provides a forum for asking questions. You just can’t get that attention as an individual bank.

As for attention, participation in the Association’s Community Service Award initiative provides an opportunity to rave about your community support initiatives through the media and to legislators. Why wouldn’t you want exposure for all the good you do in the communities you serve?

The Association has the contacts that we can take advantage of to get the word out.

NJBankers Committees cover most disciplines which represent many areas of banking. Bankers from Public Relations specialists to Lending professionals to HR officers to Security experts are able to share the latest information relevant to the Committee. Here’s an opportunity for engagement where your bank is sure to benefit. Ask your staff to join a committee, attend meetings and connect with likeminded colleagues. Two River Community

Engagement is essential. Whether you are engaging within your company, NJBankers or even with national trade groups that address specific fields, it’s critical for your survival and growth. Get engaged. Participate. available for our staffs from the C-suite to the teller line is an investment in my bank’s future.

Two River Community Bank is a stronger institution because of our participation in professional development

Bank employees serve on several Committees and the information that is shared helps them to manage their respective disciplines. They can even share questions via a communication designed for each Committee. Participation on a Committee

directly benefits their ability to get the job done!

NJBankers can provide information and guidance on current and future issues because of their access to industry resources. From knowledgeable speakers to articles in the Association’s publications, to John McWeeney’s weekly email MO Connections, you and your team need to participate to gain this valuable insight. This is an investment in the future for you and for your bank.

NJBankers exposes us to the “bigger picture”; something that is hard for one bank to navigate. Understanding what is going on in the industry helps us with our strategic direction and the tactics we could implement.

The Association is taking on new initiatives to better serve our needs. With all the talk of Millennials and what drives them, NJBankers will be launching a new initiative, a Young Bankers Program, designed to energize Millennial bankers.

We’ll need to promote engagement in this group to our younger associates. It will help in retention and recruitment efforts as well as develop the rising leaders in our companies.

Take a look at the benefits of and opportunities for engagement and take full advantage of your membership.

Visit the NJBankers web site for events, publications and news. NJBankers will also be developing an app to make it even easier to connect with them through your phone or tablet.

Engagement is essential. Whether you are engaging within your company, NJBankers or even with national trade groups that address specific fields, it’s critical for your survival and growth.

Get engaged. Participate. You’ll certainly benefit with each connection you make with NJBankers.

■ William D. Moss is president and CEO of Two River Community Bank. He can be reached at wdmoss@tworiverbank.com.

Fall 2018 New Jersey Banker

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From the President’s Office

Great Expectations

By John E. McWeeney Jr.

A

s I write this article summer has faded and fall is upon us. The passage of Labor Day really seems to get Americans moving again. Kids of all ages are back to school. Businesses resume their frenetic pace. Our lawmakers are back in session and, of course, all of us, it seems, take to the roadways as New Jersey traffic continues to grow.

It’s also a time of excitement and optimism as the football season John E. McWeeney Jr. kicks off, baseball President/Chief Executive Officer begins its march to NJBankers the World Series and politics heat up; this year in anticipation of the much-hyped mid-term November elections.

Will the Giants and the Jets make the NFL playoffs this year? Can the Yankees make a run at the World Series? How will the US – China trade war turn out? Will the so called Blue Wave give Democrats control of the House again and maybe even the Senate? Here in New Jersey, will recreational marijuana be legalized? By the time you read this article we’ll probably have answers to most of these questions. To be sure the people involved in all of these quests have great expectations; which of them will see their aspirations come true?

NJBankers has great expectations as well. Fresh off of our early September visit to Washington, D.C. for meetings with the regulators, we’re optimistic for more regulatory reform. The OCC’s initiative to reform and modernize CRA offers great potential for banks to do even more to support their communities without the burden of outdated policies and procedures. We strongly urge our members to respond to the OCC’s Advance Notice of Public Rulemaking (ANPR) and share their ideas about CRA reform. Similarly there seems to be a collective willingness among the regulators to consider BSA reform as well. Will Congress get together on bipartisan legislation to create a much-needed Safe Harbor for banks dealing with legalized marijuana in their states?

NJBankers has other expectations beyond regulatory reform. We’re very excited to be launching a new initiative targeted towards “Young Bankers”. We’re looking to build on our success with our Emerging Leaders Training Program, by reaching out to a much larger group of “Young Bankers” and creating a robust ongoing program for networking, community service and education. Our first “Young Bankers” meeting is scheduled for the fall with a goal of launching the program for 2019.

NJBankers also has expectations to expand the impact of our community service and philanthropic activities on behalf of

the banking industry. This past summer with the support of 14 member institutions, we completed a summer long program encompassing 23 volunteer days at Eva’s Village in Paterson. Through the outstanding efforts of our colleague Erin Suckiel, we raised more than $30,000 for Eva’s Village and really made a difference in the lives of their clients.

We’re also excited to broaden the mission of the NJBankers Charitable Foundation beyond veteran’s causes, which we’ll continue to support, to include areas related to financial services like financial literacy and counseling, to name a few. The size of the Foundation has grown thanks to recent contributions from Bankers Cooperative Group and NJBankers Business Services so we’re in a position to do more in the area of giving.

As Yogi Berra famously said, “It’s tough to make predictions, especially about the future”.

Only time will tell how some of the questions I posed earlier turn out. I do know this, though, if you have goals and you don’t pursue them with passion, your odds of success are not very good. So I invite our members and friends to join NJBankers in pursuit of our great expectations. Working together we will make a difference.

■ John E. McWeeney, Jr., is president and CEO of the New Jersey Bankers Association, and can be reached at jmcweeney@njbankers.com.

Upcoming Events October 18, 2018 FDIC Directors College Pines Manor, Edison October 23, 2018 Delaware Trust Conference Chase Center on the Riverfront, Wilmington, DE October 24-25, 2018 2018 Advanced IRA With PMC NJBankers Office, Cranford October 28 - November 2, 2018 CFT-Commercial Lending School Cranbury

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New Jersey Banker

October 30, 2018 How to Market Your Bank in the New Economy Kean University – STEM Building, 6th Floor, Union November 1, 2018 FinPro's Annual Presidents and Directors Conference Fiddler's Elbow Country Club, Bedminster

November 5-6, 2018 2018 Advanced IRA With PMC NJBankers Office, Cranford November 27, 2018 CFO Conference W/FMS, NY/NJ The Berkeley Oceanfront Hotel, Asbury Park November 29, 2018 Emerging Leaders Rising Star Awards Dinner Stone House at Stirling Ridge, Warren

Fall 2018

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Behind the Teller Line

M&T Bank Corporation

M&T Bank Corporation, founded in 1856, serves customers at more than 90 branches in New Jersey and has a consistent focus on employee development and community involvement.

Since opening its first commercial banking office in New Jersey in 2007, M&T has increasingly invested across the state and acquired 97 retail branches through its 2015 acquisition of Hudson City Savings Bank.

M&T’s profile continued to grow in 2017 when it became the Official Community Bank of the New York Jets, allowing the bank to serve fans at Jets Training Camp in Florham Park and MetLife Stadium in East Rutherford, and be the exclusive provider of New York Jets branded debit cards.

M&T’s newest branch opening was in downtown Paterson on April 23. To celebrate the new branch, about 60 M&T employees descended on Paterson’s Public School #20 for a volunteer event to refurbish classrooms and playgrounds for the students.

M&T, with assets of $118 billion, now operates seven commercial banking offices spread across the state and has become a preferred relationship banker to New Jersey’s small and large companies, commercial real estate developers, health care and not-for-profit organizations, auto dealers and consumers.

The bank has a long history of catering to small business owners and ranks as the nation’s 7th largest issuer of U.S. Small Business Administration (SBA) loans. M&T is the third largest SBA lender in New Jersey and also serves as a key partner to the New

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New Jersey Banker

Jersey Economic Development Authority loan programs.

M&T Bank’s subsidiaries include Wilmington Trust, one of the nation’s renowned wealth advisory firms. This expertise is a valuable resource to business owners considering selling their business or passing it down to the next generation. The relationship management approach toward businesses can include the necessary transition planning.

More than 5,000 bank employees participate regularly in 12 diverse resource groups designed to promote employee engagement and professional development.

The Women’s Interest Network is the bank’s largest resource group, regularly sponsoring employee seminars, as well as community volunteer opportunities. Other active employee groups include: iGen; PRIDE; and the African-American Resource Group.

“We place an active focus on making sure our team members are engaged in their jobs, that they have a chance to make a contribution in their communities and that they all have access to the training and development needed to grow their careers within the bank,” said Area Executive Paula Mandell.

M&T’s employees are highly active in the state as part of the company’s approach to community-focused banking, serving on more than 80 not-for-profit organization boards and committees. In 2017, M&T supported non-profit organizations throughout New Jersey with $2.7 million in grants.

A partnership with Rutgers Business

School allows M&T’s bankers to serve as advisors to students at community colleges across New Jersey who participate in the RBS New Jersey Community College Case Competition. The bankers mentor students who are preparing presentations for the competition.

The bank’s charitable and volunteer support reaches hundreds of organizations across the state, including organizations such as Jersey Cares and the Special Olympics of New Jersey. M&T also supports many community based organizations, including New Jersey Community Development Corporation in Paterson, New Brunswick Tomorrow and St. Joseph’s Carpenter Society in Camden to name a few.

The company has formalized its approach to community involvement by offering all employees 40 hours of leave time annually to be used for community volunteer service. Employees serve on local boards, serve food to the homeless, teach financial literacy to children and many more activities.

M&T has also been focusing on improving work-life balance for its team members. The company’s maternity leave policy now includes 12 weeks of fully paid leave for a primary care giver, and an additional two weeks of paid leave for secondary care givers.

The Buffalo-based bank is actively hiring for a number of positions in New Jersey with plans to continue growing its business here into 2019 and beyond.

■

Fall 2018

Directors’ Corner

7 Things Bank Boards Should Focus on in the Year Ahead

By Alan J. Kaplan, Founder & CEO, Kaplan Partners

T

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Alan J. Kaplan

he world of corporate governance today shines a brighter spotlight on Boards of Directors than ever before. While bank regulatory relief has provided a long-awaited respite from some elements of overreach, bank examiners seem to be zeroing in more and more on Governance, Director Performance and Board Succession. Here are seven key things that Directors should have on their radar screens in the year ahead:

DEFINING INNOVATION - Digitization and Innovation are the buzzwords of the moment. However, truly embracing the transformations taking place all around us can be daunting. Pondering how technology has altered our client relationships and approaches to new customer acquisition means thinking out of the box, which may be a challenge for some bank Directors and executives. A refresh of the bank’s website is not an innovation—it is table stakes. True innovative thinking requires more proactivity and planning, and likely some outside perspective as well. Boards should encourage management to craft a plan to address these challenges, which are critical to remaining relevant.

TALENT MANAGEMENT - Boards historically viewed talent management as the purview of executive leadership and the CEO, except perhaps when it came to CEO succession. In today’s talent deficient industry environment, however, boards need to hold the CEO and senior team much more accountable for developing the next generation of leaders and revenue generators. If your bank wants to perform above the mean, then the senior team must be composed of very strong above average players who are well suited to execute your strategic plan. A true linkage between the business strategy and human capital strategy has never been more vital for success and survival. Boards need to pay more attention here.

REVISITING COMPENSATION STRATEGIES - Balancing the tradeoffs between enhanced compensation packages and performance/accountability has become a significant challenge for Compensation Committees and CEOs. In this competitive talent climate, banks need to make sure that their compensation practices properly reflect the bank’s market and goals, motivate the right behaviors, and incentivize key players to both perform and remain with the institution. Fresh Board thinking in this area may be appropriate, particularly for banks that have historically been less performance driven with their incentive programs, or do not have the currency of a publicly listed stock as a compensation tool.

ENHANCED ACCOUNTABILITY AND SELF-ASSESSMENT - Just as Boards need to truly hold their CEO accountable for institutional performance, Boards need to hold themselves accountable as well.

Governance advocates are pushing hard for Boards to assess their own performance, both on a group and individual basis. Directors should

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have the fortitude to confidentially evaluate the performance of their peers to identify areas for improvement via enhanced training. Directors should be open to this kind of constructive feedback, and work to consistently improve the value they bring to the institution.

ONBOARDING NEW DIRECTORS AND ONGOING TRAINING - Plenty of data reinforces that new executives as well as board members contribute more rapidly when there is a formal approach to ramping up their knowledge of the company. Expectations of new directors should be clear up front, just as they would be for any new employee. Strong onboarding programs form the foundation of ongoing Board education.

A robust combination of information and inculcation into the institution provides valued context for decision-making; clarifies the cultural norms; and often reveals the hidden power structures which exist in every boardroom. There should be a formal plan annually for each Director’s education to maintain currency, refresh specific skills, and to stay abreast of leading practices in bank governance.

BOARD REFRESHMENT - Are we truly building a board of diverse thinkers with the range of skills needed to govern appropriately in today’s industry? While age and tenure have become flashpoints around continued board service, in reality they are nothing more than artificial mechanisms to avoid dealing with declining contributions and underperforming directors. Every board seat is a rare and previous thing, and needs to be filled with someone who broadens the collective skills and perspectives seated around the board table. Board Nominating and Governance committees need to better manage Director accountabilities, and be willing to make the tough calls when needed.

Underperforming Directors should be encouraged to raise their game or be asked to step aside.

LEADING BY EXAMPLE - In today’s information driven society with endless social media channels and instant visibility, C-Level leaders and board members are under the microscope. Lapses in judgment, breaches of policy or inappropriate behavior, once validated, must be dealt with quickly and decisively. The company’s brand reputation and credibility are always at risk. The board itself—along with the CEO of course—must set the standard for ethics and compliance and lead from the front. Every day.

Bank Boards will continue to be under scrutiny no matter what the environment. More importantly, a bank’s Board of Directors must be a strategic asset for the institution, and provide strong oversight and advice for management. The expectations of good governance have never been higher, and successful bank boards must raise their own performance to help ensure their bank’s continued success and survival.

■

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Alan J. Kaplan is Founder & CEO of Kaplan Partners, a retained executive search and talent advisory firm headquartered in suburban Philadelphia. Kaplan Partners is the country’s only talent advisory firm member of the ABA and ICBA. You can reach Alan at 610-642-5644 or alan@KaplanPartners.com.

Fall 2018 New Jersey Banker

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Politics and Policy

Do It All

By Michael P. Affuso, Esq.

I

t is axiomatic that in business when you can’t do everything, to do something. It seems the natural corollary is that if you do nothing for long enough, you’ll be forced to do everything. This is the state of the state pension and health benefits crisis.

This problem has two chief issues, both are faced squarely by businesses in New Jersey.

First on the pension side, a full Michael P. Affuso payment has not Executive Vice President/ been made in deDirector of Government Relations NJBankers cades. If you can imagine a business owner failing to properly fund the employer portion of the company 401k plan, I’d bet imagining them in

an orange jumpsuit – they’d be headed to jail. There is much blame to go around, but since there are no real ramifications in the short term, none of the principals feel the pain. Add in the late 90s gift of higher benefits based on the chimera of the dotcom bubble and two decades later we are at the cliff – actually over it.

The second issue is on the health benefits side. The current plans are based upon assumptions that reflect realities of a generation ago. While the legislature took steps to rein in costs almost a decade ago, there is much more to do. These plans do not reflect the current trends in coverage and cost share for both current workers and retirees.

While public workers lament the aforementioned changes “Chapter 78” and supporters laud its benefits, the reality is that they are akin to someone with emphysema

giving up smoking. Radical changes are necessary.

ENTER THE NEW LEADERSHIP. State Senate President Steve Sweeney’s bipartisan task force — N.J. Economic and Fiscal Policy Workgroup — has delivered an aggressive list of recommendations on how to restore financial responsibility to state government, with the state forced to raise taxes to pay the interest on $48 billion in bonds and facing a $152 billion shortfall in funding pension and retiree health benefits. Some of the recommendations include: • Merge schools into districts with grades from kindergarten through 12. About half of the state’s 600-plus districts are educationally fragmented, increasing costs and undermining consistency in curriculum;

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Fall 2018

Powerful IT platform to enable your strategic business goals • Cap payouts to public workers for unused sick time at $7,500; • Permit counties to levy a sales tax to offset their reliance on property taxes; • Consider assets such as the New Jersey Turnpike for revenue generation, possibly offering premium fast lanes as is done in Maryland and Virginia; • Transition state workers to a hybrid retirement benefit, with a pension for the first $40,000 of their earnings and a 401(k)style account with a guaranteed return for income above that; • Move public workers into health plans rated “gold” under Obamacare, instead of the current plans rated “platinum.”

Recently, Governor Murphy was able to secure an agreement with some public workers unions that would result in $500 million in savings in 2019 and 2020 by making reasonable changes in the health care plans.

The agreement, reached within the collective bargaining process, through amended plan design, does not need legislative approval but does require the approval of the health benefits commission. This “short cut” provides real savings, with less influence of the political system. The agreements mirror the current trend in the private sector to encourage participation with in-network care. The Governor insists that this is just the beginning.

New Jersey has the unenviable position of a tax burden already the highest in the nation on businesses and fifth highest on residents.

Continuing on this path would just put New Jersey’s economy further behind and shrink state revenue sources. Reasonable spending cuts such as these are the only way to ensure there will be adequate funds for essential state services.

While the choice between the Sweeney plan and the Murphy plan may play well with those who are interested in a fight, why not do both? Why not overachieve? Why not do it all? We’ve certainly had decades of doing nothing.

■ Michael Affuso, Esq., is executive vice president and director of government relations for NJBankers. He can be reached at maffuso@njbankers.com.

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Fall 2018 New Jersey Banker

11

Cybersecurity

What You Need to Know About Your Bank's Risks

By C. Glen Combs and Michael R. Gilliam, CISSP

C

ybersecurity quickly is moving to the forefront of pressing concerns for financial institutions and their leaders. Regulators and examiners increasingly are expecting the board of directors and C-suite executives to obtain a greater familiarity with cyber threats and mitigation measures.

In May 2017, for example, the Federal Financial Institutions Examination Council (FFIEC) updated its Cybersecurity Assessment Tool (CAT), which was developed to help identify an institution's risks and determine its preparedness. The FFIEC's instructions for using the assessment explicitly contemplate the involvement of the CEO and the board. Banks aren't yet required to use CAT, C. Glen Combs but it's expected to become mandatory eventually.

The message is clear – executives no longer can afford to take a hands-off approach to cybersecurity. They need to stay informed on critical security issues, and their chief information security officers (CISOs) should play a key role in keeping them up-to-date.

ROLE OF THE CISO The CISO plays an advisory role, helping other C-suite executives make better, risk-informed decisions in the day-to-day execution of the bank's operations. A CISO also can help design and implement the security strategy a bank deploys to effectively protect itself and its customers from known threats.

To provide the expected advisory services, the CISO must be aware of the current threats (including general threats, industry-specific threats, and even institution-specific threats) confronting the bank. In addition to understanding this threat landscape, the CISO needs intimate knowledge of the bank's ability to mitigate these threats, which includes evaluating the existence and effectiveness of the security program and its controls and communicating the results to the C-suite.

Armed with measurements of the existence and effectiveness of the security program's controls, the CISO can provide specific advice to the CEO and other C-suite members about the risks facing the bank and the additional steps that might be necessary.

required security controls and the effectiveness of each. It is important for executives to understand how the effectiveness is measured. For example, is it a system that just measures the existence of the control, or is some form of measurement or testing done on the control? Historical metrics related to control implementation and effectiveness also are essential to provide perspective and illustrate progress (or lack thereof).

Status of regulatory compliance. Banks are subject to a broad and complex web of compliance obligations. Depending on the services they offer, applicable state and local regulations, and the types of information they process, the regulatory burden can differ dramatically among banks. For every financial institution, though, failure to comply can lead to fines, lawsuits, and customer loss. The CISO should brief fellow C-suite executives on the bank's current compliance status with all applicable laws and regulations. He or she also should update executives on how the bank is tracking and proactively preparing for potential regulatory changes.

Upcoming security initiatives. The CISO should explain current threats and the areas of risk that need to be addressed through various security initiatives, a measure which might require capital expenditures and approval from executive management. The explanation should cover not only where the security program stands today but also the overall direction going forward. Because this information can affect business initiatives that are not directly related to security, it facilitates risk-informed decision-making.

Risk management. Risk management is an ongoing process conducted by the security team to identify the areas with the highest amount of risk based on known threats, weaknesses, controls, and assets. In the end, the security team might determine that some identified risks are not sufficiently mitigated or that the residual risks remaining after the controls have been implemented are so considerable that they require new security initiatives. This information is vital for executives, as risks that aren't adequately addressed must be considered when conducting business operations.

KNOW WHAT YOU KNOW – AND WHAT YOU DON'T

CRITICAL COMMUNICATIONS FROM THE CISO

No one, not even regulators and examiners, expect C-suite executives to be experts on cybersecurity issues. These executives should, however, understand their banks' security posture so they can satisfy regulatory expectations and make better, risk-informed decisions for the overall business.

■

The CISO regularly should brief executives on the following: Status of security controls. Security controls – composed of people, processes, and technology working together to mitigate specific threats – are the bedrock of any cybersecurity program. Executives must understand the status of such controls to know how well the bank is equipped to defend against threats.

Evaluating the status of such controls can be accomplished with dashboards that provide executives with a visual representation of all

Glen Combs is a partner in risk consulting at Crowe LLP, a public accounting, consulting and technology firm, with offices around the world. He has more than 30 years of experience providing an array of services, including cybersecurity solutions, managed security services, outsourced IT security and IT leadership consulting. To learn more, contact Glen Combs at +1 859 685 3476 or glen.combs@ crowe.com. This article was published by Bank Director in August 2017 and is reproduced with permission.

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Fall 2018

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Feature

Why Auto Financing Needs a Digital Revolution

By Andy Mayers

T

he way cars are bought today is radically different than it was 20, 10, and even 5 years ago. The digital evolution has opened the door to a quicker purchasing process at the dealership, especially in terms of faster credit decisions. However, while both consumers and dealers have benefitted from these changes, customers still feel the time it takes to complete paperwork and finalize the F&I portion of the transacAndy Mayers tion takes too long.

Additionally, while dealerships still provide the majority of applications to lenders, more and more consumers secure their finance options directly. Faced with these new realities, dealers and lenders are turning to digital technology to stay ahead of consumer preferences and find ways to make auto financing as seamless and satisfying as possible.

BALANCING THE ONLINE AND IN-STORE EXPERIENCE The average car buyer spends more than 15 hours researching their purchase online and three hours at the dealership according to Cox Automotive’s 2018 Car Buyer Journey Study, with half of the in-store time

14 New Jersey Banker

spent negotiating or doing paperwork. This leads to a 46 percent satisfaction rate among consumers with negotiations and financing/ paperwork being the top two areas that took longer than expected. In short, less than half of all car buyers are satisfied with their experience and want it to be faster.

Today’s consumers want to perform more self-service activities to help expedite the purchase process. They use computers and smartphones for research, shopping, communication, and deal-making before ever stepping foot inside a dealership. However, customers still want to come into the dealership to test drive, learn about the vehicle, and sign the final paperwork – they just want it to be quick and seamless when they get there.

These consumer expectations change the game for lenders and dealers who must balance what happens online with what happens in-store, while adjusting to each individual customer’s wants and expediting the process. Clearly, consumer expectations are sky high, but advances in digital technology are making adapting to these changes possible for dealers and lenders.

tion, followed by the dealer entering that data into a credit application portal and submitting it to lenders for decisions and pricing. This model is becoming obsolete, as consumers seeking greater transparency are now willing and able to enter their applications online to speed up and gain visibility into the overall finance process. This offers significant benefits: elimination of duplicate data entry and fewer mistakes by dealership personnel. Efficiency is also gained by moving the process online because consumers tend to self-report on their credit and financial status with higher accuracy than when dealers report for them.

And while individual credit decisions happen in seconds thanks to digitization, the entire deal-making process – especially in terms of desking and contracting – takes longer than it needs to be. Rates, length of loan, down payment and other terms are negotiated in several rounds, punctuated by multiple rejections which frustrate the car buyer. The last thing a dealer wants is for a customer to walk away without a car because a deal took too long.

MAKING AUTO FINANCE CONSUMER-FRIENDLY

As the complexities of the loan originations process continues to grow, streamlining communication between dealers and lenders is more critical than ever. This is

Let’s face it, the traditional credit process isn’t consumer-friendly. It requires consumers to physically complete a credit applica-

CREATING MORE ALTERNATIVES

Fall 2018

where emerging digital tools can help by providing lenders an opportunity to offer rehashing or alternative deal structuring within their initial credit decision.

When the customer is researching and negotiating a deal online, they are given the opportunity to fill out paperwork online as well. This includes credit checks, proofs of income and residence, etc. Once submitted, that information needs to be included in all future communications with the customer, as the last thing that should happen is forms being filled out at the dealership because what was submitted online was not properly downloaded.

With this information in hand, lenders can determine what type of loans and credit lines can be approved for each individual customer. This can set expectations for the customer and the dealer on what type of funds are in play for a customer and what car and deal makes the most sense. This allows dealers to get to the right finance decision for every customer faster, gives lenders the ability to close more financing deals, and improves customer satisfaction rates.

Doing this at the beginning of the process and being able to do it quickly and easily online, saves time for the customer and the dealer with a higher customer satisfaction for customers

MOVING FORWARD While there are a number of financial tech companies offering credit decision and digital retailing solutions to dealers, there are very few adding solutions specifically for lenders. As a result, lenders need to be more aggressive and take advantage of digital tools to be available for financing wherever the customer may want to complete an application such as lender hosted websites, third party fintech sites, listing services like Autotrader, or a dealers’ own website. Lenders can help move the transaction forward by staying in tune with new tools and offering and communicating alternative deal structures proactively whenever they render a credit decision.

How should lenders do this? By communicating with consumers using plain lan-

guage and a format that is easily understood without jargon. By creating a fluent dialogue with customers, lenders can originate more loans and deliver more pre-approved and qualified financed customers to their dealer partners.

No one wants a car deal to fall apart due to a failed financing process. Customers end up unhappy that they can’t get the car they want, and everyone is upset that time was wasted without a deal. By working together, dealers and lenders can embrace the digital revolution, improve the lending process to ensure customers are satisfied and more deals take place.

■ Andy Mayers is the Lending Solutions Strategist for Cox Automotive. In his current role, Andy spearheads enterprise product strategy for lending partners across Cox Automotive. As the lending solutions strategist, he works with various Cox business units to identify product opportunities that will deliver enhanced value for lending partners, while providing the voice of the lender when new innovations are delivered to Cox Automotive.

ENABLING DIGITAL RETAILING The car buying process is in the midst of a digital revolution, with dealers and lenders embracing what’s commonly referred to as “digital retailing.” With digital retailing, the purchase process, particularly F&I paperwork and negotiations, can improve dramatically. Customers can complete many purchase steps online before finishing the process in-store, and a deal is negotiated electronically, resulting in a digital contract.

One of the most prevalent functions we have seen is consumers filling out their own credit applications on-line.

Digital retailing is driving changes in technology needs for lenders to support consumer-originated applications. We have seen the emergence of Direct-Indirect lending where lenders are pre-approving customers and distributing leads to dealers, leveraging their existing relationships to retain existing customers.

Engaging these new technologies saves time and energy, customers are better informed about what they can afford before making a decision on a car and dealers are better positioned to offer them vehicle and financing options that will get approved.

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The New Jersey Diane B. Allen Equal Pay Act: THE STRONGEST AND MOST COMPLICATED EQUAL PAY ACT IN THE COUNTRY By: Thomas J. Carnahan, PhD & Chris Lindholm, VP Compliance, OutSolve Note: Neither authors in the byline are attorneys. Nothing contained in this article should be considered legal advice. If you decide to pursue any proactive pay equity work, you should retain outside counsel to ensure any efforts are protected by attorney client privilege.

E Thomas J. Carnahan, PhD

Chris Lindholm

ffective on July 1, 2018, the strongest and most complex equal pay act in the United States became law.

The law passed the general assembly in March of this year and was signed in April by Governor Phil Murphy, who ran on a platform of equal rights for all minorities, especially women. For the OFCCP (the labor department who audits Federal contractors), EEOC, and state Departments of Labor/Attorney’s General offices, pay discrimination is a hot topic – accelerated by the #metoo movement bringing pay equity and the wage gap to the foreground of public consciousness.

Regardless of political affiliation or any other label that can define or divide us, it’s hard to find someone who agrees women or minorities deserve less pay for equal work, when all other variables are the same, compared to their white male counterparts. So, if it’s true that very little “overt” bigotry is occurring, why are these laws and regulations necessary? Simple, believe it or not. Decades, if not centuries of overt bigotry and stereotypes have created market data that carries forward the “sins of the past.” In a perfect world, companies would proactively handle compensation differences by ensuring that compensation is managed in a transparent and fair manner. As we are all too aware, capitalism is driven by margins and margins are affected by revenue and cost savings. Eliminating the inherit bias that exists in market based pay analysis and other avenues used by organizational compensation departments is not cost effective.

Some organizations will do the right thing and take care of any inequity that occurs at their organization while keeping an eye on the effects of the wage gap. Others will begrudgingly do the work necessary to reduce risk and stay

16 New Jersey Banker

out of the headlines of their local or national news. Others will accept risk and continue to “roll the dice” until they get caught. Why? Because the shareholder is more important than the employee and frankly, it takes effort that is not, at face value, contributing to the bottom line.

For business entities in New Jersey, your battle towards pay equity just got a lot more complicated, but know that it’s still attainable. In addition to race and gender, New Jersey expects all organizations to have pay equity for the following minority groups as well: creed, color, national origin, ancestry, age, marital status, civil union status, domestic partnership status, affectional or sexual orientation, genetic information, pregnancy or breastfeeding, gender identity or expression, disability or atypical hereditary cellular or blood trait of any individual, or because of veteran status. That’s a lot to check and unpack. Let’s go through the three types of compensation compliance checklists to help you prepare for any future pay equity project you choose to enact.

1. OFCCP Compensation Compliance – Currently all compensation compliance for the OFCCP is discussed by the new Directive 2018-05 and this applies only to Federal contractors employing 50 or more people. Directive 2018-05 indicates you are in violation of your agreements of fair pay if, upon inspection of your compensation practices, you are paying significantly different amounts of pay by gender or race, after accounting for job related reasons as to why pay may be different. This can be analyzed by multiple forms of job grouping including job titles, grades or the OFCCP can group similar jobs together into “Pay Analysis Groups.” Unfortunately, at this time, it is

Fall 2018

2.

3.

still considered something of a grey area on how the OFCCP may group jobs together. Although they give some information on how they may trust how the organization has grouped similarly situated jobs, they reserve the right to reject it and create their own. Any reasons for differences in pay must be objective and free from potential bias (which is why most performance appraisals are not counted as a part of any compensation investigations – they are usually very subjective). The request for compensation information will come as part of an audit from the OFCCP. They will settle fines and back pay given to those who were adversely impacted through the use of conciliation agreements. Note that OFCCP is typically constrained to individual establishment reviews. However, recently OFCCP has shown a willingness to evaluate individual complaints and then pass them on to the EEOC. EEOC – The EEOC is an organization that applies to any employer with 15 or more employees in most industries. In order for the EEOC to get involved, they must receive a substantiated complaint by a current or former employee who feels that they have been discriminated against. The EEOC will do a similar study to the OFCCP looking to see what variables predict the pay differences among employees; however, they are not concerned with statistical differences in pay. The EEOC is more concerned with any differences in pay that are attributable to membership of any protected class. They will give you the ability to settle out of court with fines, back pay to those affected, etc.

State pay equity laws. These, including the New Jersey law, are the most difficult to navigate as they are a new and emerging process in 2018 with limited precedent of litigation history with which to compare. They also focus on a term that businesses better become familiar with and that is “comparable worth”. Each state has different regulations as to what may be included as a variable for predict-

ing pay. They also have a different suggestion on how jobs/employees should be grouped, so that they can be compared. They are the most similar to the process of the EEOC; however, in some states there is no need for a complainant, as they can request data as part of a yearly check on compensation for state contractors. Also, each state law provides further guidance on how you can recruit and discuss pay in the state and how employees can discuss pay. There are various penalties, fines and even potential criminal cases (misdemeanors) that can come out of these situations. State regulations on equal pay are a serious matter.

SUMMARY OF THE DIANE B. ALLEN EQUAL PAY ACT: Extending previous law, the new act makes it illegal to pay a member of any federal or state protected class different from any other member of a class when they are working in a position deemed to have comparable worth. New Jersey defines comparable worth as “substantially similar work when viewed as a composite of skill, effort, and responsibility.”

Essentially, this is the short version of a best practice for creating pay grades/bands.

The law covers a wide variety of protected classes which creates some major headaches on how organizations are supposed to create a voluntary ID form for employees to self-identify. Employee reactions to an extended form that contains gender identification and sexual preference will be an even more dubious burden.

Comparisons of data can happen across facilities and locations, which is a break from the federal agencies that tend to look at an organization by establishment unless there is pervasive or systemic discrimination. If you’re paying your New Jersey employees less (even after adjusting for any local cost of living) than employees in Texas, you’ll be in trouble continued on next page

Fall 2018 New Jersey Banker

17

Cover

important to be “It’s prepared to proactively meet the requirements of New Jersey’s state law.

”

with the Garden State. Violations are deemed to occur with every paycheck handed out. It’s a $100 fine for each employee’s paycheck found to be underpaid and back pay can go back as far as six (6) years per employee. And there’s the possibility that each employee can be awarded by a jury up to 3 times the amount you owe as a part of treble damages awarded.

If you live in New Jersey, you need to understand that it’s ok for employees to share what they make per year, month, week, and/or hour. You are not allowed to take action against employees, even if you have a policy against sharing their own individual compensation information. Your policy is now against the law. You can be found guilty of unlawful employment practices if it is proved you have taken retaliatory action against any employee who discusses their compensation information.

According to New Jersey the only reasons pay can be different is because of: training, education/experience, quantity or quality of production1, a factor that is not a proxy variable for membership in a protected class2, time in job/time with company3, performance4, or another bona fide factor like working conditions or physical danger. Let’s talk about these four (4) caveats from our experience as pay equity experts: 1. If there are differences, it’s mainly going to be because of disparate treatment in opportunities offered to employees. For sales, production employees, etc. any pay equity issues usually come in the form of giving lucrative opportunities over a certain location, region, etc. to a member of one class (usually because of “like me” bias) and not giving equal opportunity to members of another class.

2. Proxy variables may include the use of market data (which is biased towards white males) and deciding starting pay by asking questions like “what would you like to make?” during the hiring process. For example, two candidates (1 male and 1 female) make it to the hiring phase for two openings for an experienced senior accounting position. The female employee currently makes $80,000 and the male currently makes $100,000. By asking what they would like to make in this new role, you feel that you’re giving them the opportunity to tell you what they think they are worth and; therefore, there’s no bias, right? Wrong. They can only base their “worth” on what their last company paid them. So the two equally qualified applicants ask for a 10% increase on what they made resulting in the female being offered $88,000 and the male being offered $110,000. A $20,000 gap at their old company is now a $22,000 gap at your company.

3. Time with company. This is usually negatively correlated with pay.

An employee who has shown loyalty to a company by staying with them for 30-40 years “should” be the highest paid, but that’s often not the case. For someone who wants to increase their seniority and pay faster, they need to switch jobs, gain experience and switch

18 New Jersey Banker

4.

again. Companies frequently hire external experience at a much higher starting salary than the equivalent internal employee makes at the same job.

Performance reviews are often touted by organizations as the reason for pay differences. Those making more money are perceived as being better performers. Maybe that’s true, but the problem is that most organizations don’t have the data to prove it. Vegas odds would highly favor that most people reading this article have a performance review that would be deemed too subjective by experts to include in a compensation analysis. Your perceived best defense for differences in pay just got thrown out of the model. Not good. You NEED to make sure that you are using best practices for performance management that are re-evaluated on an appropriate schedule, and this isn’t basic best practices, but best practices for being able to defend compensation and pay equity differences.

In closing, it’s important to be prepared to proactively meet the requirements of New Jersey’s state law. Some good first steps include: 1) Meeting with counsel and leadership to align need 2) Identification of HR practices to be redesigned/developed based on pay equity best practices 3) A compensation analysis study to determine baseline pay gap/ equity 4) Building a project plan to execute pay equity changes knowing this takes time and resources 5) Plan for long term maintenance to retain equitable pay Pay equity isn’t a trend, it’s the new standard.

■

Chris Lindholm has 18 years of experience in Affirmative Action Planning, OFCCP audit support, training and EEO compliance consulting including implementation of Federal Affirmative Action Plans for thousands of Federal contractors. He has extensive knowledge of Executive Order 11246, Vietnam Era Veterans Readjustment Assistance Act (VEVRAA/Section 4212), and Section 503 of the Rehabilitation Act. Experienced Affirmative Action consulting team manager in support of consulting staff, software development and compliance support.

Thomas Carnahan has more than 15 years of internal and external (consulting) experience working with governmental and public/private corporations specializing in the employee life cycle. His experience includes time with the Department of Defense working on DARPA projects, helping to clear governmental organizations from EEOC Consent Decrees, and building and validating HR programs centered around recruiting, selecting and retaining top talent. He also has multiple years of experience teaching undergraduate and graduate statistics in psychology and business departments at the University of Memphis and American University of Phnom Penh in Cambodia.

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Feature

How to Find the Remarkable Value Hiding in CECL Compliance Data By: John Dalton, CPA, Fiserv

T

“New insights will emerge that can move your organization from a reactive state to predictive or prescriptive analytics. Instead of asking what might happen, instrumentlevel data can help your organization make something happen.”

here is no "easy button" for CECL. Adhering to the new standards will take time, effort and considerable planning, but it is possible to turn the pain of compliance into the benefit of strategy.

The new current expected credit loss mandate (CECL) has made broad, sweeping changes to credit measurement and reporting. To meet CECL requirements, banks and credit unions must use hisJohn Dalton torical information, current conditions and economic forecasts to estimate expected losses. The new guidelines require collecting, sorting and analyzing significant amounts of data from various sources as well as altering methodologies to estimate expected losses.

The CECL requirements mark the first time this much data has been aggregated at the individual financial instrument level. But once that history – that instrument-level data – has been captured, good things can happen. With the right data, financial institutions can begin improving decision making around credit risk, interest rates and profitability.

WORKING TOWARD CECL STANDARDS With less than two years to go, financial institutions should be working through the necessary steps to adhere to the new standards.

The multiyear implementation period is intended to give organizations a chance to prepare, but time will go quickly.

CECL requires quantitative, measurement-based historical data through the contractual or behavioral life of a loan, rather than an

20 New Jersey Banker

estimate. Most auditors are advising financial institutions to collect seven to 10 years of data. Collecting and storing that amount of information can be daunting, which is why many financial institutions are partnering with third-party providers as part of their CECL plans. Employing a solution that enhances credit modeling also eases the burden, providing the ability to continually analyze data to optimize the required reserve amount for every loan.

Credit has largely been, and will continue to be, an art form balanced by financial institutions' finance side, which has historically had more insight and access to models, solutions and analytics. Unlike other requirements, CECL requires input, adjustments and new, higher levels of rigor from multiple teams throughout a financial institution. CECL ups everyone's game.

THE GOOD NEWS WAITING ON THE OTHER SIDE OF CECL Although using data for better decision making has always been encouraged, capturing it prior to CECL requirements has been a step few were willing to take. Now that years of historical, instrument-level data will be collected and available to your organization, it makes sense to use it as a competitive advantage. New insights will emerge that can move your organization from a reactive state to predictive or prescriptive analytics. Instead of asking what

Fall 2018

might happen, instrument-level data can help your organization make something happen.

Start by correlating data. Look at loan demand over time and other key factors for your institution. There are many ways to pool and correlate data – by collateral or type, including mortgages, auto loans, credit cards or others. You can further segment by cost center, loan officer, FICO score or geography. Consider what level of detail provides meaningful information for your organization. Does the data tell you something that might alter your strategies?

Analyzing data provides a solid foundation for understanding your markets and metrics, including how portfolios behave and where opportunities lie. Where will the market go? How will that affect your ability to earn a reasonable return on your asset base? Do you need to change your strategy to protect against potential rate changes?

You'll soon realize the data you've sorted and analyzed offers insights that go far beyond credit loss. Data generated for CECL can be used in conjunction with budgeting and planning for more strategic risk management. With risk analysis into interest rates, liquidity, credit, market and regulatory capital, additional loan and credit data helps forecast and reduce losses. Additional data also helps generate more accurate budget projections. With those analyses in mind, your organization can build a strategy to become more competitive and profitable.

With that level of credit data, your organization can further extend a risk-adjusted return on capital to include all of the credit elements that have previously been out of reach for quantitative analysis. That can af-

fect decisions on the prices you'll set or the products you'll offer. Using data to drive strategic decisions can lead to lower overall risk and better managed return for every stakeholder, including borrowers. That's a remarkable place for your financial institution to be.

ACHIEVING TRUE STRATEGIC RISK MANAGEMENT Because credit risk has significant enterprise-wide implications for an organization, it's one of the most significant types of risk a financial institution takes – perhaps bigger than reputational, compliance, regulatory or market risks. To mitigate that risk, invest in people, processes and technology that will move your organization from the low end of the risk management curve – where compliance doesn't drive value – to true strategic risk management. It is to your benefit to implement CECL processes now to help your organization go well beyond compliance to yield business-boosting results.

■ John Dalton, CPA, is director of Product Strategy for the Financial & Risk Management division of Fiserv, where he helps financial institutions optimize their use of and return on capital by making risk actionable and transparent within their organizations. Dalton's risk advisory leadership and consultancy has spanned institutions including Accenture, Bank of America, Dixon Hughes Goodman, and Bank of Atlanta. A member of the American Institute of CPAs, he holds an MBA from Emory University, a Masters of Accountancy from Georgia State University, and a Mechanical Engineering degree from Vanderbilt University. Contact him at John.Dalton@Fiserv.com | www.fiserv.com

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Feature

Stable Funds are More Important than Core Funds

By Donald Musso, President, FinPro Inc.

T

he current regulatory framework for funding and liquidity has some material shortcomings. These shortcomings include: the categorization of digitally originated deposits as noncore, the concern over large balance deposits, the concern over municipal deposits, and the inclusion of listing services as wholesale deposits.

To better assess liquidity risk, banks should establish a matrix that arrays the current regulatory funding categorizations of core, non-core and wholesale against short term volatility, long term volatility and stable funding.

This new matrix arrays the current regulatory designations of funding against deDonald Musso posit stability. This matrix gets to the heart of the risk issue which is the stability of the funding source rather than a generic, non-risk aligned definition like core, noncore and wholesale. Within any of these three categories, funding can be short term volatile (very risky) long term volatile (less risky) and stable (little risk). For example, if a consumer opens a 1 year CD at a 1.00% rate physically in a branch it counts as a core deposit and is considered stable. If that same consumer, the same day, opens another 1 year CD at a 1.00% rate digitally, it would be noncore. Obviously the difference in designation makes no common sense as the funding source is identical.

Not all wholesale funding is risky and/or bad. A wholesale funding source, like a borrowing with a long term maturity, is sta-

ble whereas short term maturity is more volatile. The longer the term the more stable the wholesale funding source is.

To determine stability and volatility, banks need to determine customer and account loyalty using an approach similar to the FinPro Deposit Loyalty Score©. This analytical process arrays funding on a grid using stability markers. These stability markers were identified after conducting extensive liquidity analytics at a large

FinPro Liquidity Matrix©

Short term volatile

Long term volatile

Stable Funding

Deposits < $250k Core Funding Non-Core Funding

Non Maturity Maturity

Municipal Deposits Large Depositors

Wholesale Funding

High Cost Deposit Calculation is critical

Non Maturity

Non Maturity

Brokered Deposits Listing Service FHLB Borrowings

Maturity

100%

Internet Deposit assessment is critical

Deposits > $250k Valid “high cost” deposits Valid “internet” deposits

Loyalty Score 0-25%

Loyalty Score 25-50%

Loyalty Score 50-100%

Maturity 0-3 months

Maturity 3-12 months

Maturity 12+ months

Maturity

22 New Jersey Banker

Fall 2018

number of banks. The markers include, but are not limited to, relationship, transactional activity, digital footprint, age, size, tenure and price. Each marker is assigned a weight based on its relative importance to the specific financial institution.

Each weighted marker has a factor coefficient assigned to it based on institution specific bands. For example, the bands for a marker such as tenure could be less than 1 year, 1 to 3 years, 3 to 5 years and greater than 5 years. The longer the tenure the higher the factor coefficient assigned.

The weighted average result is the loyalty score. The higher the score, the more stable the funding source is as shown in the liquidity matrix.

While the process is complex, the end result is that all accounts have loyalty scores ranging from 0% to 100% that easily reflect their stability within the Bank. Intuitively this makes sense. For example, a large deposit that is from a material owner or family member of an owner, is stable. The size of the deposit itself does not determine volatility or stability. A $1 million dollar deposit from a Board member is much more stable than a deposit from single relationship customer that is less than $250 thousand.

In a similar manner, municipal deposits are not a volatile source of funding simply because they are noncore by regulatory definition. Municipal funding can be arrayed to show balances over time and a minimum threshold can be established that would determine stable funding. For example, if a municipal deposit fluctuated between $1 million and $2.5 million in balance, the first $1

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Donald Musso is President of FinPro Inc. He is a nationally known thought leader in Community Banking and a recognized expert in value creation for banks, strategic planning, loan and deposit growth, internal risk assessments, asset/liability management, customer segmentation and delivery alternatives, de novo bank formation and investment banking. He has started numerous denovoâ&#x20AC;&#x2122;s (several as a founder), is a large investor in Community Banks, is a member of various bank Boards and teaches for elite banking programs. He also frequently discusses community bank policy with all of the Banking agencies in Washington DC. Contact FinPro at 908-234-9398 or www.finpro.us.

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million would be deemed stable and the rest volatile. Additionally, if the municipality is not shopping its accounts it could lead to stability. In our municipal example, if the municipality were to not shop the account for another 2 years, the whole balance would minimally be long term volatile.

Listing service deposits should not be deemed volatile either.

The vast majority of these deposits are time deposits with identical characteristics to internal bank time deposits. There is no broker involved, rather it is simply digitally originated. As such, listing service deposits should be treated like time deposits.

The Regulatory relief bill started the process of designating funding types to more closely align with true risk. Changing the classification of reciprocal CDARs from brokered to core was an essential first step. It is time to finish the job and align liquidity analytics more closely to reality and true risk. â&#x2013;

Holland & Knight

Cira Centre, Suite 800 929 Arch St. Philadelphia, PA 19104 Contact: Leonard A. Bernstein, Esq., Partner Phone: 215-252-9521 Email: leonard.bernstein@hklaw.com

LASO Inc.

345 7th Avenue, 11th Floor New York, NY 10001 Contact: Michael Green, EVP Business Development & Sales Phone: 917-924-2202 Email: mike@laso.com

MTS Software Solutions

225 Executive Drive, Suite 4 Moorestown, NJ 08057 Contact: Gary Schwartz, CEO Phone: 561-654-1000 Email: gschwartz@mts-software.net

RMC Consulting Group, Inc.

27 Ann Street, Suite 100 Verona, NJ 07044 Contact: Roseann Casiere, President/Owner Phone: 973-239-0346 Email: roseann@rmcgroups.com

Ramirez & Co., Inc.

61 Broadway, Suite 2924 New York, NY 10006 Contact: Angelo DiCaro, SVP Phone: 212-378-7182 Email: adicaro@ramirezco.com

Sandelands Eyet LLP

1545 U.S. Highway 206, Suite 304 Bedminster, NJ 07921 Contact: Alina Eyet, Managing Partner Phone: 908-470-1200 Email: aeyet@se-llp.com

OutSolve, LLC

3330 W. Esplanade Avenue, Suite 301 Metairie, LA 70002 Contact: John Austin Melendrez, Sales Consultant Phone: 888-414-2410 Email: jmelendrez@outsolve.com

Fall 2018 New Jersey Banker

23

Feature

Vulnerability Scanning

! vs

Penetration Testing

?

?

What is the difference, and what is right for me

By Sean D. Goodwin, Senior IT Assurance Consultant

H

ave you been hearing these terms thrown around by your IT or Compliance teams, but aren’t quite sure what they are talking about? This article aims to clarify the two types of testing, and provide some basic information to help identify which test is right for you. Do you need to address common missing patches, or are you more concerned with a specific threat actor? Each test serves a specific purpose and has varying degrees of complexity. Having an adequate understanding of each type of testing will ensure your organization is getting the most value out of the budget you have, for both compliance and security needs.

Sean D. Goodwin

WHICH IS RIGHT FOR ME? These testing approaches range in the complexity and required resources, starting with a basic, credentialed vulnerability scan. As the scope of testing expands to include items like threat emulation and exploit attempts, the resource demand, both for performing the tests and implementing the resulting recommendations, increases. Your answers to the questions below can help to determine whether you need an overall vulnerability scan or if more focused penetration testing is the right option for your organization.

QUESTIONS TO ASK: • Do we have regulatory responsibilities that require vulnerability scanning or penetration testing?

• Are there specific threats we are most concerned with (e.g. ransomware or insider threats), or are we looking for a general vulnerability baseline?

• Do we have the resources to perform this testing in-house, or is a third party required?

VULNERABILITY SCANNING This process looks to identify hosts on your network, and look at identifiable attributes to discern vulnerabilities that have already been publicly disclosed.

Vulnerability scanning is the less intrusive of the two options.

Within the realm of vulnerability scanning, you can choose a few different levels of access, each providing a different level of information.

A thorough test will involve providing the scanning tool with administrator level credentials for all target systems. The scanning tool is able to authenticate each host and take a detailed look at the local software installations, configurations, etc. This will provide the most information possible for the end- user. By default, many systems are configured with usability prioritized over security, leading to a weak configuration. These credentialed scans can be configured to check for local settings that may not be a “vulnerability” in the traditional sense, but rather a weak configuration. As an added benefit, if your organization has decided to build system images using a standard like the CIS Benchmarks, many vulnerability scanning tools can confirm compliance with these baselines during the scan.

Vulnerability scanning is not without its flaws, however. Since these tools are performing automated checks, they are prone to providing results that contain false positives. This happens when software is updated, but may leave behind traces of the earlier version. The vulnerability is not present, but the scanning tool sees traces of an outdated version and includes this vulnerability in the results. These results are included in a massive listing, which can be difficult to prioritize. These tools do not have the in-depth understanding of your network a human would, so it will treat all vulnerabilities equally. In vulnerability scanning you will need to have a human reviewing the results to adjust the risk ratings based on the context of the impacted device and any mitigating controls.

PROS • Can be automated / scheduled to re-test • Vulnerability testing gives you complete visibility to all known security weaknesses present throughout your network

CONS

• Prone to giving false positives • Hard to prioritize remediation efforts due to volume of data provided • May categorize an item as low risk even if it could be used to gain access to the system

PENETRATION TESTING Penetration testing goes beyond the vulnerability scan. In a penetration test, the tester may start by performing some level of a vulnerability scan to focus their exploitation efforts, although this will likely not be as in-depth. Based on the maturity of your organization’s control environment, you may want to provide a certain level of information to the tester to ensure the tester can focus on the threats you are most concerned with. This can be a great way to increase the value of the test, without massively increasing the cost.

PROS • Confirmation of the exploitability of vulnerabilities by attackers • Depending on the scoping, you can verify your detection and response capabilities during the penetration test.

•

CONS

• More expensive due to required skills of the tester and amount of dedicated time • A specific target or end goal will be described to the tester, which will focus their efforts. Because of this they may not find everything in the environment, but rather more granular issues a more generic vulnerability scan would miss.

■ Goodwin is a Senior Consultant in Wolf’s Information Technology (IT) Assurance Services group where he is responsible for coordinating and executing IT audit services at client locations for our financial, healthcare, educational and investment planning clients. He has over five years of experience in the IT auditing and information security fields. He holds the security certifications of Certified Information Systems Security Professional and GIAC Certified Incident Handler, among others. To discuss your specific goals and situation contact Goodwin, Senior IT Assurance Consultant, at (617) 261-8139 or sdgoodwin@wolfandco.com.

Fall 2018 New Jersey Banker

25

NJBankers Activities

NJBankers and BCG Volunteers Headed to Eva’s Village to Serve up a Hot Lunch and a Smile NJBankers and BCG (Bankers Cooperative Group) volunteers headed to Eva’s Village in Paterson to serve up a hot lunch to their guests. Donning our hairnets, aprons and gloves, we got to work serving lunch, serving smiles and then we cleaned up to ready for the next round of guests.

Marie Caliendo, Eva’s Village Manager, Corporate & Foundation Relations gave us a tour of their comprehensive facilities and then we all posed for a photo as we contributed $1,000 to aid in

their mission to provide care and support for people who are struggling with poverty, hunger, homelessness, and addiction.

Our visit was a part of the NJBankers 2018 philanthropic initiative which began in May and runs through December. Fourteen banks have joined us to support Eva’s compassion for those in need. If any member is interested in participating in the initiative, please contact Erin Suckiel, Program Coordinator at esuckiel@ njbankers.com.

Bankers Cooperative Group Contributes $100,000 to NJBankers Charitable Foundation Bankers Cooperative Group (BCG) has generously contributed $100,000 to the NJBankers Charitable Foundation. Rich Siderko, president/CEO of BCG presented a ceremonial check to NJBankers President/CEO John McWeeney, Jr., the Foundation’s Chairman, at the NJBankers summer Golf Outing. Bob Stillwell, (center) Founder of the Foundation, was on hand to join in to celebrate the contribution.

NJBankers Hosts Delegation from China For the first time, NJBankers hosted a Delegation from China who had come to learn more about the banking industry as well as the U.S. economy. NJBankers President/CEO John McWeeney, Jr., and Mike Affuso, NJBankers EVP/Director of Government Relations discussed current conditions and events. Of course there was an interpreter! The Association has also hosted visitors from Japan. NJBankers will continue to welcome delegations from a world away!

26 New Jersey Banker

Fall 2018

Start Building Stronger Business Relationships Today.

New Jersey Banker is one of the most widely distributed state banking magazines in the United States, giving your brand unparalleled access to a widespread audience of C-level executives. As the official quarterly magazine of the New Jersey Bankers Association, the publication reaches more than 15,000 bankers at 91 banking institutions across the Garden State.

The New Jersey Bankers Associationâ&#x20AC;&#x2122;s primary goal is to promote the free exchange of ideas and experiences, and New Jersey Banker is its main outlet. Executive level bankers throughout New Jersey rely on the local, in-depth facts, research and analysis to make crucial decisions every day.

To learn more about New Jersey Banker or to customize a marketing program unique to your business needs, call 860-719-1991 or email bdimauro@ambizmedia.

Feature

Reduce your Costs and Expand Your Employee Benefit Program

BANKERS COOPERATIVE GROUP , INC.

A N N J B A N K E R S A F F I L I AT E D C O M PA N Y

By James DiOrio

W

ith rising health care costs, employers are having a very difficult time meeting the individual needs of their employees. From 1999 to 2017, the cost of family medical coverage increased by 224%, while employee contributions increased by 270%. At the same time, workers’ earnings only increased by 64%, while overall inflation increased by 47%. To make matters worse, there has been a 250% James DiOrio increase in the average member deductible over the past 10 years. Nationwide, 51% of all covered workers have a deductible of at least $1,000.

This figure is very close to the 53.8% figure shown in the NJBankers Employee Benefit Survey of 2017. The bottom line is that employees are now paying more money out of their pocket (through payroll deductions and plan deductibles) for less coverage.

What can employers do? Maybe they need to recognize the fact that we live in a time when the average workforce is much more diverse than it was 10 years ago.

The family structure of the workforce has changed dramatically with more single women, same sex marriages and people marrying later in life. A Millennial wants different things from a benefits program than a married Boomer or a Gen Xer. A possible solution is to put the “insurance” back into an employer’s medical plan. Since no cost preventive care is a federally mandated benefit, employees should be protecting themselves from medical catastrophes. A strategy for employees may be to purchase the highest deductible plan possible and supplement this coverage with various employee pay-all voluntary coverages such as: • Critical Illness • Cancer • Hospital Indemnity

28 New Jersey Banker

The above coverages are true insurance indemnity plans. They simply “indemnify” the policyholder for certain medical events, regardless of the provider or the network used. A combination of a high deductible plan sponsored by the employer and voluntary health plans paid for by the employee may result in lower cost for both the employer and employee as well as a medical plan which will protect the employee from financial ruin.

In a study by Met Life, 58% of respondents wanted a customized benefits option.

Because of the different needs of Millenials, Gen Xers and Boomers, the voluntary program can easily be extended to nonmedical insurance plans such as: • Life • Pet • Disability • Vision • Accident • Auto • Legal • Homeowners • Dental • Identity Theft The advantages of offering these programs are: • Competitive Costs- Employers would give their employees the opportunity to purchase these benefits through group purchasing power. As a result, employees would obtain these benefits at a lower cost than they could buy them as an individual.

• Broader Benefits Offering- Without spending corporate funds, employers would be able to offer a much broader benefit package to its employees. The ability to offer broader benefits have been shown to increase employee productivity and loyalty, while helping to attract new employees.

• Flexibility - While life or disability insurance may be more important to one employee than say Pet insurance, an employer should want to meet as many as employee needs as possible.

• Pre-tax Deductions - Certain health related coverages can be paid for on a pre-

tax basis, thus reducing the employee’s cost further when compared to an individual product. Because of an IRS Chief Counsel Memorandum released early last year, some of the pre-tax advantages for certain types of plans may be eliminated.

• Convenience - The employee can easily enroll in these plans online and pay for the coverage through payroll deduction. Quite often the enrollment process includes one-on-one in person or telephonic consultations with a benefits expert. If an employee leaves their employer, the coverage is portable and can be billed directly. The MetLife Study indicated that 62% of respondents were interested in portable benefits.

• Little Internal Administration - Third Party Administrators (TPAs) and insurance companies do the majority of the work related to the enrollment, billing and eligibility maintenance of these plans.

Established in 1982, Bankers Cooperative Group, Inc. (BCG) is the self-contained brokerage facility for members and associate members of the New Jersey Bankers Association (NJBankers). Today, BCG is the leading provider of employee benefit programs for New Jersey’s banking industry.

As administrator of the New Jersey Bankers Association sponsored Employee Benefits Trust (EBT), BCG is able to leverage almost 8,000 industry employees and their dependents to negotiate group employee benefit programs and pricing not generally attainable on an individual employer basis. The “Cooperative” in our name is what sets BCG apart from the competition. Since 1998, BCG has returned $2.6 million in patronage dividends to its shareholders and EBT participants.

■ Jim DiOrio is a senior consultant at Bankers Cooperative Group. For additional information contact Jim DiOrio at 908-272-8500 x606 or jdiorio@bankerscoopgroup.com.

Fall 2018

Meet Our Endorsed Service Providers

Promontory Interfinancial Network – Trusted Partner Chosen by 3,000+ Financial Institutions Nationwide

W

ith the largest bank network of its kind, a Network comprised of thousands of financial institutions nationwide, Promontory Interfinancial Network offers unique services that bring banks and other institutions together in a way that enables each to benefit from The Power of Many SM. Promontory Network members use its services— Insured Cash Sweep®, or ICS®; CDARS®; Promnet Repo SM; IND®; Yankee Sweep®; and Bank Assetpoint®—to manage their balance sheets more profitably. Visit promnetwork.com to find out how Promontory Interfinancial Network can help your bank: • Build multi-million-dollar relationships • Replace higher-cost funding and/or reduce collateralization • Manage liquidity • Purchase funding • Buy and sell loans The ICS®, or Insured Cash Sweep®, and CDARS® services can help your bank to attract large-dollar customers and provide cheaper funding to support other initiatives. Offer your

customers the unique combination of return and access to multimillion-dollar FDIC insurance.

With ICS and CDARS, your bank can: • Offer access to higher levels of FDIC coverage than a bank of any size can offer on its own • Improve margins and asset liquidity by reallocating collateralized deposits • Purchase wholesale funding or sell excess deposits Bank Assetpoint®, brought to you by Promontory Interfinancial Network, is a nationwide marketplace for loans, offering access to new loan opportunities via high-touch service from professionals possessing in-depth knowledge of banks.

Bank Assetpoint’s team helps its over 1,400 registered bank participants to connect with each other and with nonbank buyers and sellers.

To learn more, contact Cecil Bright at cbright@promnetwork. com.

■

Strategic Resource Management Inc. (SRM) EXPERTISE YOU CAN TRUST, RESULTS YOU CAN COUNT ON COMPLEXITY, COMPETITION, AND CONVERGENCE

STRATEGIC CONSULTING

Financial services is a complex, competitive landscape. The convergence of technology and ever-changing expectations of individuals and businesses is creating an environment where survival of the fittest is the rule. SRM's clients depend on our experience, expertise, and proprietary benchmark data to thrive in this environment. Below is a sampling of the practice areas we offer.

SRM's team includes subject matter experts in payments, digital transformation, core systems, outsourcing, advanced technologies and M&A. In these areas, we have conducted engagements that included situational assessments, strategy development, long/short-term resourcing services and due diligence for institutions considering institutional transactions.

COST SAVINGS AND REVENUE ENHANCEMENT

IMPARTIAL ANALYSIS

SRM provides RFP, vendor evaluations, contract negotiations, and conversion services. Using the insights gained from thousands of engagements at hundreds of financial institutions, SRM is able to uncover substantial cost savings and revenue enhancement opportunities. In addition, our experience accelerates the process of evaluating, selecting, and implementing vendor solutions.

SRM delivers measurable improvements to our clients.

We are independent and do not endorse any third party solution providers ensuring our services are performed with the highest level of impartiality. Our firm is respected in the vendor community for our practice of transparency and open communication between all parties.

PROCESS EFFICIENCIES

THERE ARE BILLIONS OF WAYS WE CAN HELP YOU

With the increasing pressure on margins, financial institutions are looking for ways to streamline high volume processes through the application of technology. SRM's knowledge of artificial intelligence (AI), robotic process automation (RPA), and the use of enhanced automation for contract and vendor management creates efficiencies and improves productivity for clients in North America and Europe.

Last year, we delivered more than $70 million of new value to our clients. This year we will find another $80 million for the financial institutions that engage us. Across the history of our firm, we have seen more than $2.2 billion of value generated from the work we do. For more information, visit the SRM website: www.srmcorp.com ■

Fall 2018 New Jersey Banker

29

Notes

Margaret O. Volk

Kenneth R. Geiger

David V. Fasanella

PEAPACK-GLADSTONE BANK Peapack-Gladstone Bank announced the promotions of Margaret O. Volk to Senior Vice President, Residential Lending Manager and Kenneth R. Geiger to Senior Vice President, Special Assets.

NORTHFIELD BANK Northfield Bank announced that in connection with Northfield’s executive management succession plan, David V. Fasanella has joined the Bank as Ex-

Paul J. Ritter III

Jennie Piperi

ecutive Vice President and Deputy Chief Lending Officer

BOILING SPRINGS SAVINGS BANK Boiling Springs Savings Bank announced the promotion of two executives to the title of Senior Vice President. Moving forward, Debra Cannariato will oversee all marketing and advertising initiatives for Boiling Springs’ retail market and loan division in New Jersey. Also promoted to Sr. Vice President is Theresa O’Keefe,

There’s a Reason Leading Banks Call on Mercadien Our responsive, forward-thinking, relationship-driven team provides the solutions they need and service they trust.

Regulatory Compliance | Bank Secrecy Act | Internal Audit Enterprise Risk Management | Information Technology

Julius Wilson

Diane Scriveri

who now will be responsible for the overall network operations and management at each of the Bank’s 17 branches across Bergen, Passaic, Morris and Essex counties. In addition, Acela Roselle and Elyse Beidner, were both promoted to Executive Vice President roles.

CENTURY SAVINGS BANK Century Savings Bank is pleased to announce that Paul J. Ritter III has joined the bank’s esteemed Board of Directors.

KEARNY BANK Fairfield-based Kearny Bank has hired Anthony Bilotta as chief banking officer, a new position.

METUCHEN SAVINGS BANK Metuchen Savings Bank announced that Jennie Piperi has been promoted to the newly created position of Executive Vice President and Chief Operating Officer.

LAKELAND BANK James E. Hanson II, CEO and president of the Hampshire Cos. real estate firm, has been named to the boards of directors of Lakeland Bancorp Inc. and its subsidiary, Lakeland Bank.

NEWFIELD NATIONAL BANK

Salvatore Zerilli, CPA, CAMS

Managing Director | szerilli@mercadien.com

Princeton, NJ 609.689.9700 | Philadelphia, PA 215.854.4059 Mercadien.com 30 New Jersey Banker

Newfield National Bank announced that Julius Wilson was promoted to Chief Information Technology Officer. Wilson is responsible for overseeing all technical activities of Computer and Network Operations.

FREEDOM BANK Freedom Bank announced the hire of Diane Scriveri to the position of Executive Vice President and Chief Lending Officer. ■

Fall 2018

Shots

The United Way of Hunterdon County received a grant from Somerset Savings Bank to help fund programs directed at low-income households as well as individuals who may be homeless or at-risk homeless. The funds are being used to support the United Ways Hunterdon Thrive initiative as well as its Diaper Bank, Holiday Hands, Tools 4 School and Volunteer Income Tax Assistance (VITA) programs. Pictured: Bonnie Duncan, CEO of United Way of Hunterdon County (center) with Kimberly Holmes (left) and Gemma Truskiewicz, both of Somerset Savings Bank.

Lakeland Bank presented a $10,000 Community Impact Grant to Fulfill at the B.E.A.T Center in Toms River, N.J. The purpose of Lakeland Bank’s Community Impact Grant Program is to address specific community-focused initiatives and invest in eligible high-performing nonprofit organizations that make a strong and lasting impact on our communities.

Glen Rock Savings Bank celebrated a grand re-opening of its location at 83 Northfield Avenue in West Orange. Held to showcase a redesign of the branch’s interior to feature a lighter and more open/efficient space. Present were (left to right): Arnold Romero, Assistant VP & Northfield Ave Branch Manager; Henry P. Ingrassia, former Bank CEO & current Board Member; Susan McCartney, West Orange Township Council President; Malcolm W. Greenough, Chairman of the Board of Directors; Fred Viaud, Bank President & CEO; and Andriette Mathews, Bank EVP, COO & CFO.

Two River Community Bank was proud to partner with the United Way of Monmouth and Ocean Counties to collect books for K-3rd grade children in need within the community. Thanks to generous contributions from local participants, the Bank was able to double its total from last year and donate 2,348 books. The donations helped prevent the “summer slide” and supported early grade literacy over the summer months and beyond.

NVE Bank made a $1,000 donation to the Office of Concern Food Pantry at St. Cecilia Church in Englewood to fund the Pantry’s Product Protection initiative. The donation will cover the cost of purchasing durable storage containers to ensure that the food products collected through donations are adequately stored and protected against heat and moisture.

The OritaniBank Charitable Foundation announced that the $60,000 grant that it provided to the North Jersey Friendship House (NJFH) in 2017 for the food truck purchase, equipment and training of staff members has come to fruition.The staff of NJFH rolled up to the Bank with the new truck and set up lunch for the staff and Board of Directors to say “Thank You” and show them how the grant money was being spent.

Fall 2018 New Jersey Banker

31

COLLABORATIVE THINKING MATTERS. efficiency matters

Knowing the inner workings of your business is job one. Count on Riker lawyers to understand the banking industry, know what matters most to you and work collaboratively to solve business problems with clockwork efficiency.

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