New Jersey Banker 1Q 2018

NEW

JERSEY

S P RIN G 2 0 1 8

B A N K E R

Will Tax Reform Sink the Housing Market?

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NJBankers Board of Directors Gerard Banmiller President/CEO 1st Colonial Community Bank

Stanley J. Koreyva Jr. President/COO Amboy Bank

Craig L. Montanaro President/CEO Kearny Bank

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

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

Anthony Labozzetta President/CEO Sussex Bank

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

Greg White* Northern New Jersey Region Bank President Wells Fargo & Co.

Detlef H. Felschow President/CEO Roselle Savings Bank

Thomas Lupo President/CEO Regal Bank

Kevin B. Peterson President/CEO Haddon Savings Bank

John S. Fitzgerald President/CEO Magyar Bank

Christopher D. Maher Chairman/President/CEO OceanFirst Bank

Robert Rey President/CEO NVE Bank

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

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

Christopher Martin Chairman/President/CEO Provident Bank

Thomas J. Shara * President/CEO Lakeland Bank

NJBankers Officers

NJBankers Staff John E. McWeeney Jr. President and CEO ext. 627 jmcweeney@njbankers.com Michael P. Affuso, Esq. Executive Vice President and DirectorofGovernmentRelations ext. 628 maffuso@njbankers.com Jenn Zorn Senior Vice President and Director of Education & Business Development ext. 611 jzorn@njbankers.com Emily T. DeMasi Vice President and Director of Communications ext. 610 edemasi@njbankers.com Wendy C. Mandelbaum Controller ext. 603 wmandelbaum@njbankers.com Claire Anello Office Manager, Database and Website Manager ext. 631 canello@njbankers.com

Contributing Editor Emily T. DeMasi

Gerald L. Reeves Former Chairman President/CEO Sturdy Savings Bank

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

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

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

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

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

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

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

The Warren Group Design / Production / Advertising custompubs@thewarrengroup.com

www.thewarrengroup.com 280 Summer Street • Boston, MA 02210 617-428-5100

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.

Spring 2018 New Jersey Banker

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Table of Contents

Cover Story

18

Will Tax Reform Sink the Housing Market

Departments 5

From the President’s Office 8 Politics and Policy The Year Ahead for Banking Get in the Arena

6

Chairman’s Platform 7 New Associate Members Let’s Make Banking the Attractive Profession It Should Be 32 Bank Shots Upcoming Events 34 Bank Notes

8

Features

10

Directors’ Corner The Fed Is Reconsidering What It Expects From Directors – Hooray!

12

Behind the Teller Line NVE Bank – We are the Community

14

Meet Our Endorsed Service Provider BCG Pays Out Record Patronage Dividends

16

Meet Our Endorsed Service Provider Innovative Financing Solutions (IFS)

22 Feature

2018 Economic Leadership Forum Huge Success Boasting Nearly

600 Attendees

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New Jersey Banker

24 Feature

New Jersey’s Department of Banking and Insurance Adopts New

Mortgage Processing Requirements 26 Feature

Cybersecurity Wellness Is Necessary to Rise to the Challenge of

Digital Threats 28 Feature

Population of Agency Bonds Is Evolving 29 Feature

Banks Are Competing on Convenience 30 Feature

A World of Innovation

Spring 2018

From the President’s Office

The Year Ahead for Banking

By John E. McWeeney Jr.

W

e certainly live in interesting times. The level and pace of change in today’s world is amazing. In the first six weeks of 2018 we saw the stock market rise to record levels in January and then give it all back and then some during a few trading days in February. Phil Murphy was sworn in as New Jersey’s 56th governor and Jay Powell took over as the 16th chairman of the Federal Reserve.

John E. McWeeney Jr. President/Chief Executive Officer Heck, even the NJBankers Philadelphia Eagles won the Super Bowl, their first NFL Championship since 1960. So what does all this portend for New Jersey’s banks in the year ahead?

While things that happen in Washington and the financial markets will surely have an impact on New Jersey banks, without question the No. 1 issue for NJBankers and many of our members this year is Gov. Phil Murphy’s proposal to create a state bank.

While the goal of the state bank would be to increase economic development and fairness, it could have exactly the opposite effect if it harms New Jersey banks. Deposits are critical to our banks’ ability to fund their loan activities and one of their most important source of deposits are municipal deposits. Any meaningful disintermediation of municipal deposits could strain their liquidity and negatively impact their ability to lend, therefore harming New Jersey consumers, businesses and communities.

A state bank bill has already been dropped in the Senate and we anticipate one to be dropped soon in the Assembly. NJBankers and many of our members are and will continue to be actively engaged to try and work with the governor and the legislature to come up with a solution that does no harm to our members and drives economic growth.

Another important banking issue at the state level is the proposal to legalize recreational marijuana. Regardless of your social views on this issue, it seems likely to happen given the support of the governor and many in the legislature. The challenge this presents for banks is that marijuana is still considered a controlled substance and illegal at the federal level. Hence banking marijuana and related businesses brings with it the potential of being prosecuted for a felony by the U. S. attorney’s office.

We need the federal government to provide some protection to banks that they will not be prosecuted for banking a business that is legal in their state. When this will come is questionable but the issue is getting more attention in Congress as more states legalize medicinal and recreational marijuana use. NJBankers is part of a Cannabis Banking Coalition that includes 16 other state bankers associations. The coalition is urging ABA and ICBA to engage with Congress on the issue and seek some protection for banks that engage in cannabis banking.

At the federal level our primary focus right now is the passage of S. 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. This bipartisan bill has 24 co-sponsors and is the banking industry’s first opportunity for meaningful regulatory relief since DoddFrank was passed. If passed by the Senate, there are a number of companion bills in the House that can align with it. Perhaps even more important are the appointments

by President Donald Trump of new heads at the Federal Reserve, FDIC, OCC and CFPB. In each case the appointees have indicated a willingness to review and modify regulations that have proven to be over burdensome to banks and harmful to their customers. In April, NJBankers will be participating in both the ICBA Capital Summit (April 8-11) and ABA Government Relations Summit (April 23-25). We’ll be visiting the New Jersey Congressional delegation during these trips and we’d like

to have a strong delegation of New Jersey bankers with us. I urge you to register for one of the events. Please also mark your calendar for Sept. 5 and 6 when we’ll be visiting Washington for meetings with the regulatory agencies.

As we look to other broader issues that will affect the performance of New Jersey banks in 2018 clearly the national and local economies are at the top of the list.

The economy enjoyed good momentum heading into the year and all indications are that this will continue. Corporate earnings are up and will benefit considerably from the new legislation lowering corporate tax rates. Employment continues to expand and finally it appears wages are increasing too. Assuming interest rates don’t rise too quickly and choke off economic activity, banks should directly benefit from higher net interest margins. If Congress and the Administration could agree on infrastructure spending that would generate even more economic activity.

The economy appears strong at the regional and local level as well, which bodes well for loan demand.

Both commercial and residential real estate values have risen and New Jersey infrastructure spending will continue due to legislation approved last year for the Transportation Trust Fund. Some potential pitfalls are New Jersey’s ongoing fiscal woes and the potential negative impact of the federal tax reform on New Jersey property values. All in all, 2018 looks like it should be another strong year for New Jersey’s banks. Beyond that future performance will be greatly influenced by how issues, like the state bank, play out. NJBankers will be out front and advocating on these critical issues. Please join with us to protect the future of the banking industry and its ability to continue serving New Jersey’s consumers, businesses and communities. ■ John E. McWeeney, Jr., is president and CEO of the New Jersey Bankers Association, and can be reached at jmcweeney@njbankers.com.

Spring 2018 New Jersey Banker

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Chairman’s Platform

Let’s Make Banking the Attractive Profession It Should Be

By James S. Vaccaro

Y

ou may have heard it before from family, friends, neighbors or their children graduating from high school, college and graduate school – why would I ever want to work for a bank? We hear that banks are too traditional, not progressive, nor innovative. “Bankers are driven primarily by regulation and bankers present themselves as professionals unwilling to take risks or think creatively.”

SHALL I GO ON? We’ve read everything that we can get our hands on about preferences of Millennials entering the workforce. We’ve been advised that they exhibit a different set of professional values than the current workforce. They are attracted to companies where their work has a purpose and where they are able to make a meaningful impact. Millennials want James S. Vaccaro companies where there are continued learning Chairman opportunities. Millennials are socially aware Chairman/President/CEO Manasquan Bank and responsible and want a company that ascribes to the same value system. They want engagement and job satisfaction.

With thousands of people who will search for jobs in the coming year, Glassdoor, a popular job and recruiting company, announced its annual 50 Best Jobs in America for 2018 list. Not surprisingly, “banker” was not on the list.

I find it quite interesting and more than a bit disappointing that those looking for jobs or entering the workforce don’t consider applying to banks when establishing a career path. I counted, and of the top 50 best jobs on the Glassdoor list, a minimum of 35 of those jobs either reside directly or are embodied in primary career functions in banks! Some of the coveted positions included were compliance manager, marketing manager, facilities manager, human resources manager, database administrator and business development manager as a “best job.”

MILLENNIALS WANT LEARNING OPPORTUNITIES The banking industry is always evolving whether a result of changing customer preferences, regulations or even technology and cybersecurity challenges. Working in our industry is anything but static. To keep up, bankers attend seminars and conferences and many banks have an education and training department. With ongoing change comes ongoing learning opportunities.

MILLENNIALS WANT THEIR JOBS TO BE MEANINGFUL Millennials, when looking for meaningful jobs, often gravitate to jobs in health care. Listed in the “best jobs” report are nursing practitioner, occupational therapist and physician assistant. Yet a Millennial looking

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New Jersey Banker

for a meaningful job would do well working for a bank. Banks, indeed, very much represent the “health care of finance.” It’s meaningful to help someone get their own home. It’s meaningful to help protect the banking public from cybersecurity attacks. It’s meaningful to help stop money laundering efforts and possible human trafficking.

SOCIAL AWARENESS IS A TOP CONSIDERATION FOR CHOOSING A JOB One of the most quoted characteristics of Millennials is that they are socially aware. Every day, bankers get involved in the communities they serve. Whether teaching financial literacy classes, helping to build affordable homes, serving lunches to the homeless or conducting a toy drive, bankers are an integral component of the health of the community. Bankers are neighbors reaching out to neighbors. They become board directors for community based organizations; finance and budget advisors for schools and houses of worship; providers of financial support through foundations; and cheerleaders for community improvement efforts. Millennials would certainly appreciate our social awareness as an industry.

ENGAGEMENT AND JOB SATISFACTION GO HAND-IN-HAND A banking career requires engagement – with peers, regulators, customers and the community. Every day, bankers interact with their peers – in a branch office or out in the marketplace. Disciplines intersect when an employee on the front line sees that a customer needs help with retirement planning and calls in the expert. It happens when an employee in the marketing department gets help from IT to create a clean CIF. Everyone wins! I can go on and on because it happens in every branch and department every day.

NOW THE CHALLENGE IS TO CONVERT THEIR THINKING AND GET THE WORD OUT As you begin attracting and interacting with Millennials and your

Spring 2018

new hires, remember that NJBankers has many resources for keeping them on track with their goals and aspirations. Learning opportunities are probably the most obvious. Last year, the association hosted 14 conferences, 22 seminars and 86 webinars on everything from human resources management to enterprise risk management.

NJBankers also offers professional accreditations including the CLE, CPE, HRCI, ACAMS and CRCM so employees can certify their experience and knowledge.

The NJBankers Leadership Academy is a resource for developing emerging leaders, your frontline potential and boards of directors.

The association has 34 different committees covering most of the critical functions of our banks. Committee members network with peers and discuss common issues. I encourage you to promote committee membership to your employees.

With all the professional development resources available; the commitment to improve the communities we serve; the reputation of the industry for making dreams come true, we have the ingredients that will attract the best and brightest. I certainly hope to see “banker” on the list next year.

■ James S. Vaccaro is chairman of the New Jersey Bankers Association and chairman, president and CEO of Manasquan Bank. He can be reached at jvaccaro@manasquanbank.com.

New Associate Members The Baker Group

RIZCO

Jon Virostek, VP Capital Markets The Baker Group 1700 Rio Grande Suite 120 Austin, TX 78701 Phone: 512-659-0504 Email: jvirostek@gobaker.com

2003 Highway 71 Suite 3 Spring Lake, NJ 07762 Contact: Debra Rizzi, Partner, President Phone: 732-223-1944 x102 Email: Debra@rizco.com

Correction: On page 34 of the NJBankers Winter 2018 issue, New Leaders Alexa Monte's photo was incorrectly represented as Frank Di Dolci's. We regret the error. To the right is her photo from the event.

CSI KNOWS FUTURE FINTECH.

Spring 2018 New Jersey Banker

7

Politics and Policy

Get in the Arena

By Michael P. Affuso, Esq.

I

have worked for nearly a decade at NJBankers. I have witnessed the passage of Dodd-Frank, a law with some laudable goals to protect customers and the financial system, which in reality created a massive bureaucracy which falls far short of removing systemic risk. I have witnessed the passage of state foreclosure laws which are aimed at “keeping people in their homes”; which have resulted in a spike of abandoned Michael P. Affuso properties which Executive Vice President/ Director of Government Relations drag down NJBankers values for the commonweal and will undoubtedly push up the long-term cost of borrowing.

Through it all, bankers have kept calm and carried on.

Some of you might make the annual pilgrimages to D.C. to visit the Hill and state your case – but often less than 20 percent of our membership is represented. Some of you have also participated in the political process – but again it is a mere one third of you. Some of you have participated in Bankers Leadership Day – but by the time the last speaker spoke there were less than 20 bankers in the room.

While I seek in no way to depreciate the contributions of those who have participated, we must collectively appreciate the dire consequences of lack of participation.

The New Jersey Bankers Association has a dual mandate to provide education and advocacy for our members. Since I joined NJBankers, the membership has shrunken by 25 percent. Our base is shrinking. Fortunately, due to prudent planning, we can financially withstand the shrinking base – our education mandate is sound. Unfortunately, our collective voice is correspondingly shrinking. If this continues, our advocacy position will become untenable.

A strange opportunity presents itself.

As you all know, Gov. Phil Murphy has

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New Jersey Banker

proposed a state bank. Should this bank come into creation, and should it take municipal deposits, we know it will result in the death of some institutions and mere catastrophe for others. We know it will affect our customers, our communities and our ability to lend. These dire results are not the “death by 1,000 cuts” of Dodd-Frank or the foreclosure laws, they are the guillotine.

However, these dark days may turn into our finest hour – if we so choose. We must choose to be leaders and accept leadership.

We must choose to be involved. We must choose to write op-eds when requested. We must choose to talk to the media when requested. We must choose to talk to legislators. We must choose to participate in the political process. We must choose to fight.

We all must choose to get into the fight.

While it is a great honor to serve and work with the minority of bankers who currently participate in our advocacy efforts, I believe I would be remiss if I did not echo their frustration of the lack of broad participation. We welcome all to the fight – we beseech you to join us. For those who choose to get it, we shall sing the song of the happy warrior together. For those who are not so sure, I leave you with the words of Theodore Roosevelt, who as a young man who made himself and made himself president, who lived a life of vigor and expected that of others and urged them into the arena: “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least

fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

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

Upcoming Events April 9, 2018

Women’s Leadership in the 21st Century-Communication Boot Camp Cranford April 16, 2018

Leadership Academy-Advanced Leadership-Leading Your Managers Cranford April 18, 2018

Accounting & Tax Seminar with FMS – New York/New Jersey Hackensack April 19, 2018

Liquidity Workshop with KPN

Lincroft April 20, 2018

Success through Effective Management (STEM) Cranford May 16-20, 2018

114th Annual Conference

Marco Island, Florida June 13, 2018

Women in Banking Conference

Somerset June 20, 2018

Compliance University

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Spring 2018

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Directors’ Corner

The Fed Is Reconsidering What It Expects From Directors – Hooray!

By Richard Daingerfield

I

ndependent members of bank boards have distinguished themselves in business, civic affairs and otherwise; but few of us have spent our careers working for banks. We therefore lack the deep banking expertise possessed by bank management and bank regulators.

Where we lack expertise, we are open to receiving advice.

Regulators have given it to us…in abundance.

Not surprisingly, the financial crises triggered a legislative and regulatory response. Perhaps surprisingly, the DoddFrank Act is 2,300 pages long (roughly four Harry Potter novels) and regulations enacted pursuant to Dodd-Frank exceed 22,000 pages (roughly 40 Harry Potter Richard Daingerfield novels).

Director and Chairman of the Risk Committee, Peapack-Gladstone Bank The goals of Dodd-Frank are laudable (reduce systemic risk, eliminate “too big to fail,” enhance consumer protection, etc.), but the pursuit of these goals has been – to put it politely – imperfect.

The pendulum may be starting to swing back. On Aug. 9, 2017, the Federal Reserve published a proposal addressing supervisory expectations for boards of directors.i In it, the Fed admits: [B]oards often devote a significant amount of time satisfying supervisory expectations that do not directly relate to the board’s core responsibilities, which include guiding the development of the firm’s strategy and the types and levels of risk it is willing to take (also referred to as risk tolerance), overseeing senior management and holding them accountable for effective risk management and compliance among other responsibilities, supporting the stature and independence of the firm’s independent risk management and internal audit functions, and adopting effective governance practices.

Boards completing such non-core tasks may do so at the expense of sufficiently focusing on their core responsibilities, which when exercised effectively promote the safety and soundness of the firm. [Emphasis added] Translating this from bureaucratic English into plain English: The Fed has asked boards of directors to count the leaves on the trees; and leaf-counting competes with a board’s primary responsibilities, which are about forests, not leaves.

How many leaves are we asked to count? At a recent conference for banking lawyersii, several speakers noted the extraordinary number of demands that regulators have placed on bank directors. One speaker said that the Fed’s Supervision and Regulatory Letters (commonly known as “SR Letters”) assign

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more than 500 tasks to boards of directors.iii No wonder our board books have swollen to hundreds and hundreds of pages!

I’m not that old, but I still remember a time when directors complained about board books exceeding 200 pages. If a board secretary could deliver that today, he/she would be carried triumphantly out of a board meeting on the shoulders of grateful directors.

We are not lazy. We just want to let management attend to the many details that must be addressed to run a bank safely, soundly and profitably; and we want to keep our focus on the major issues that are at the heart of a board’s responsibilities.

The Fed’s proposal signals that it is increasingly sympathetic to this. For example, one key aspect of the proposal would shift responsibility for addressing most concerns raised in examination reports from boards to management: Federal Reserve examiners and supervisory staff would direct most MRIAs and MRAs to senior management for corrective action. MRIAs or MRAs would only be directed to the board for corrective action when the board needs to address its corporate governance responsibilities or when senior management fails to take appropriate remedial action.

Boards of directors would remain responsible for holding senior management accountable for remediating supervisory findings.iv We directors don’t need – or want – to be relieved of our responsibility to oversee management. But we welcome the Fed’s new willingness to concede that the responsibilities of a bank’s board of directors do not include micro managing the banks that we serve.

It is clear that the new thinking at the Fed comes from the very top of the house. In testimony at his confirmation hearing, Fed Chair Jerome Powell said: “We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms[.]”v Randal Quarles, the newly appointed fed governor and vice chair for supervision, clarified and amplified this new direction in a recent speech. Gov. Quarles said: The body of post-crisis financial regulation is broad in scope, complicated in detail, and extraordinarily ambitious in its objectives. * * * At this point, we have completed the bulk of the work of post-crisis regulation[.] * * * As such, now is an eminently natural and expected time to step back and assess those efforts. It is our responsibility to ensure that they are working as intended and – given the breadth and complexity of this new body of regulation – it is inevitable that we will be able to improve them, especially with the benefit of experience and

Spring 2018

hindsight. * * * I believe that we have an opportunity to improve the efficiency, transparency and simplicity of regulation. By efficiency I mean the degree to which the net cost of regulation – whether in reduced economic growth or in increased frictions in the financial system – is outweighed by the benefits of the regulation.vi Let’s hope that examiners embrace this new thinking and allow boards to hand back to management some of the mindnumbing minutia that currently takes up so much of our time. We are at our best when we are focusing on our primary responsibilities, which include setting strategy, setting risk parameters and providing support, guidance, oversight and a robust challenge to management.

You may know that NJBankers recently partnered with FinPro to launch a forum for independent directors who serve on risk committees. For banks that don’t have a risk committee, any independent director who is responsible for risk oversight is welcome to participate.

We had our first meeting at Peapack-Gladstone Bank in November. It included a presentation (and lively discussion) on cyber security followed by an open forum in which many issues and concerns were aired. The next meeting of this forum will be on May 3 from 8 a.m. to 10 a.m. at Northfield Bank, 581 Main St. (8th floor boardroom) in Woodbridge. If you are interested

in attending (or just being placed on the mailing list for future meetings), please let Lauren Barraza know at lbarraza@ njbankers.com. ■ Richard Daingerfield is a director of Peapack-Gladstone Bank and chairman of its risk committee. He is a retired banking lawyer, having most recently served as executive vice president and general counsel of a $120 billion super regional bank. He also teaches a course at Boston University Law School’s graduate program in banking and financial law and is the author of a book based on that course. He started his legal career at Wilentz, Goldman & Spitzer, in Woodbridge, in 1980.

FOOTNOTES i.

The proposal can be found in the Aug. 9, 2017 edition of the Federal Register at 82 Fed.Reg. 37,219 to 37,227.

ii. The American Bar Association’s Banking Law Committee met in Washington, D.C., Jan. 18-20, 2018. iii. The pending proposal would eliminate 27 SRs. I haven’t bothered to count how many of the >500 requirements are contained in those SRs. iv. 82 Fed.Reg. 37,223 v. Fed Chair Powell’s Nov. 28, 2017 confirmation hearing testimony can be found here:

https://www.federalreserve.gov/newsevents/testimony/powell20171128a.

htm vi. The full text of Gov. Quarles’ speech can be found here: https://www.federalreserve.gov/newsevents/speech/quarles20180119a.htm

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11

Behind the Teller Line

NVE Bank – We are the Community

1887

: a milestone year. Grover Cleveland was president of the United States. Our nation celebrated the 100th Anniversary of the U.S. Constitution. Great Britain marked the Golden Jubilee of Queen Victoria. And the first Groundhog Day was observed in Punxsutawney, Pennsylvania.

Englewood, New Jersey also had its own memorable event occur that year.: the opening of The Englewood Mutual Loan and Building Association. What later became known as NVE Bank was the area’s first savings and loan association, ending its inaugural year with 100 “members” and assets of $25,000.

A lot has changed in the last 131 years. NVE now has 11 branches, over 30,000 customers and assets of over $700 million.

But what hasn’t changed is the bank’s role as a leader in Bergen

12 New Jersey Banker

County, committed to helping customers and communities prosper through the products and services it offers and the charitable causes it champions.

What makes NVE unique, says Rob Rey, president and CEO, is the bank’s emphasis on social responsibility. “For us, it’s personal” says Rey. “We are based in Bergen County. Most of our employees live in Bergen County. So unlike many other banking institutions, our customers are our neighbors and our communities are where we live and raise our families. That makes us deeply connected to the citizens of Bergen County, and dedicated to making a difference where we can.

The bank’s deep roots within the towns it serves are nurtured by reinvesting financial and personal resources back into those communities, translating into a spirit of service that permeates

Spring 2018

the culture of NVE. Quoting BlackRock Inc. CEO Laurence Fink, Rey says “Society is demanding that companies, both public and private, serve a social purpose.” NVE walks the talk. The bank goes to great lengths to choose the right people to join its team, taking pains to ensure they understand that community service is expected of them and fostering in them a sense of pride about the bank and the values it stands for. Bank officers are strongly encouraged to serve on the boards of local nonprofit organizations.

And NVE team members spend hundreds of hours annually volunteering for service projects throughout Bergen County that benefit community institutions such as Englewood Hospital and Medical Center, bergenPac, the Office of Concern Food Pantry, Flat Rock Brook Nature Association, the American Heart Association, Bergen Family Center, Rebuilding Together Bergen County and many more.

The bank also established the Community First Rewards Program, designed to reinvest resources into communities and to support the local non-profit groups that lend a helping hand day in and day out. Eligible 501 (c )(3) organizations who enroll in the program can earn monetary rewards from NVE by encouraging staff members, volunteers and others affiliated with the organization to open accounts at NVE. Rewards are earned based upon the balances in designated accounts. “It’s a win-win” says Rey. “The program offers patrons of these worthy organizations a way to give back to their favorite charities, and the organizations benefit from their relationship with NVE.” NVE is also strongly committed to education and established its own scholarship program in 2007. The program annually funds scholarships to local high school and middle school students and awards the monies at a ceremony attended by the students and their parents, school faculty and NVE executives and board of directors. To date, the bank has awarded over $150,000 to deserving students from the communities it serves. And many of those students have returned to intern at the bank during the

summer, and in some cases return as full time employees after college graduation.

Rey is also extremely proud of NVE’s customer service oriented culture, and describes it as a true game changer in the banking business. “Superior customer service is not just a catch phrase for us.

While we offer a full range of innovative products and services that compare with any of the “big banks,” our commitment to customer satisfaction is truly unparalleled.

Our team members truly care about their customers and make an effort to know each one individually. We want to be there for them through every stage of their life – whether it’s buying a first home, saving for college or helping them prepare for retirement. In many instances, we serve

more than one generation of a family, as kids grow up, return to Bergen County and settle down, starting their own relationship with NVE.” NVE Bank.

Strong, enduring, committed, caring, its name has stood for strength and stability for 131 years. And that legacy continues. For the past five years, NVE has earned Bauer Financial Inc.’s Five-Star Rating, designating it as one of the strongest banks in the nation. In contrast, it’s hard to keep up with the “big banks” as they change ownership, change names and change the rules. From the day NVE first opened its doors in 1887, the bank has remained a stable pillar of the community. That’s a track record very few banks can ever hope to achieve.

■

Spring 2018 New Jersey Banker

13

Meet Our Endorsed Service Provider

BCG Pays Out Record Patronage Dividends

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

Bankers Cooperative Group (BCG) held its board of directors meeting recently and took time to celebrate BCG’s record patronage dividend being paid out to shareholders.

Left to right: Richard Siderko, president/CEO, BCG; Donald Sims, president/CEO, Union County Savings Bank; Jorge Gomes, president/ CEO, Lusitania Bank; Nicholas Lorusso, director, Spencer Savings Bank, Joseph Coccaro, president/CEO, Bogota Savings Bank and John McWeeney Jr., president/CEO, NJBankers, and chairman, BCG.

E

stablished in 1982, Bankers Cooperative Group Inc. (BCG) is the self-contained brokerage facility for members and associate members of the New Jersey Bankers Association. 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. To satisfy the varied needs

of the NJBankers membership, the EBT offers multiple choices for dental, life insurance, long term disability, and vision product lines.

The “Cooperative” in BCG’s name is what sets them apart from the competition. Since 1998, BCG has returned $2.8 million in patronage dividends to shareholders and EBT participants. Simply put, the more business done with BCG, the greater the share of future declared patronage dividends.The BCG objective is to build a lasting, sizeable and differentiated insurance business for NJBankers membership. ■

Rich Siderko, President/CEO, BCG presenting a ceremonial check to (left to right) Mya Martinez, administrator, human resources and Joanne Mandry, interim CEO, Children’s Aid and Family Services Inc.

14 New Jersey Banker

Spring 2018

Richard Siderko, president/CEO, BCG (left to right): Michael Tozzoli, CEO and Carlton Meier, CFO, West Bergen Mental Healthcare Inc.

Rich Siderko, president/CEO, BCG presents a dividend check to (left to right): Lori Young, SVP retail banking/human resources and Nancy Graves, president/CEO, Bank of New Jersey.

Rich Siderko, president/CEO, BCG and Craig Montanaro, president/CEO, Kearny Bank.

A subsidiary of Herbein + Company, Inc.

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Richard Siderko, president/CEO, BCG, presents a dividend check to Kenneth Totten, president/CEO, United Roosevelt Savings Bank.

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Financial Outsourcing Solutions www.fosaudit.com

Spring 2018 New Jersey Banker

15

Meet Our Endorsed Service Provider

Innovative Financing Solutions (IFS)

I

nnovative Financing & Consulting Group LLC t/a Innovative Financing Solutions (IFS) is a bank consulting and business advisory firm specializing in the development and implementation of government guaranteed loan programs for community banks and small regional banks primarily located within the northeast and portions of the southeast. IFS formed the Community Bank Consulting Group to provide an “outsourced” government guaranteed lending arm for financial institutions that may not have the loan volume or internal expertise and support staff needed to implement a sound, secure, safe and profitable government guaranteed loan program.

IFS also specializes in the arrangement of commercial financing for business clients, ranging in size from small and growing entrepreneurial companies, to established middle market firms.

IFS’s relationship-focused, value-added approach provides its bank clients with innovative solutions designed to meet their customers’ financing needs and business objectives. As the Bank’s SBA Consultant we provide: • Knowledge and Expertise – IFS possesses significant government lending knowledge and expertise in order to be considered as a trusted and effective liaison between the bank and the government agency.

• Flexibility and Adaptability – IFS is capable of understanding a bank’s business model, regional brand and go-to-market strategy – and possesses the flexibility required to design a program that effectively fits into the bank’s unique business model.

• Full Range of Services – IFS provides a full range of services and support, including eligibility assessment and confirmation, loan structuring, credit analysis and underwriting, loan closing, loan review

and admin support, and ongoing compliance reporting all of which is designed to ensure the quality and integrity of the loan portfolio.

• Responsiveness – IFS consistently provides strong support, as well as prompt and timely follow up. The ability to be highly responsive to senior management, the lending and support/administrative staff, and the borrowers is imperative.

For more information, contact Michael D. Ryan, president and CEO at (484) 485-2756 or mryan@innovfs.net.

■

rePRINTS You can order a professional reprint of any article in the NEW JERSEY BANKER.

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16 New Jersey Banker

Spring 2018

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Will Tax Reform Sink the Housing Market?

18 New Jersey Banker

Spring 2018

Cover

By Jeffrey Otteau

E

nactment of the Tax Cuts & Jobs Act has caused quite a stir with most forecasters predicting ‘Armageddon’ for high-tax states like New Jersey and New York. The primary reasons for these dire predictions are a reduction in the Mortgage Interest Deduction (MID) from a maximum principal balance of $1 million down to $750,0001, and the newly imposed $10,000 limitation on the deductibility of State & Local Taxes (SALT). Because of these changes, some have gone so far as to predict wholesale price declines in high-tax states, reaching as high as 10 percent in some locales. History has proven however that initial cries that the “The Sky is Falling” often end up proving baseless once the dust settles.

For the most part, the changes for personal tax returns are temporary, taking effect on Jan. 1, 2018 with a sunset date of Dec. 31, 2025.

A careful look at the details indicates these reforms to contain a combination of both plusses and minuses whereby most individual taxpayers will end up paying less in Federal Income Taxes, even in high-tax states. Here’s a summary of how this will play out in New Jeffrey Otteau Jersey.

STANDARD DEDUCTIONS Taxpayers come out way ahead as a result of the standard deduction being nearly doubled. For example, the deduction for a married couple filing jointly has been increased from $12,700 up to $24,000.

STANDARD DEDUCTIONS 2017

2018-2025

Single

$6,350

$12,000

Head of Household

$9,350

$18,000

Married Filing Jointly

$12,700

$24,000

This means that all taxpayers who claim the standard deduction can exclude nearly twice as much of their income from taxation, regardless of whether they are a renter or homeowner. For renters, this is a huge windfall as deductions of this magnitude (e.g. $24,000) were previously the exclusive domain of homeowners. Advocates for lowand moderate-income households have made the argument for decades that the higher itemized deductions available to homeowners were unfair as they benefitted those with higher incomes while providing no relief to more-needy lower-income renter households. From this perspective, increasing the standard deduction for renters is actually quite progressive.

Itemized Deductions: On the ‘loss’ side of the ledger, the MID reduction and SALT limit have the effect of limiting itemized deductions for homeowners, thus potentially increasing their taxable income in the process. In other words, homeowners will pay taxes on a greater portion of their Adjusted Gross Income (AGI) because of these changes.

ITEMIZED DEDUCTIONS MORTGAGE INTEREST – Acquire, Construct or Substantially Improve 2017

2018-2025

Single

Up to $500,000

Up to $375,000

Married Filing Separately

Up to $500,000

Up to $375,000

Married Filing Jointly

Up to $1 Million

Up to $750,000

Pre-existing debt and binding contracts prior to Dec. 15, 2017 are grandfathered (except for Home Equity Loans)

ITEMIZED DEDUCTIONS STATE & LOCAL TAXES (SALT) 2017

2018-2025

State Income Tax

Fully Deductible

Capped at $10,000

Property Taxes

Fully Deductible

Capped at $10,000

Note: New Jersey also caps property tax deduction @ $10,000 For a married couple filing jointly, the limit on the MID has been reduced from a maximum loan balance of $1 million to $750,000.

There are however mitigating factors which lessen the effect of this change. One of these is that homeowners who owned their home, or had entered into a binding contract to purchase their home, prior to Dec. 15, 2017 are ‘grandfathered’ under the prior $1-million limit.

This means that there will be no effect on existing homeowners, or those who purchase a home during the early months in 2018. Another offsetting factor is that principal mortgage balances exceeding $750,000 account for a minority of homebuyers. With a current median home value in New Jersey of slightly less than $300,000 ($294,000), it’s clear that most homebuyers will be unaffected by this change. Even in the more expensive northern part of the state, this limit won’t be relevant unless the home purchase price exceeds $833,000 (90 percent LTV) or $938,000 (80 percent LTV). And so, the reduction in the MID will have no effect on homebuyers with low or moderate incomes, while having a potentially adverse effect on those with higher incomes …. which is not at all how this has been reported.

Another negative for taxpayers is that the previously unlimited2 itemized deductions for State & Local Taxes (SALT), have now been capped at a maximum of $10,000. Much has been written about the potential effects of this change for New Jersey homeowners paying high amounts for state income taxes and local property taxes. The truth however is that many New Jersey households pay less than this amount. For example, assuming a married couple with 1 child and a household income of $100,0003, who own a $350,000 home, the statistical average is for total SALT of $9,500 ($7,000 property taxes and $2,500 state income tax). So once again, the potential for adverse effects is primarily limited to New Jersey’s higher-income households.

To round out this topic, here’s a couple of side comments: 1) The new $10,000 SALT limit is no different than New Jersey’s

Spring 2018 New Jersey Banker

19

Cover continued “FALT4” limit. This is because New Jersey doesn’t allow any deductions for Federal Income Taxes and also limits deductions for local property taxes to $10,000.

2) The 2017 tax code already limited the ability of higher-income taxpayers earning more than $261,500/$318,800 (single/married) to claim the full amount of their SALT deduction pursuant to the Pease Rule5, which has been suspended in 2018. So, the effects of the new SALT limits will be mitigated for some higher income taxpayers.

Another provision of the new tax law is that mortgage interest on HELOC6(will no longer be deductible. More recently however, the IRS issued guidance indicating that HELOC interest will still be deductible provided the money borrowed was used to “acquire, construct or substantially improve” the taxpayer’s home that secures the loan. The IRS went on to explain that “interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.” The IRS further stated that “As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.”

PERSONAL EXEMPTIONS In addition to allowing taxpayers to claim the greater of Standard or Itemized deductions, the 2017 tax code also permitted personal exemptions of $4,050 per person for the taxpayer, spouse and dependents. Under this formula, a married couple with 1 child was able to exclude an additional $12,150 of their income from taxation (3 X $4,050). Personal exemptions have however been suspended for 2018-2025, which effectively reduces the amount of income that can be excluded from taxation, thereby increasing taxable income upon which federal income taxes are calculated.

Like Pease limits, the Personal Exemption Phaseout (PEP) limited personal exemptions for higher income households with incomes of more than $261,500/313,800 (single/married) with complete elimination at $384,000/$410,150. Therefore, higher income taxpayers were not allowed to claim these personal exemptions under the prior tax code. With the suspension of Personal Exemptions, the PEP rules are no longer applicable.

PERSONAL EXEMPTIONS

exemptions, because they are subtracted directly from the bottom-line tax bill rather than from taxable income. Therefore, $1 of tax credits is equal to approximately $5 of deductions/exemptions, making this especially beneficial to households with younger age children.

Another change here is that last year’s credit was phased out for households with incomes greater than $75,000/$110,000 (single/ married) which has now been increased to $200,000/$400,000.

Considering the combined effects of doubling the amount of the credit and raising the phaseout threshold, these are significant changes that may help to reverse low birth rates in recent years.

CHILD TAX CREDIT Children Age 16 or younger

$1,000 per child

$2,000 per child

Credit is reduced by $50 for each $1,000 of income above the income threshold amounts

Threshold is $110,000 for joint returns; $75,000 for others

Threshold is $400,000 for joint returns; $200,000 for others

TAX BRACKETS The tax tables have also been changed significantly for the better due to lower rates and a rebracketing of the income bands. While there continue to be seven income stratifications, the percentage rate has been reduced for five of those bands. Equally significant, is that the upper and lower limits of each band have been changed whereby the top portion of taxable income has generally been shifted into a lower band. For instance, for a married couple with a taxable income of $300,000, the top portion of their income would have fallen in the 5th band last year with a 33 percent tax rate, while this year it has moved into the 4th band at only 24 percent.

This is especially favorable to those same high-income households who are more likely to be paying more than $10,000 for SALT.

TAX BRACKET SCALES – MARRIED FILING JOINTLY BAND

2017

2018 2025

1

-

$18,650

10.0%

-

$19,050

10.0% 12.0%

2

$18,650

$75,900

15.0%

$19,050

$77,400

2017

2018-2025

3

$75,900

$153,100 25.0%

$77,400

$165,000 22.0%

Taxpayer, Spouse & Dependents

$4,050 per person

Suspended

4

$153,100 $233,350 28.0% $165,000 $315,000 24.0%

Personal Exemption Phaseout (PEP) highincome taxpayers in 2017

PEP begins at $261,500/$313,800 and entirely eliminated at $384,000/$410,150

Not applicable

5

$233,350 $416,700 33.0% $315,000 $400,000 32.0%

6

$416,700 $470,700 35.0% $400,000 $600,000 35.0%

7

$470,700

CHILD TAX CREDITS Another significant change is that the tax credit for children ages 16 and younger, has been increased in 2018 from $1,000 to $2,000 per child. Tax credits have a much greater effect than deductions and

20 New Jersey Banker

& Up

39.6% $600,000

& Up

37.0%

EFFECTS ON HOMEOWNERSHIP Now that the basic formulas have been explained, the next step is to calculate the ‘net effect’ of limiting deductions and exemptions in 2018 while simultaneously reducing personal tax rates. It should go without saying, but what follows is basic mathematics using

Spring 2018

the formulas discussed above. In preparing this analysis we made a series of assumptions for familial status, annual income, home value and mortgage amounts based upon real-world circumstances here in New Jersey.

The results will be startling if you’ve been following the political commentary and media coverage on this subject. As shown in the table below, the new tax code will result in a net tax savings for most existing and future homeowners in New Jersey, especially married couples due to their favorable treatment under the prior and new tax code. And those who end up paying more in taxes are mostly limited to high-income households living in luxury homes…which again is probably not what you’ve been told. Apparently, the vast number of pundits who have been commenting on this topic never ran the math.

CALCULATED EFFECTS ON NEW JERSEY HOMEOWNERS

FEDERAL INCOME TAX 2018

AGI

FILING STATUS

CHILDREN

HOME VALUE

2017

$100,000

Single

0

$350,000

$14,086

$13,240

($846)

-6%

$100,000

Married

1

$350,000

$8,116

$6,739

($1,377)

-17%

$150,000

Single

0

$425,000

$25,560

$24,578

($982)

-4%

$150,000

Married

2

$425,000

$18,003

$15,599

($2,404)

-13%

$200,000

Single

0

$750,000

$34,647

$35,563

$916

3%

$200,000

Married

2

$750,000

$26,192

$24,984

($1,207)

-5%

$450,000

Married

2

$1,500,000

$95,639

$95,909

$271

0%

$750,000

Married

2

$2,000,000

$190,721

$203,168

$12,447

7%

$800,000

Married

2

$2,800,000

$204,185

$221,668

$17,483

9%

$1,000,000

Married

3

$2,000,000

$276,653

$295,668

$19,015

7%

$1,250,000

Married

2

$3,000,000

$380,801

$388,168

$7,367

2%

$1,500,000

Married

3

$3,000,000

$450,893

$480,668

$29,775

7%

CHANGE

Notes 1: Married status presumes filing jointly. | 2: Does not consider effect of AMT which may reduce increase for high income households .| 3: Does not consider favorable treatment of pass-through business income in 2018

CONCLUSION As with all major policy changes there will be winners and losers, but the big picture is that the housing market will remain viable in the years ahead. The hysteria that has ensued due to misinformation is however likely to cause home sales to be sluggish during the early part of 2018 resulting in a delayed spring surge. Because of this, normal marketing times are likely to lengthen slightly over the short term. Looking ahead however, home sales will regain their footing by late spring or early summer once the facts about tax reform become known.

That’s not to say that high-tax states like New Jersey won’t be adversely affected over the longer term however. Tax reform will result in a windfall of savings in lower-tax states where residents pay much less in state income taxes and local property taxes, making New Jersey even less competitive than it was before. As most everyone is aware by now, a large number of residents choose to leave each year, and businesses choose to locate elsewhere, due in large part to New Jersey’s high tax profile. And the recent tax reform makes this worse than it was before because other places have become even more affordable.

Another concern for the future, is that increasing Standard Deductions removes some of the financial benefits of homeownership. But while the after-tax benefits of homeownership have clearly been lessened, this ranks low on the scale of reasons to buy a home. Still, some potential homebuyers and retirees will likely choose rentership over homeownership because of these changes.

And so, to take a page from Henny Penny (a.k.a. Chicken Little), the sky is not falling anytime soon! The housing market will remain viable, and prices will not collapse. Over the longer term however, New Jersey has some very important work to do in restoring its competitiveness for attracting and retaining people and businesses.

■ Jeffrey Otteau is president at Otteau Group (www.otteau.com). The firm provides appraisal, consulting and risk advisory services for real estate. He can be reached at jeffrey.otteau@otteau.com or (800) 458-7161.

FOOTNOTES 1.

New limit is $750,000 for married couples filing jointly, $375,000 for single, head of household & married filing jointly 2. In fact, they were not previously unlimited, as the Alternative Minimum Tax (AMT) lessen or negated these deductions for higher income households in 2017 and for 2018-2025.

3.

4.

5.

6.

2016 NJ median household income was $76,126 Federal & Local Taxes (FALT) named after the provision’s author, former Rep. Donald Pease (D-Ohio) Home Equity Lines of Credit

Spring 2018 New Jersey Banker

21

Feature

2018 Economic Leadership Forum Huge Success Boasting Nearly 600 Attendees Photos courtesy of Don Christensen, Rizco and Dave Gruol, David Gruol Photography

Attendees were welcomed by NJBankers President and CEO John E. McWeeney Jr. and Robert H. Doherty, New Jersey state president of Bank of America, the forum presenting sponsor.

A Fireside Chat with U.S. Secretary of Commerce Wilbur L. Ross Jr. was a highlight of the morning session. Secretary Ross joined NJBankers Chairman James Vaccaro, chairman, president and CEO, Manasquan Bank, via live video conference to discuss his entrepreneurial outlook, view of Washington politics and direction for the Commerce Department in the Trump Administration. Secretary Ross was unable to attend in person because he was called to Washington for a meeting.

An economic outlook was presented by Dr. Lindsey Piegza, chief economist and managing director of Stifel Financial Corp.

Her presentation was well received by all, so Dr. Piegza spent much time speaking with attendees after the General Session.

Both Rider University and Rutgers University sent representatives of their programs to the event to provide more information about their importance to veterans who are seeking a degree at the schools.

Geoffrey Greener, chief risk officer, Bank of America, joined John McWeeney Jr., NJBankers president and CEO, for a discussion about the important topic of managing risk and responsible growth.

22 New Jersey Banker

Donna Custard, president, NJ Chamber of Commerce Foundation informed attendees on the Chambers “Jobs for New Jersey’s Graduates Program.”

“How I Learned to Stop Worrying and Love my Activist Shareholder” was presented by Day Pitney LLP and included Michael T. Rave, Esq., Partner, Day Pitney LLP; Lisa Schultz, managing director, co-head capital markets, Keefe, Bruyette & Woods, A Stifel Co., and Juan I. Bonifacino, CFA, managing director, Keefe, Bruyette & Woods, A Stifel Co..

Spring 2018

“The New Kid on the Block – Venture Capital” session was presented by McCarter & English and featured a panel moderated

by Michael Horn, Esq., partner, McCarter & English. Panelists included David Broderick, Esq., partner, McCarter & English; Adam Fine, co-founder and CEO, Windham Venture Partners; Bobby Varma, vice president of products and business strategy, Princeton Identity Inc.; and Alan Wink, director, capital markets, EisnerAmper.

“How the Housing GSEs are Supporting Community and Economic Growth in the Garden State” was presented by the Federal Home Loan Bank of New York and featured speakers Adam Goldstein, SVP, chief business officer, FHLBNY; Paul Heroux, SVP, chief bank operations officer and community investment officer, FHLBNY; Joseph Weisbord, director, credit and housing access, Fannie Mae; and Jason Jefferies, lending manager, single family affordable lending division, Freddie Mac.

Keynote Speaker Chester Elton, No. 1 bestselling business author; organizational culture, employee culture and teamwork expert presented “All In: Creating a Culture of Buy-In and Belief” to an energized audience. His engaging and interactive presentation was clearly enjoyed by all. Elton then signed copies of his book of the same name, “All In: Creating a Culture of Buy-In and Belief.”

A very popular break-out session was “Federal Tax Reform and Its Potential Impact on Banks and Their Clients” presented

by Stevens & Lee/Griffin. Scott Balestrier, president, Griffin/Stevens & Lee Tax and Consulting Network; Robert Duquette, professor of practice in the accounting department, Lehigh University/Member, Griffin/Stevens & Lee Tax and Consulting Network; Jay Wagner, co-chair, estate and trusts department, Stevens & Lee and Matt Jozwiak, senior vice president, Griffin Financials Group presented a lively discussion.

The NJBankers Economic Leadership Forum on Jan. 19 at The Palace at Somerset Park, drew nearly 600 attendees and was a huge success, boasting an impressive lineup of guest speakers and panelists. The forum is an opportunity to hear from key thinkers on the issues that shape our great Garden State and the nation.

NJBANKERS CHARITABLE FOUNDATION SUPPORTS VETERANS PROGRAMS After the Economic Leadership Forum concluded, the trustees of the NJBankers Charitable Foundation gathered together to contribute $15,000 to the Rider University Veterans and Military Affairs Office and $10,000 to Rutgers University Office of Veteran and Military Programs and Services to support their veteran’s educational initiatives.

Spring 2018 New Jersey Banker

23

Feature

New Jersey’s Department of Banking and Insurance Adopts New Mortgage Processing Requirements

By Michael R. O’ Donnell, Michael P. Crowley and Clarissa Gomez

N

ew Jersey’s Department of Banking and Insurance recently adopted two changes regarding residential mortgages that will affect all residential lenders. First, it published a new mandatory disclosure form on its website that lenders are required to use in connection with residential mortgage applications as of Jan. 1, 2018. Second, the department amended its regulations regarding the permissible fees that lenders can charge borrowers for appraisals in connection with residential loan applications. Lenders should be aware of both changes in order to ensure compliance with the same.

MANDATORY DISCLOSURE FORM Before accepting loan fees from loan applicants, all lenders and brokers doing Michael R. O’ Donnell business in New Jersey are required to, among other things, give loan applicants a written disclosure setting forth certain information. See N.J.A.C. 3:1-16.3(a). Prior to 2018, lenders and brokers were free to use their own form to make the required disclosures, so long as the disclosures were made.1 However, the department recently published a new mandatory disclosure form that lenders are required to use in connection with residential mortgage applications as of Jan. 1, 2018.2 A copy of the new disclosure form is posted on the department’s website at http://www.nj.gov/dobi/ division_banking/ocf/index.htm.3 Lenders were not provided with any prior notice of this disclosure and, as such, confusion has ensued.

While the department has indicated that its new form is a vehicle to ensure compliance with residential mortgage loan application disclosures and uses terminology more in harmony with the TRID regulations, there appear to be inconsistencies between the new form and what is actually required by New Jersey regulations. For that matter, the new form seems to create some new regulatory requirements beyond those set forth in the regulations.

First, the new form provides that the loan applicant “must be given a NJ Application Disclosure form when you receive your Loan Estimate.” (Emphasis in original). Pursuant to N.J.A.C. 3:1-16.3, however, a lender or broker is only required to give the disclosure before accepting “any application fee in whole or in part, any credit report fee, appraisal fee or any fee charges as reimbursement for third party fees[.]” N.J.A.C. 3:1-16.3(a). The new form, therefore,

24 New Jersey Banker

creates an ambiguity regarding when the lender or broker must give a loan applicant the disclosure form. However, lenders should err on the side of caution and provide the form as early in the mortgage lending process as possible.

Second, the new form contains a list of “permissible fees” that a lender or broker may charge the loan applicant, including an application fee, origination fee, lock-in fee, commitment fee, and discount points. Brokers may only charge an application fee and broker fee. However, the form does not specify that this list is nonexhaustive, and there are additional fees that are permitted under the regulations but not specified on the form, such as a credit report fee, appraisal fee, warehouse fee and other third party fees. See N.J.A.C. 3:1-16.2. Therefore, if a lender charges a loan applicant an appraisal fee, for example, a loan applicant may question whether this fee is permitted because such a fee is not specified on the form.

However, there is no doubt the charges listed above are permitted.

Nonetheless, the form will add to consumer confusion as to what can be charged. It would be prudent for lenders to create and use an addendum to Section 4 of the new form in order to set forth these additional permissible fees.

Third, the form requires every lender to respond to the following: “A ‘Correspondent Mortgage Lender’ may hold a loan for only 90 days before selling it to a third party. Your lender is a ‘Correspondent’: Yes: ______; No: _______.” However, the regulations only require that correspondent mortgage lenders include such a statement and do not require that other lenders do so. See N.J.A.C. 3:1-16.3(a)(6). Thus, the new disclosure form effectively creates a new requirement for all lenders to disclose whether they are correspondent mortgage lenders, although this is not required by the regulations.

Fourth, the regulations require lenders and brokers to disclose whether all or any part of the permissible fees are refundable, as well as the terms and conditions for the refund, which “may be disclosed by making reference to these rules with proper citation.”

See N.J.A.C. 3:1-16.3(a)(3). The new form, however, provides only that application fees, lock-in and commitment fees are refundable in certain circumstances. The form further provides that “[f]ees paid for Credit Reports and Appraisals are generally non-refundable.”

(Emphases in original). However, the regulations expressly provide that the lender may charge up-front fees for credit reports and appraisals based on a reasonable estimate “provided that any amount in excess . . . is refunded to the borrower at or prior to closing.”

Spring 2018

See N.J.A.C. 3:1-16.2. Accordingly, lenders may want to advise borrowers that, when the actual cost is less than the estimate, the excess amount will be refunded.

In sum, while the department has commented that its new mandatory disclosure form is designed to ensure that lenders and brokers comply with the disclosure requirements under the regulations, the form appears to create new regulatory requirements, contains several inconsistencies when compared with the regulations, and arguably could confuse consumers.

Nonetheless, lenders must be aware that the department now considers the form mandatory and comply with the same.

APPRAISAL FEES On Dec. 18, 2017, the Department also adopted changes to a longstanding rule governing fees incident to the origination, processing and closing of first mortgage loans, N.J.A.C. 3:1-16.2 (the Regulation) which specifies the fees lenders can charge residential borrowers.

Under the prior version of the regulation, the permissible appraisal fee differed based on who performed the appraisal: If the appraisal is performed and delivered by a third-party appraiser, the fee shall not exceed the amount paid, or to be paid, directly to the party performing and delivering the appraisal. If the appraisal is performed and delivered in-house, the fee shall approximate the usual, customary and reasonable fee for comparable appraisals by third party appraisers based on a survey of such fees charged by lenders to be conducted annually by the department and published in the New Jersey Register. If the appraisal is performed by a third-party appraiser and delivered by an appraisal management company, the fee charged by the lender shall not exceed the amount charged by the appraisal management company and shall approximate the usual, customary and reasonable fee for comparable appraisals by third party appraisers based on a survey of such fees charged by lenders to be conducted annually by the Department and published in the New Jersey Register.

Under the amended regulation, the permissible appraisal fee is “the direct cost of the fee charged by a duly credentialed real estate appraiser for an appraisal in connection with a mortgage loan application.” Id. The plain language of this amendment suggests that any fees charged by an appraisal management company (AMC) for its services above and beyond the fees charged by the appraiser itself cannot be charged to the borrower. Indeed, when the Department proposed this amendment, at least one commenter suggested that the Department should clarify the regulation and “explicitly codify permission for lenders to pass through reasonable AMC fees to New Jersey borrowers.” See 49 N.J.R. 3817(a). Nonetheless, the Department declined to do so, stating: The Department declines to make the change suggested by the commenter. The Department has issued a letter dated Sept.

23, 2016, pursuant to N.J.A.C. 3:1-16.2(a)7xv authorizing an AMC fee pass through. Others in the industry may rely on this third-party fee approval letter, and it will be made available by the Department upon request. Therefore, the Department sees

no delay to lenders seeking AMC fee approval. The Department also anticipates posting this Sept. 23, 2016, letter online in the near future.

Id. The referenced letter has not yet been posted online, but is available from Department upon request and confirms that “this letter constitutes a generic approval of AMC fees as a permissible type of third party fee, pursuant to N.J.A.C. 3:1-16.2(a)7xv[.]”

Accordingly, although not expressly stated in the amended regulation, lenders may continue to pass through reasonable AMC fees to borrowers.

Finally, the amended Regulation makes two more changes regarding appraisal fees. First, it states that an appraisal fee may be charged by a lender or broker, but not by both in connection with the same application. Second, it allows the cost for a subsequent appraisal to be charged to a borrower for the same property and same application “for good cause shown.” “Good cause” may include: (i) a changed circumstance that materially affects the property value; (ii) a delay from the time a prior appraisal was performed, provided no material delay was caused by the lender and (iii) compliance with federal regulations.

■ Michael R. O’Donnell is the co-managing partner of Riker Danzig Scherer Hyland & Perretti LLP. He provides a wide range of commercial litigation services to clients, particularly financial institutions, title insurance companies and reinsurers. His work includes real estate and title disputes and related legal malpractice claims, lender liability and the work-out of problem loans, commercial lending, sophisticated judgment collections, fraud and fraudulent transfer claims, title disputes, reinsurance collections, oppressed shareholder claims, RICO claims and D&O and fidelity bond issues. O’Donnell has defended title underwriters and agents and financial institutions in class actions ranging from claims of overcharges on settlement services to violations of the Expedited Funds Availability Act. He is the past chair of the District XB Ethics Committee of the Supreme Court of New Jersey, and a member of the Association of the Federal Bar of New Jersey.

FOOTNOTES 1. A disclosure has been required since 1981 as part of the adoption of the original Mortgage Bankers and Brokers Act, N.J.S.A. 17:11B-1 et seq., replaced by the Licensed Lenders Act, N.J.S.A. 17:11C-1 et seq. and then the Residential Mortgage Lending Act, N.J.S.A. 17:11C-51 et seq.

2. The new form is based on a previous form originally produced by the Mortgage Bankers Association of New Jersey to implement provisions of the Department’s Mortgage Processing Rules and to comply with the Real Estate Settlement Procedures Act (RESPA) changes that took effect in 2010. The new form uses terminology that is consistent with the federal Loan Estimate and Closing Disclosure forms required under the TILA-RESPA Integrated Disclosure (TRID). The Consumer Financial Protection Bureau (CFPB) published an updated guide to the TRID disclosure forms on Dec. 6, 2017 to incorporate amendments and clarifications set forth in the CFPB’s final rule issued on July 7, 2017. See https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_kbyo_guide-to-loan-estimate-and-closing-disclosure-forms_v2.0.pdf and https://www.consumerfinance.gov/policy-compliance/ rulemaking/final-rules/2013-integrated-mortgage-disclosure-rule-under-real-estate-settlement-procedures-act-regulation-x-and-truth-lending-act-regulation-z/ 3. The Department directs that “Beginning on Jan. 1, 2018, the ‘NJ Application Disclosure Form’ must be used for such disclosures, preferably in a two-sided single sheet format. A copy of the completed form must be provided to the applicant(s) and maintained in the loan file.”

Spring 2018 New Jersey Banker

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Feature

Cybersecurity Wellness Is Necessary to Rise to the Challenge of Digital Threats

By Jerry Thompson

C

ybersecurity will always be a top priority for banks, especially in this digitally evolving world where cyber-criminals are after high-value data. Unlike other companies which may only hold a small fraction of a person’s information, banks require substantial amounts of personal information to open accounts.

In the wrong hands, this information can be used to duplicate or fraudulently use an individual’s identity, making it incredibly important for banks to have the proper cybersecurity practices in place to protect their information.

Cybersecurity refers to the methods used to protect and guard an organization’s information digitally stored on local servers or cloud networks. As a modern banker, you hold a significant amount of responsibility Jerry Thompson in securing your networks to protect all proprietary banking data, including customer and employee files, making it integral for your bank to commit to first-rate cybersecurity practices.

ADAPTING TO CURRENT CHALLENGES In September 2017, the nation was stunned by news of a major data breach at a large credit reporting firm. While the breach was frightening for many of the 143 million people1 whose information was potentially exposed, it also served as a wake-up call for businesses and financial organizations to double, and triple check their cybersecurity measures.

As an organization that stores customer information, it should come as little surprise that cybersecurity is critical. Cybersecurity and fraud prevention are closely entwined in the financial industry.

In 2016, banks were responsible for stopping nearly $17 billion in fraudulent transactions.2 While this indicates that banks’ efforts to protect customers from fraud are helping, balance that news with the fact that fraud attempts have doubled in the past two years.

Focusing on cybersecurity and fraud prevention isn’t just about protecting the customers and data you already have. Customers are aware of the need for fraud protection, and are drawn to financial organizations that emphasize their protection.

While many financial services focus on fraud prevention and maintaining compliance with federal and local regulations, these protections may not be enough to effectively operate in the digitally evolved world.

EXPANDING SECURITY UNDERSTANDING Compliance with regulations is critical and can play a key role in

26 New Jersey Banker

starting the journey towards cybersecurity, but it shouldn’t stop there.

Regulations are in place to address specific security concerns and set a baseline.

This can leave cybersecurity gaps specific to your bank that can be exploited by cybercriminals. Electronic data and transactions construct the core of the banking industry, making it vital for organizations to react to match the current threat level. Banks striving to go beyond the basic security guidelines laid out in federal and local regulations are stand outs in the financial industry, but they should be the norm.

An organization that waits for regulations to force them to increase their digital security could find themselves behind the cybercrime trends. Being proactive and prepared to face a cyberattack or breach can start by changing company mindset about security.

ENVIRONMENT OF PROTECTION Building a good cybersecurity program can be difficult if your organization is unable to shift the mindset that cybersecurity is a one-position job. Chief information security officers (CISO) retain a lot of the responsibility of cybersecurity details and plans, but not everything should rest on one person, or one team’s shoulders.

Spring 2018

Based on research for Willis Tower Watson, nearly 90 percent of all cyberattacks were the result of some type of human error or behavior3. While companies can work hard to ensure that their security programs are up to date and their firewalls are running at full capacity, the factor of human error played a part in multiple data breaches last year.

While employees can make mistakes, it’s important to create a structure of security that can compensate for some of the inevitable fumbles. Educating employees about phishing attempts, secure connections and password security can help mitigate some problems that may occur.

Successful cybersecurity is an organizational effort, with the CISO guiding all employees on how they can participate and increase their security practices through daily habits. These reforms can be as simple as adding two-factor authentication on external access points to servers, to restricting access to sensitive information.

Adjusting daily operations could be challenging at first for many employees, but new practices can help foster a more secure environment to help eliminate some common mistakes.

CREATING A CYBER-SECURE CULTURE Financial organizations are facing a new threat environment with cybercriminals growing by the number every day. Even with the best technology in place to defend from a direct attack, other vulnerabilities could slip through the cracks. That’s why it’s imperative to construct a culture of cybersecurity that can be seen throughout the company. Here are a few guiding principles to consider: • Education – Your employees can only help with overall security efforts if they know what to look for. Educate employees about what potential phishing attempts or malware looks like so they can steer clear of it or report it to the appropriate person.

• Awareness – Stay alert of current cyber trends, whether it’s on the security side or hacking side. Increasing your knowledge about what other companies or industries are facing when it comes to cyber-attacks can help lead the discussion about what security measures your bank should implement.

• Review – Do a routine review of cybersecurity practices employees should be following. This can help determine which security practices really stick in the mind of employees and which ones need to be worked on more frequently. Be sure to evaluate the practices as you go, to potentially weed out superfluous ones.

• Prepare – The best cybersecurity practices always include a plan for the worstcase scenario. No system is foolproof; your organization needs to lay out a plan to react quickly to a breach if it does happen to get back on the path towards recovery as quickly as possible.

No matter how secure your bank is or how smart the individuals in your IT department are, there will always be an enterprising criminal who is determined to find a hole in your security. Be prepared, heighten your cybersecurity awareness, and never stop looking for new ways to increase data protection. And, if a breach or cyber-attack happens to your

organization, know how to react and mitigate the damage after it occurs.

■ Jerry Thompson is the senior vice president and chief revenue officer at Intersections Inc.® the provider of Identity Guard®. Under his leadership, Identity Guard has expanded its business development efforts into the employee benefits business, become an advocate and thought-leader for identity theft protection, and concentrated on providing solutions for business partners through a customer-experience focus. He is committed to working with organizations to provide quality services including data breach programs that help organizations prepare for a data breach to protect their customers and employees. For more information about Identity Guard, contact Richard Siderko, BCG president/CEO, at (908) 272-8500.

FOOTNOTES 1.

2.

3.

O’ Brien, Sarah Ashley. “Giant Equifax data breach: 143 million people could be affected” CNN, Sept 2017.

“ABA Report: Banks Stopped Nearly $17 Billion in Fraud Attempts in 2016” ABA Banking Journal, Jan 2018.

Kelly, Ross. “Almost 90% of Cyber Attacks are Caused

by Human Error or Behavior” Chief Executive, Mar. 2017

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

Salvatore Zerilli, CPA, CAMS

Managing Director | szerilli@mercadien.com

Princeton, NJ 609.689.9700 | Philadelphia, PA 215.854.4059 Mercadien.com

Spring 2018 New Jersey Banker

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Feature

Population of Agency Bonds Is Evolving

By Jim Reber

N

ot so long ago, a wildly popular variety of government agency bonds was struggling to get to market fast enough to meet investor demand. Chances are your community bank owned some, or a lot, of these bonds, known as “step-ups.” Lately, the ever-changing dynamics of supply and demand have made the build-out more difficult and the attractiveness less so. Since we’re in the community banking business, and most everything we touch is somehow cyclical in nature, it bears examining why stepups are at least temporarily on hiatus and what could spark their triumphant return.

But before we do, let us revisit the basic structure. These step-ups are issued by the usual suspects: Fannie Jim Reber Mae, Freddie Mac and the Federal Home Loan Bank. They have good liquidity, are pledgeable and are 20 per risk weighted, so they meet all those safety and soundness criteria. Their maturities can vary from three years to 15. Their “lockouts,” which are the periods from issue until the first call date, can be as short as three months and as long as three years. The one thing they have in common: a stated interest rate, or coupon, that will rise in the future if the bond isn’t called by the issuer.

COMPARISON SHOPPING Beyond the promise of a higher rate in the future (if the bond still exists), step-ups can have very different structures. For one, the steps can be one-time-only (which is comparatively rare), or they can be multi-steps. For another, the height of the steps can be miniscule (as small as 12.5 basis points, or .125 percent, annually) or as large as two percent annually. For still another, most step-ups can be called at any interest payment date, but a few have one only call date. Your broker should show you all the possible outcomes during the pre-purchase phase.

In the end, the reason step-ups have appeal to community banks is that they provide protection against rising rates.

Portfolio managers realize that they are sacrificing yield today for some potential upside later. The trick is to buy enough yield in the future to make up for the lost revenue today, which involves guesswork, as the following illustrates.

In March 2017, Fannie Mae issued a fixed rate bond that matured 3/29/2021 with a coupon of 2.125 percent. It also issued a step-up that matured 3/29/2022 with a beginning coupon of 1.75 percent. Both bonds were callable in six months, which meant September 2017. In fact, both were called, so the first investor’s holding period yield was 37.5 basis points higher for the same six months. The breakeven date was March 2020, which now will never happen.

28 New Jersey Banker

MARKET HEADWINDS With that as a background, let’s examine the difficulty in launching step-ups in today’s market. As short rates rise relative to longer rates, the underwriters struggle to rob enough coupon from the front end of the cash flows to make the back coupons attractive to risk-averse investors. Remember that portfolio managers are comparing fixed rate callables with step-ups, as we saw in our example. In the two years between January 2016 and January 2018, the yield curve between one and 10 years flattened 100 basis points.

To demonstrate, we can refer back to our Fannie Mae step-up from 2017. That bond, which you remember was called in September 2017, would have had a terminal coupon of 4.00 percent had it lasted five years. Today, in a much higher short-term rate environment, a similar step-up would begin with a coupon of about 2.00 percent but would have a terminal coupon of only 3.00 percent. Plenty of portfolio managers are deciding that a fixed rate callable is a better option at the moment.

PROOF IN THE UNDERWRITING Now let’s look at some more numbers for evidence. Back in the steep curve days of say, 2011, nearly half of all agency issues had some type of stepped-up coupon structure. Even as late as a year ago, nearly a quarter of the new bonds had built-in yield protection. In December 2017, step-ups accounted for less than five percent of newly hatched bonds.

Community banks in general own fewer agencies than before. In the past six years, the sector’s weightings have gone from about 18 percent of the total portfolio to about 11 percent today. I would suspect that given the continued rising demand for well-structured mortgage products and highquality municipal bonds, and their attendant shrinking spreads, agency bonds can make a comeback among community banks – especially when we see the yield curve begin to steepen. The evolution of the agency bond market will continue to respond to investor demand, and that will include step-ups.

CUTTING EDGE BOND ACCOUNTING

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To learn more, contact your Vining Sparks sales rep or visit viningsparks.com.

■ Jim Reber is president and CEO of ICBA Securities, an NJBankers endorsed service provider, and can be reached at (800) 422-6442 or jreber@icbasecurities.com.

Spring 2018

Feature

Banks Are Competing on Convenience

By Trevor Dryer

W

hen it comes to financial services, the main benefit most fintech newcomers have over traditional banks is convenience. While there have always been people willing to pay a higher price for more convenience, many are shocked to see how much some businesses are paying for a quick loan. It’s not a stretch to say some borrowers, with decent credit, are paying 15 percentage points more, to avoid the hassle and paperwork of a traditional loan. That’s money that could have been used to expand business further, hire people, buy inventory, and contribute more to the overall economy. This has become increasingly more common since the recession. Today, 22 percent of small business loan applications are going to Trevor Dryer “alternative lenders,” a term that barely existed a decade ago.

Mainstream lenders have taken note and are ready to make traditional banking less cumbersome, but that’s easier said than done for some. Large financial institutions have the capital to invest more heavily in technology to compete, but it can be a struggle for small to medium sized banks. The speed at which technology is changing is not something these community banks aren’t used to or equipped for. In these situations, finding a fintech company who wants to partner, rather than compete, is critical.

Financial institutions that partner with fintech companies, like Mirador, are able to create a modern banking relationship in a more efficient way. The fintech company focuses on making a better process by removing the barriers created by forms and paperwork so the bank can concentrate on what they do best – helping people. It’s true that many actions performed at a branch are being moved online, but it is incorrect to assume the desire for a human relationship when banking is diminishing. Most would agree when it comes to money, a very important and personal thing, even millennials want to communicate with a real person.

It’s just how and when that is changing.

The recession created an environment ripe for alternative lenders and online payment sites to grow, but their success was a wakeup call for traditional financial institutions. Banks are changing their strategy to cater to the next generation. While some like to talk about how banks are on a path to extinction, that’s just not that case. In fact, a study1 conducted by CGC Catalyst found that almost 90 percent of people who are 18-35 years old have a financial services relationship with a bank or credit union and less than four percent use an online bank only.

Banks that provide the convenience and human connection people desire will likely thrive. This is true for smaller banks, which serve an important role in the community, as well. They too can incorporate the technology necessary to serve the next

generation, but they may need to partner to compete. While disrupters of traditional financial channels are exciting and fast, banks are familiar which might just be more important when someone is deciding where to trust their money, especially if banks can incorporate speed as well.

■ Trevor Dryer is co-founder and CEO of Mirador, an NJBankers endorsed service provider. Dryer has dedicated his career to creating technologies that create opportunities for both financial institutions and their customers. Prior to Mirador, he launched new financial products as entrepreneur in residence at a mobile payments company. At Intuit, Dryer ran mobile payments and point-of-sale products and created products for Intuit’s banking division. He has served as a regulatory lawyer for technology companies as well as a consultant at Bain & Company. Dryer holds a bachelor’s degree from Harvard University and a law degree from Stanford Law School. He can be reached at (503) 451-0518 or tdryer@ miradortech.com.

FOOTNOTES 1. https://www.ccg-catalyst.com/ccg-catalyst-research-study-millennials/

Spring 2018 New Jersey Banker

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Feature

A World of Innovation

By Salvatore Zerilli

S

top and think about this: We keep hearing about innovation in just about every facet of our life. Everywhere you look or turn, the word “innovation” seems to be there. It’s an agenda topic in most board rooms and is causing some level of anxiety because people simply do not know what it really means. Over time, the definition will evolve because innovation will impact our lives more and more. Many will view innovation as a threat, but it is in fact an opportunity to thrive.

Wikipedia states, “Innovation is also viewed as the application of better solutions that meet new requirements, unarticulated needs or existing market needs.” Innovation can take the form of products, services, technologies or processes. Synonyms are change, modernization, creativity.

Salvatore Zerilli, Innovation is greatly impacting the world as we know it today at an alarming pace. The only constant is change. Several years ago, Uber arrived, disrupting the transportation industry. They are now the largest taxi company and they do not own a fleet of vehicles. Then, more recently, Amazon acquired Whole Foods disrupting the grocery industry and questioning the delivery models of traditional carriers like Fed Ex and UPS. Robo-advisors are utilized in wealth management, and we can just speak to Alexa at home to have a product to our door that same or the next day. In banking, we have had our share of disruption from fintech companies to the rise of crypto-currencies.

No industry is going to be untouched.

And don’t overlook blockchain, which is being described as the most disruptive of any modern technology and is being compared to the invention of the internet in relation to the transfer of data. Likewise, banks no longer own the end-to-end payment chain and the number of consumers utilizing non-bank payment providers is growing in leaps and bounds.

How is a traditional brick and mortar bank to remain competitive and relevant in this era? Innovation is the answer. Innovation is making new use of the old. It’s not invention, although it could involve invention.

The innovation gap within the financial sector has been largely filled by the growth of fintech start-ups. The main causes of sluggish innovation within the banking industry include, (1) numerous industry regulations, (2) perception of risk or uncertainty, (3) lack of sense of urgency and (4) legacy systems that cannot support modern technologies.

The banking industry cannot be solely focused on the here and now.

They must think of and plan for the consumer of the future, who already demands an immediate need for interaction and delivery of products and services from anywhere at any time. Banks need to find ways to better leverage technology to enhance customer experiences. Banks must become customer-centric and intuitive for both the consumer and the small business, with easier, more convenient and faster ways to bank.

Big data and analytics will allow your bank to understand how your customers behave, and what products and services to launch to keep

30 New Jersey Banker

them at your bank. Banks may take for granted that once a solution is introduced to their customer base, all is well. However, you will need a feedback loop with customers to make sure that your bank is keeping pace with expectations and that the innovative products, services and payment channels you are offering are meeting customers’ needs.

Banks will need to expand beyond traditional products, services and channels as open Application Programming Interface, the Internet of Things and more fintech/banking partnerships take root. As a prime example, TD Bank recently acquired a technology artificial intelligence company to explore innovation further.

Innovation in the banking industry requires a bank to examine all operations and infrastructure. No department should be overlooked. Some examples are as follows: • Human Resources departments need to change the focus of their recruiting to look beyond the traditional hires and to those that have a technology and data analytics background. Without these skill sets, a bank cannot properly manage the risks of modern technologies, including artificial intelligence. Also, how the bank will train its current staff on the modern technologies and promote innovation from within are key success factors.

• Information Technology departments need to find ways to work with their legacy banking systems and integrate the modern technologies into their product and service offerings. They need to assess the risks related to the modern technologies to ensure they are properly mitigated. Everyone has heard of botched system roll-outs that resulted in outages which brought an onslaught of complaints on social media platforms. Every mistake is amplified in this digital era and no mistake is truly forgotten. A digital imprint remains forever.

• Lending departments need to continue their efforts to eliminate paperbased credit underwriting, and to introduce automated score card models to speed approval and funding, to stay competitive with the likes of SoFi, which is marketed as a modern finance company. SoFi’s dramatic rise proves the need in the market for quick decisioning and superior service.

• Deposit and Operations departments should look at ways to create leaner front-line offices and branches and increase customer reach through digital means, with instant access and around-the-clock customer service. Payment technologies need to be assessed and deployed to speed the transfer of money. This may include NACHA same-day ACH, peer-to-peer technology whereby your bank partners with another in-network bank (e.g. Zelle) or participation in third-party platforms (e.g. Venmo). Consumers will be more accepting of these types of payment methods if they are offered directly by their bank, a partner they can trust.

• Bank Secrecy Act and Fraud departments need to assess artificial intelligence platforms to assist in the customer transaction-alerting process to more readily filter out the noise of false positive alerts.

• Regulatory Compliance departments need to align the bank’s business strategy with their compliance program and continually evaluate pro-

Spring 2018

cess innovation which, in turn, will increase your efficiencies for cost savings and turnaround time.

• Internal Audit departments must be nimble to adapt to innovation changes throughout the bank. They need to ensure that their audit universe and audit programs reflect the changing landscape, while remaining cost effective. Process innovation is key to this success and will include continuous audit techniques. Auditors need to continually think outside the box to ensure that risks associated with innovative products, services, and processes are properly mitigated. Consider the audits you undergo now for mobile banking and cyber security. These audits didn’t exist 10 years ago, or at least not in the way they are conducted now. Internal auditors who understand the evolving risk landscape both from a business and technology perspective will be better suited to challenge the business stakeholders. Model risk governance will continue to grow in importance; therefore, having the right staff with technological and analytical skill sets is a must.

We live in exciting times that are filled with great opportunities to rise to the top of our industry and really differentiate ourselves.

This can only be accomplished by embracing innovation and not remaining complacent while the world passes us by. Innovation is a journey.

Savvy leaders take seriously the work of making their financial institution ready for that journey.

Fostering your institution’s innovation begins with a mindset, vision and culture, meaning, understanding where you are today and your desired future state, and getting buy-in from leadership making change. So, the questions remain. Where is your institution today and where do you envision it to be in the future?

How do you plan on getting there? I suggest that you embrace and leverage innovation; the opportunities for your institution’s competitive advantage will follow. Good luck on your journey. ■ Salvatore Zerilli, CPA, CAMS, is a managing director of Mercadien and chair of its Financial Institutions Services Group, which helps banks manage risk, maintain compliance and increase profitability with forward-thinking, best-practice audit, consulting and accounting solutions based on extensive experience in the banking and regulatory compliance sectors. Zerilli can be reached at szerilli@mercadien.com or (609) 689-9700.

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Spring 2018 New Jersey Banker

31

Shots

PEAPACK-GLADSTONE BANK was presented with America’s Grow-a-Row’s “Good Investment” award for consistent support throughout the years in planting and harvesting at every opportunity and bringing extra awareness of AGAR’s efforts to feed those suffering from food insecurity. By delivering healthy produce to New Jersey food banks and countless financially deprived individuals and offering healthy alternatives to their daily staples, America’s Grow-a-Row has made an impact in alleviating food insecurity within the Garden State while protecting low-income individuals from chronic diseases. Chip Paillex, AGAR president and founder, and Julie Rusin, AGAR director of programming, (left) present America’s Grow-a-Row’s “Good Investment” recognition award to Rosanne Schwab, Peapack-Gladstone Bank public relations and corporate communications manager (right).

Chris Martin, chairman, president and CEO, Provident Financial Services Inc., the holding company for PROVIDENT BANK, was joined

by Provident board members and senior executives to ring the closing bell at the New York Stock Exchange. Provident Financial Services Inc., recently celebrated its 15th anniversary as a public company listed on the NYSE. Pictured left to right, Len Gleason, investor relations officer; Matthew Harding, director; Robert Adamo, director; Frank L. Fekete, director; Terence Gallagher, director; Chris Martin; Jim Byrne, Head of U.S. listings, NYSE; John Pugliese, director; Valerie Murray, president, Beacon Trust Co.; John Kuntz, general counsel; Tom Lyons, CFO.

32 New Jersey Banker

ROSELLE SAVINGS BANK accepted the “Business of the Year” award from the Roselle Chamber of Commerce at the 4th Annual Roselle Chamber of Commerce Dinner and Community Service Awards at the Central Park restaurant in Roselle. The ceremony acknowledged the contributions of businesses and individuals that have demonstrated strong contributions to the local community. Roselle Chamber of Commerce recognized the following categories at the annual awards ceremony: Humanitarian Award of the Year, Police Officer of the Year, Fire Fighter of the Year, Educator of the Year, Principal of the Year, Business of the Year, Home-Based Business of the Year and New Business of the Year. All recipients were honored among family, friends and colleagues for standing out in the community and going above and beyond in their respective positions. Pictured left to right, Wilfrid Peralte, Roselle Chamber of Commerce president; Detlef Felschow, president and CEO, Roselle Savings Bank; Sonya Ashley, Roselle Chamber of Commerce vice president

Jenifer Morack, director of Garden State Go Red For Women, presented UNITY BANK with a plaque to honor the bank’s support of Go Red For Women. Unity Bank and its employees donated $2,017 in support of the American Heart Association’s Go Red for Women Wear Red Day program. Morack is pictured (center) with Unity Bank President and CEO James A. Hughes and the bank’s Director of Human Resources Bridget Walsh. Go Red For Women encourages awareness of the issue of women and heart disease, and also action to save more lives.

Spring 2018

every child

deserves a home base from which to explore the world.

Everyone deserves the opportunity to build a better life.

Donate or volunteer at habitat.org.

Notes bank since June 2007 and the audit committee chair since 2009. Active in the industry for more than 40 years with a vast knowledge of banking and oversight governance, she previously served as a former chief bank examiner for the New Jersey Department of Banking and Insurance.

Fred Nitting

Leonard Carlucci

Janine Akey

David Santom

BERKSHIRE BANK Berkshire Bank promoted Lori Gazzillo to senior vice president and director of the Berkshire Bank Foundation. In her new position, Gazzillo is responsible for the development, planning and implementation of strategies to support the Berkshire Bank Foundation improving the quality of life, cultivating partnerships and fostering community relationships across the bank’s six-state footprint.

COLUMBIA BANK Thomas J. Kemly, president and CEO of Columbia Bank, announced that Fred Nitting has been appointed senior vice president and chief accounting officer. In his new position, Nitting will manage Columbia’s accounting department and will assume the new role of investor relations manager once the bank completes the Initial Public Offering (IPO) later this year.

LAKELAND BANK Thomas J. Shara, president and CEO of Lakeland Bank, announced the following appointments. Leonard Carlucci has been appointed to senior vice president and team leader in Waldwick and is returning to Lakeland after a brief break in service. Patrick M. Trask, CPA, has been appointed senior vice president and team leader of the New York commercial and middle market lending team based in Highland Mills, New York.

METUCHEN SAVINGS BANK Metuchen Savings Bank Board member Janine Akey was elected as vice chair of the board at the annual meeting. Akey has been a director of the

NORTHFIELD BANK Northfield Bank promoted Eileen Bergin and Irene Greenman to senior vice president. Bergin holds the titles of corporate secretary, in-house counsel and CRA officer and also is responsible for corporate governance leadership.

Bergin joined Northfield Bank in 2009 as vice president of corporate governance after a 24-year career in the legal and financial industries.

Greenman joined Northfield in 2010 as vice president of loan servicing after a 16-year career in banking operations. Greenman oversees the daily operations of the bank’s loan servicing department and provides leadership in mergers, acquisitions and system conversions.

ORITANI BANK Washington-based Oritani Bank has named Kurt Breitenstein its new chief lending officer, following the retirement of current CLO Thomas Guinan.

Breitenstein began at Oritani in 2016, but has over 25 years of experience in commercial lending, and held senior commercial loan officer positions at Sussex Bank, Valley National Bank and Greater Community Bank, among others in the area.

PEAPACK-GLADSTONE BANK Peapack-Gladstone Bank introduced a new member of the team of private bankers at Peapack Capital, a subsidiary of the bank, which focuses on equipment finance and leasing. Based out of Marlborough, Massachusetts, David Santom, senior vice president and head of asset management at Peapack Capital, is now responsible for all aspects of the asset management function at Peapack Capital, including equipment valuations and reviews, portfolio analyses, end of lease negotiations, equipment inspections and dispositions.

NJ Bankers Shot contined.

WELLS FARGO & COMPANY (NYSE: WFC) announced that the Union County Economic Development Corporation (UCEDC) received a $250,000 grant in lending capital to aid its statewide funding and training programs for women and diverse small business owners. It is one of 12 organizations nationwide selected in Round 4 of the Wells Fargo Works for Small Business: Diverse Community Capital (DCC) program. Pictured are Tomas Porturas, vice president of Wells Fargo community relations; Tashana Bisumber, branch manager at Wells Fargo Cranford branch location; Maureen Tinen, president of UCEDC; and Adam Farrah, vice president of UCEDC.

34 New Jersey Banker

BOILING SPRINGS SAVINGS BANK has donated $7,500 to the Rutherford Community Pantry. The contribution further supports the bank’s longstanding mission to enhance the quality of life in the communities it serves. Pictured left to right: Franklin Ochoa, Rutherford-Union Avenue branch manager for Boiling Springs Savings Bank; Jane Tarantino, Rutherford Community Pantry representative; and Carmen Addeo, Rutherford-Orient Way branch manager for Boiling Springs Savings Bank.

Spring 2018

Sandler O’Neill + Partners, L.P.

The Leader in Bank & Thrift M&A for 2017 + 50 Transactions + $15.5 Billion in Announced Deal Value + $125.3 Million Median Deal Value (1)

(1)

(1)

Sandler O’Neill was the top M&A advisor for banks & thrifts in 2017. For the third consecutive year, we advised on more M&A deals with a greater aggregate deal value than any other firm focused on the financial services industry. Our firm advised on 50 transactions with a total deal value of $15.5 billion. From New Hampshire to California, we worked on deals involving community and regional financial institutions in 22 states and every geographical region in the United States. Along with our diverse footprint, we also worked on transactions with a wide range of deal values. In addition to working on some of the largest deals in the industry, our median transaction value for the year was $125.3 million, which included 13 transactions under $50 million in value.(1)

STRONG | INDEPENDENT | FOCUSED

and

has merged with

has merged with

has merged with

$2,200,000,000 Sandler O’Neill advised Astoria Financial Corporation 3/7/2017

$2,200,000,000 Sandler O’Neill advised Capital Bank Financial Corp.

5/4/2017

$1,900,000,000 Sandler O’Neill advised BNC Bancorp 1/22/2017

$1,000,000,000 Sandler O’Neill advised First Financial Bancorp

has merged with

has acquired

has merged with

has agreed to acquire

$816,000,000 Sandler O’Neill advised USAmeriBancorp, Inc 7/26/2017

$705,000,000 Sandler O’Neill advised PacWest Bancorp 4/6/2017

$701,200,000 Sandler O’Neill advised Xenith Bankshares, Inc. 5/22/2017

$528,000,000 Sandler O’Neill advised City National Bank of Florida 12/1/2017

has acquired

has agreed to merge with

has merged with

has agreed to merge with

$489,000,000 Sandler O’Neill provided a fairness opinion to Sandy Spring Bancorp, Inc. 5/16/2017

$487,000,000 Sandler O’Neill advised Sun Bancorp, Inc. 6/30/2017

$416,700,000 Sandler O’Neill advised HCBF Holding Company, Inc. 8/14/2017

$408,000,000 Sandler O’Neill advised Clifton Bancorp Inc. 11/1/2017

has acquired

has merged with

has acquired

has agreed to merge with

$323,700,000 Sandler O’Neill advised TowneBank 4/27/2017

$303,200,000 Sandler O’Neill advised Anchor Bancorp, Inc. 8/8/2017

$271,100,000 Sandler O’Neill advised First Merchants Corporation 2/17/2017

$228,000,000 Sandler O’Neill advised Gibraltar Private Bank & Trust Co. 10/19/2017

have agreed to merge

7/25/2017

Sandler O’Neill is the largest independent investment banking firm focused on financial services companies.

For over 29 years, our deep insight into banks and thrifts has enabled us to deliver sound, valuable advice to our clients.

To learn more, please contact John Beckelman, Principal, at 212.466.7832 or William Hickey and Brian Sterling, Principals & Co-Heads of Investment Banking, at 800.635.6855.

(1)

Source: S&P Global Market Intelligence, 1/1/2017 – 12/31/2017. Deal value as of announced date and rounded based on company press releases.

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