Banking New York 2Q 2014 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SECOND QUARTER 2014 • VOLUME 32

Making Heads or Tails of

VIRTUAL CURRENCY STILL VOLATILE, BUT GAINING TRACTION

COMMERCIAL LENDERS ARE HAPPIER THAN EVER – BUT THERE’S ALSO FEWER OF THEM AUTO LOANS TAKING OFF

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BANKING NEW YORK Volume 32 | Second Quarter 2014

Making Heads or Tails of VIRTUAL CURRENCY STILL VOLATILE, BUT GAINING TRACTION

04 FROM THE EDITOR

The Volatility Dance

20 LEGAL NEWS

06 PRESIDENT'S MESSAGE

24 COMMERCIAL

IBANYS’ Efforts Produce Major Tax Savings for New York Community Banks

10 PUBLIC AFFAIRS UPDATE IBANYS Special

AGs Have a Reluctant Whip Hand

Washington, D.C. Report

LENDING SURVEY Pay up, Recruits Down in Commercial Lending

26 BANK PROFILE Kinderhook Bank Looks

to Albany, Latham for Growth

28 RAISING THE BAR

Quality Service: You Get What You Pay for

29 THE NEXT BUBBLE Auto Loans Go from Zero to Sixty 12 MANAGING

30 SMALL CHANGE

GENERATIONAL TRANSFER

For Rural Banks, Forming Relationships With Families is Key to Account Longevity

CONTRIBUTING WRITERS THIS ISSUE Laura Alix, Linda Goodspeed, Steve Vuiker TWG STAFF Timothy Warren Jr. PRESIDENT David Lovins ACCOUNTING MANAGER Mark DiSerio CEO & PUBLISHER

SALES DIRECTOR OF BUSINESS MEDIA

George Chateauneuf GROUP SALES MANAGER

Richard Ofsthun

EDITORIAL EDITORIAL DIRECTOR

Mike Warshaw CUSTOM PUBLICATIONS EDITOR

Christina P. O’Neill EDITORIAL OPERATIONS MANAGER

Cassidy Norton Murphy CREATIVE/MARKETING DIRECTOR OF MARKETING & CREATIVE SERVICES

John Bottini DESIGN PRODUCTION MANAGER

©2014 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210 www.thewarrengroup.com

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Second Quarter 2014 | 3

LETTER FROM THE EDITOR | By Christina P. O’Neill

The Volatility Dance

he advent of bitcoin as a payment medium may finally bring us into the age of electronic currency, as long as we are willing to accept some redefinitions of the function of currency. Introducing a virtual currency in tandem with a U.S. bank payment platform that’s been around since the 1970s has brought on a huge chasm between our expectations of conventional forms of payment and the new, more volatile medium. When Mt. Gox declared bankruptcy in March, its bitcoin customers quickly found out they did not have the rights of creditors or shareholders. You wanted anonymity, and you got it – we don’t know you. People who sought to get in on the ground floor of the bitcoin revolution found out that there’s no such thing as a ground floor. Regulators are calling for systems to monitor bitcoin exchanges, maintaining that a formal structure will be critical to bitcoin’s wider success as a trading medium. Already, companies that pay their employees and independent contractors in bitcoin must file W-2s and Form 1099s, just like everybody else on the financial grid.

On May 22, Istat, Italy’s measurer of economic activity, added prostitution and black market drugs to measures of GDP in that nation, apparently in a response to new EU rules calling for more accurate measure of true economic activity. The developed world, increasingly burdened by debt and demographic shifts, is seeing the importance of including the activities of shadow markets to determine the total size and clout of a given economy. That’s why a trading medium such as bitcoin is beginning to look – well – sexy – to regulators. So we’re in a bit of a contretemps with the untapped power of a new trading medium and the vulnerabilities it imposes on those who are not agile enough to do the volatility dance. Regulators want to step in before someone breaks a leg on the dance floor and banks don’t want to become wallflowers in the new economy. ■ Christina P. O’Neill Editor, Banking New York, The Warren Group

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PRESIDENT’S MESSAGE | By John Witkowski

IBANYS’ Efforts Produce Major Tax Savings for New York Community Banks The 2014-15 state budget approved by the Legislature and signed by the governor will result in tax savings for all New York community banks, and represents a major victory for the membership of the Independent Bankers Association of New York State (IBANYS).

he budget includes proposals made by the IBANYS board of directors and government relations team to protect community banks in the face of extensive tax reform, which would have increased taxes for some community banks. IBANYS retained former KPMG tax partner Brian Flynn as a consultant to analyze the tax consequences of the proposed budget to New York community John Witkowski banks. A number of recommendations were made by IBANYS to the Legislature and the governor to prevent tax increases to banks. Key recommendations were the grandfathering of the real estate investment trust (REIT) and an increase in the net interest deduction for residential and small business loans. The budget adopted IBANYS’ proposals and made fundamental changes in the way banks and thrifts are taxed in New York state. Among these changes are the merging of the bank tax into the commercial company tax; the adoption of combined unitary reporting; and the adoption of economic nexus, which will require out-of-state banks with no physical presence in the state, but doing business here, to pay New York state taxes. It also adopts a single-factor apportionment concept based on the location of the borrower York 6 | Banking BankingNew New York

or the location of the property securing a loan, and eliminates the 3 percent tax calculated on minimum taxable income. These changes are effective for tax years beginning in 2015. Further, there is a reduction in the corporate tax rate from 7.1 percent to 6.5 percent, beginning in 2016. Most importantly for community banks and small thrifts (for purposes of the law, institutions that have combined assets of $8 billion or less), one of three deductions is available under the new law. They are the REIT deduction, which many community banks have utilized over the years; the residential and business loan deduction; and the subtraction modification for qualified residential loan portfolios. The REIT deduction. When the governor proposed his budget, this deduction was not included. In fact, language specifically disallowing the deduction was included in the original bill. Due to the efforts of IBANYS, the REIT deduction was restored. It must be used by banks or thrifts that maintained a REIT on April 1, 2014, for any year in which the REIT is still in existence. With the repeal of the minimum tax, banks and thrifts may want to revisit the amount of mortgage loans in the REIT. Residential/small business loan deduction. A 50 percent net interest income deduction (i.e., interest income less interest expense deemed incurred to continued on page 8 

IBANYS Board of Directors Officers Chairman Gregory Hartz Tompkins Trust Company, Ithaca Vice Chairman Christopher Dowd Ballston Spa National Bank, Ballston Spa Treasurer/Secretary John Buhrmaster First National Bank of Scotia, Scotia Directors Thomas Amell Pioneer Savings Bank, Troy Ronald Bentley Chemung Canal Trust Company, Elmira Brenda Copeland Steuben Trust, Hornell Randy Crapser Bank of Richmondville, Cobleskill Ronald Denniston First National Bank of Dryden, Dryden Martin Dietrich NBT Bank, N.A., Norwich Robert Fisher Tioga State Bank, Spencer E. Peter Forrestel Bank of Akron, Akron Stephen Gobel First National Bank of Groton, Groton Richard Koelbl Alden State Bank, Alden Douglas Manditch Empire National Bank, Islandia Salvatore Marranca Cattaraugus County Bank, Little Valley Paul Mello Solvay Bank, Solvay David Nasca Evans Bank, N.A., Hamburg G. William Ryan Cayuga Lake National Bank, Union Springs Glenn Sutherland Catskill Hudson Bank, Monticello Mark Tryniski Community Bank, N.A., DeWitt Kathleen Whelehan Upstate National Bank, Rochester IBANYS STAFF John J. Witkowski President & Chief Executive Officer Stephen W. Rice VP Government Relations & Communications William Y. Crowell, III Legislative Counsel Linda Gregware Director of Administration & Membership Services

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PRESIDENT’S MESSAGE | continued from page 6

carry such loan) is provided for loans made to New York borrowers or where the property securing the loan is located in the state. In order for a loan to qualify for this treatment, it must be $5 million or less. When the governor introduced the bill, the deduction was 40 percent, and the maximum amount of the loan to which the deduction would apply was $1 million. As the result of suggestions made by IBANYS, the amounts were raised to 50 percent and $5 million. Subtraction modification for qualified residential loan portfolios. This deduction has been in the state bank tax law in the past, but could only be used by institutions with a thrift charter. This change was previously recommended to the New York State Tax Department by IBANYS. If 60 percent of a thrift

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or a community bank’s assets fit within defined categories, then a deduction is available that consists of the amount by which 32 percent of the institution’s entire net income exceeds the bad debt deduction allowed for federal income tax purposes. Although this deduction was in the bill as originally presented, at IBANYS’ request, changes were made in the definitions of the asset categories, which should make it easier for more banks and thrifts to qualify for this deduction. The single-factor formula for apportioning income to New York may also provide planning opportunities. (This is intended a broad overview of the new law. Each bank’s tax advisor should be contacted for the details and specifics of how this law may impact the institution.) In short, as New York revamps its

Currency Recycle rs

tax structure, the specific proposals that IBANYS developed and advocated for will mean a muchimproved tax situation for all eligible community banks and thrifts. This is a win/win situation that will produce tax savings both to institutions that currently have REITS, and those that do not. While IBANYS was not alone in working to affect the original tax reform provisions, we began the process many months ago. The strong leadership from our officers, board of directors and CFO Peer Council was a determining factor for this positive outcome. Many IBANYS member banks devoted their time and efforts, and played an important role in this accomplishment. IBANYS’ government relations staff and legislative counsel Bill Crowell formulated and executed the action plan that contributed to today’s success. The end result – significant bottom line savings for community banks – is just one example of how IBANYS provides value to our membership, and to all of New York’s community banks. Together, IBANYS member banks have made a real difference in the economic condition, viability and future of New York’s community banks, and ultimately to the communities we serve. As our membership increases, so does the strength of our collective voice, and the value we are able to provide to all New York community banks becomes even more meaningful. Thank you for your continued participation and support. IBANYS followed up by hosting webinars to explain the new tax changes and opportunities for community banks, and presented a special session on these issues at our CFO/Senior management Conference as well. As always, we will continue to keep you informed. ■

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PUBLIC AFFAIRS UPDATE | By Stephen W. Rice

IBANYS’ Special Report from Washington, D.C. IBANYS was in Washington, D.C. in April and May, representing the interests of New York community banks in meetings with Congress and regulators during the Independent Community Bankers of America’s Annual Washington Policy Summit. New York’s delegation – and the entire summit – was led by John Buhrmaster, president of 1st National Bank of Scotia. Just the second New Yorker in history to chair ICBA, he is also an IBANYS officer, director and government relations committee member.

uhrmaster was joined by fellow IBANYS national director Robert Fisher (chairman, president and CEO of Tioga State Bank, IBANYS’ past chairman and current director and government relations member), IBANYS President and CEO John Witkowski, and a number of other community bankers from the Empire Stephen W. Rice State. IBANYS’ representatives fanned out across Capitol Hill for two days of meetings with members of the New York congressional delegation, including Sen. Charles Schumer and Sen. Kristen Gillibrand’s office. Our agenda included several federal priorities, including comprehensive regulatory and tax relief for community banks to promote economic growth. We supported ICBA’s Plan for Prosperity/“Clear” Relief Act. Its provisions in H.R. 1750 in the House (and also included in H.R. 4304, the JOBS Act), and in S.1349 in the Senate. Among the changes we urged were qualified mortgage (QM) reform, relief from escrow requirements, SOX 404(b) relief, and increasing the threshold for the Fed’s Small Bank Holding Company Policy Statement to facilitate small bank capital access. The House legislation would also increase the small servicer exemption threshold from 5,000 to 20,000 loans, eliminate an10 | Banking New York

nual privacy mailings when the bank’s policies haven’t changed, and provide exemptions from independent appraisal requirement and cost-benefit justification of new rules. Our meetings “on the hill” were well received, and potentially added more New York sponsors to the legislation. We also discussed GSE reform, to replace Fannie Mae and Freddie Mac and reform the secondary mortgage market. Community banks represent 20 percent of the mortgage market, and need to retain access to the secondary market without the complexity and costs associated with securitizing loans. We stressed reforms must not result in consolidation of the housing finance system into a few mega banks and Wall Street firms. The Senate has been considering two major proposals (JohnsoCrapo and Corker-Warner). Both have positive features, but neither provides proven solutions for community banks and our customers. Senator Schumer thoroughly discussed the ramifications on community banks, and appeared receptive to our concerns and priorities. We also discussed several other issues on the hill, including eliminating the unfair credit union and farm credit system tax subsidy and the FASB proposal involving credit loss accounting standards. Yellen: ‘Fresh Look’ at Community Bank Regulation

Federal Reserve Chair Janet Yellen addressed the ICBA Policy Summit on

Thursday, her first appearance before a financial industry group since Senate confirmation earlier this year. She said the Fed is working with the Financial Accounting Standards Board (FASB) to allow community banks to build upon current credit-risk management techniques, rather than being required to use complex modeling processes for credit losses on loans and securities. She also stated that the Fed will tailor its supervision of community banks to reduce their regulatory burden. “We are taking a fresh look at how we supervise community banks and possible ways that supervision can be smarter, more nimble and more effective. A one-size-fits-all approach to supervision is often not appropriate,” she said, adding that the Fed is “taking a disciplined approach” to regulation, weighing the costs and benefits of regulatory implementation and “asking whether it makes sense for a specific policy to apply to community banks.” ICBA President and CEO Cam Fine said Yellen “hit a grand-slam homerun” with her remarks, noting what she said “resonated really big time … She clearly understands the community banking model. She has a lot of practical knowledge about the smaller banks.” Later in the day, community bankers met with the senior leadership of the FDIC, OCC, CFPB and OCC. IBANYS thanks all our New York participants for their time and effort in helping to make the 2014 Policy Summit a major success, and we join in congratulating John Buhrmaster for his leadership, and the ICBA team for producing a record attendance and significant show of force for the community banking industry in the nation’s capitol. ■ Steve Rice coordinates government relations and communications for the Independent Bankers Association of New York State. He has worked in the New York banking industry and New York state government for more than three decades.

MANAGING GENERATIONAL TRANSFER | By Trent Fleming

For Rural Banks, Forming Relationships with Families is Key to Account Longevity

I have the pleasure of working with community banks around the country. Many are in farming areas. For those banks, a real concern is an outflow of assets and relationships when the current generation of customers die off. The Des Moines Register recently reported that 50 percent or more of those expected to inherit farm land will sell it right away.

elow is a discussion of addressing and managing what I call “generational transfer.” Proactive efforts here can pay big dividends for your bank. Generational transfer is a key issue for most rural banks. One challenge these banks have is relationship retention. If you’ve taken the first step (and some are frankly afraid to look) and found that many of the heirs to your current deposits are “somewhere else,” then you realize the challenge. Two parallel tracks are necessary. First, address the heirs who are still local. Reach out, through parents if neces12 | Banking New York

sary, to form relationships and help these heirs learn that your bank can be a valuable tool for managing the assets that will be left to them, be they a business, land, or simply deposits. Second, put together a plan to reach out to absentee heirs with essentially the same message: “We are here to help you manage your inheritance.” Your bank’s plan for resident and non-resident heirs is comprised of three main parts: relationship (a face), services and technology. Generational Retention: Relationships

The first key is the relationship

factor. If you want to keep banking relationships beyond the current generation, you must – well before a “transfer inducing” event occurs – establish solid relationships with heirs. This starts early in life – even during elementary school. Kids’ savings programs and financial education can serve to implant your brand into a young person’s life. As kids grow older, work with their parents to make sure the kids feel that the bank is a trusted friend and adviser – it is essential in staying connected to these youngsters if they leave home. Hosting events, or webinars, regarding estate planning, generational transfer and asset management will strengthen your position as that trusted adviser, and make it easy for heirs to look to your bank for money management advice and services. That’s the goal – when parents retire or pass away, you want to keep your relationships with the family money, the family business, the family farm. Building strong relationships is the key. Generational Retention: Technology

Banking has been quick to adopt many new technologies, and a lot of them are customer-facing. From the advent of automated teller machines, through voice response systems, to today’s mobile banking platform, customers are demanding, and banks (most of them, anyway) are providing a variety of technologies to make access to information and transactions simple and painless. A large part of maintaining and preserving relationships with heirs and potential heirs is ensuring that it’s easy for them to do business with you. continued on page 14 

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MANAGING GENERATIONAL TRANSFER | continued from page 12

This includes Internet banking for individuals, and Internet cash management for businesses, along with remote deposit capture for those customers who still handle checks as a primary payment method for their business dealings. The rising popularity of smartphones makes mobile banking – as an extension of your Internet banking product – a must. Packaging and promoting these services is important as a part of your overall bid to serve out-of-town (and of course local) customers. Put together a brochure (print and electronic) and perhaps a website to promote your ability to assist families in preserving and enhancing wealth across generations, include descriptions of all the ways that you can help. Remember that promoting a comprehensive package casts you in

a much better light than waiting to react to requests for services. If you are serious about surviving generational transfer, make that evident to all who do business with you. Generational Retention: Services

Some of this has already been covered under technology, but there’s more to it than that. Business-specific expertise is an important part of helping families realize that there may be more value to keeping the family farm or business than selling it. Land management, timber management, business valuation, estate planning and general business planning advice are all important, depending on the economic landscape in the communities you serve. These capabilities will set your bank apart with current and future generations. For example: the death of the farmer

in the family need not mean selling off the land, if you can aid the surviving spouse in leasing out the land for farming. Doing so can provide comfort to the family, by keeping the land, and generate needed income for years to come. There are many examples across many familyoriented businesses. Remember, packaging and promotion of services is critical as a part of your bid to serve the heirs to your current customers. Proactively presenting a solution casts you in a much better light than waiting to react to requests for services. Again, if you are serious about surviving generational transfer, make it evident to all that do business with you. ■ Trent Fleming is banking consultant with expertise in the fields of technology, operations and strategy.

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Making Heads or Tails of VIRTUAL CURRENCY STILL VOLATILE, BUT GAINING TRACTION BY STEVE VIUKER 16 | Banking New York

asy come, easy go. That’s the federal government’s take on the possibility of economic gain in the realm of virtual currency, the most high profile of which is Bitcoin. The currency’s ease of use by those with criminal intent is cited by those in the banking industry who say they wouldn’t finance a Bitcoin startup, or a company that takes payment in bitcoin. (Editor’s note: Bitcoin refers to the payment system itself, while bitcoin pertains to the currency.) But the ease and low cost of payment processing via Bitcoin has also spurred the Federal Reserve to consider how to improve the payment system most widely used by regulated banks. Most of that payment system dates from the 1970s. In a thin-margin banking system that is now motivated to reduce processing costs, it may be yet another example of the uneasy relationship between the regulated world and the shadow economy, a dynamic which has existed since at least the reform-minded 1930s, when Joseph Kennedy, who built considerable wealth as a result of market opportunities presented by Prohibition and its repeal, became head of the Securities and Exchange Commission.

WE KNOW THE DRILL “Investors looking to get in on the ground floor of a bitcoin-related company should realize that fraudsters may see the latest digital currency trend as a chance to steal their money through old-fashioned fraud,” said Gerri Walsh, senior vice president for investor education at The Financial Industry Regulatory Authority. That sums up the feelings regarding Bitcoin from the government. And the SEC last summer issued a similar alert to investors after charging a Texas man with running a bitcoin-related Ponzi scheme. Separately, regulators in Texas issued a cease-and-desist order against an oil and gas exploration company that accepts bitcoin from investors, saying it didn’t disclose the risks associated with using the virtual currency to buy a working interest in its wells.

DEATH AND TAXES – AND NOW, PROPERTY In a major step, the Internal Revenue Service issued a notice providing that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that the use of virtual currency in everyday business transactions must be reported to the government. This includes the payment of wages and compensation for independent contractors. Employee wages paid via virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes. Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply, such as the requirement for payers to issue a Form 1099 to their contractors.

THE GOOD PARTS Then there’s the consideration of economic gain from the use of virtual currency. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. So far, the banking industry’s first reaction to Bitcoin is to express reservations about funding bitcoin-based startups – an understandable concern, particularly in a tight regulatory climate. But the system’s real-time settlement, often within 60 minutes, is appreciated by some early-adopting merchants, principally those with a significant online presence. Comparatively low transaction costs and fast confirmation continued on page 18 

Readying for Prime Time Barry Silbert’s SecondMarket, whose Bitcoin Investment Trust (BIT) is already the largest regulated private Bitcoin investment fund in the world, has begun taking steps to open its own publicly-traded, over-the-counter Bitcoin ETF, with a projected launch date of in the fourth quarter of this year. SecondMarket’s process does not require SEC approval. Once online, anyone with a mainstream trading platform, like e-Trade or TD Ameritrade, will be able to buy shares in the fund, which is billed as a safe, regulated means for getting exposure to Bitcoin. Existing BIT customers who’ve had an account for at least 12 months will also automatically qualify. The longterm goal is to get the fund on NASDAQ or NYSE, though Silbert said that will likely not come for a while. “I think we’re going to see volatility for the foreseeable future, given the fragmented nature of exchange markets and the low levels of liquidity,” Silbert said, noting that large purchaser sale orders can still move the market. He does not expect an immediate rush into the shares, given Bitcoin’s ongoing dramatic price fluctuations. But he said ETFs are key to tamping down those swings.” I do think vehicles like this will help to reduce it, it will be bringing in larger sums of money, which will ultimately reduce supply of bitcoin subject to volatility,” he said.

Second Quarter 2014 | 17

Ed Wilson of the Washington, D.C.based law firm Venable, explained to Banking New York how he sees Bitcoin evolving: “Regulation by an established regulatory regime, such as New York’s Department of Financial Services, will help bring legitimacy and stability to the bitcoin market. A result will be broader use of Ed Wilson bitcoin and, perhaps, greater innovation in the use of the bitcoin ‘rails’ – that is, intermediaries – to transmit other types of financial information securely. At the same time, one of bitcoin’s great attractions is that it is relatively free from the costs of regulation (as well as regulation itself). Regulation brings costs as well as delay to the payment system. At some point, the cost of bitcoin transactions [to comply with regulatory overhead, for example] will approach an amount that deters usage of a ‘private’ currency, one not backed by a government. I do not know what that number is or will be, but the lack of backing from an OECD country, for example, suggests that as bitcoin transaction costs reach parity with traditional currency costs, bitcoin will suffer. “My opinion to date is that people see what they want to in bitcoin. Those who think it is a passing fancy see it as the tulip mania of our day. Those who embrace it view bitcoin as the financial product for a borderless world. Those in between see it, I think, in three different ways. The first is that it may be the initial step toward an electronic currency. If it is, then it will break the two step process we now follow for non-cash transactions: ‘information/verification’ and then value transfer. This applies to both international and credit/debit card transactions. There is a reason we as a society decided that before we engage in a transaction we want to know that, as the seller, funds are set aside to pay for the good and, as a buyer, that the goods are conforming. With bitcoin, this ‘verify then pay’ process is no longer readily available. So, some work needs to be done. “The second way it is viewed is as a new set of financial rails. Bitcoin, at least so far, has proved to be a safe way to transmit value. Some have suggested that dividing bitcoin into very small units (as is permissible) will make it economical to use these fractions of a bitcoin to transmit other forms of financial ownership (stocks, bonds, mortgages, etc.) If this proves true, then bitcoin will take on a complementary, and perhaps more valuable, role. “The third group views bitcoin as a set of possibilities, with some major issues ahead of it. The first is that bitcoin will have to join the regulated mainstream in order to be successful at all. Until it does, bitcoin will be an outlier and a novelty. Joining the mainstream, however, will drive the costs of doing business in bitcoin up to a point where the supposed convenience may not be worth the cost. A second is that bitcoin must become easier to trust. The recent thefts and bankruptcy may not affect the validity of bitcoin itself, but it has adversely impacted people’s willingness to trust both the currency and transactions in it. Finally, it must become more stable. At the present time using bitcoin is a bit like making a first descent of a river. One doesn’t know if that river’s ‘Victoria Falls’ are around the next bend.” 18 | Banking New York

Photos by Steve Viuker

Bitcoin and the Victoria Falls Effect

are highly competitive with other payment systems such as wire transfers. The move toward bitcoin-based payment systems may well become merchant-driven in future years as credibility is built – if that happens. Recently, Ireland saw the country’s first Bitcoin ATM in Dublin. The machine, which converts physical euro cash

“INVESTORS LOOKING TO GET IN ON THE GROUND FLOOR OF A BITCOIN-RELATED COMPANY SHOULD REALIZE THAT FRAUDSTERS MAY SEE THE LATEST DIGITAL CURRENCY TREND AS A CHANCE TO STEAL THEIR MONEY THROUGH OLD-FASHIONED FRAUD.” — GERRI WALSH, SENIOR VICE PRESIDENT FOR INVESTOR EDUCATION, THE FINANCIAL INDUSTRY REGULATORY AUTHORITY into the digital currency, is being operated by Bitvendo, a Bitcoin vending business started by a number of Irish and international digital currency enthusiasts. In order to use the desktop device, which is located in mobile phone accessory shop GSM Solutions, users must first download and set up a digital wallet in which to store their bitcoins. The user then scans a digital QR code, generated by their digital wallet, at the vending machine and enters the amount of euro cash they wish to convert into bitcoins. The conversion takes place at an exchange rate dictated by a selection of different bitcoin exchanges, which is updated in real time, and the digital currency is then lodged into the user’s digital wallet. Bitvendo charges a 3 to 5 percent commission on each transaction.

Photos by Steve Viuker

Photo above and facing page from the conference Inside Bitcoins, April 7 and 8, at the Javits Convention Center in New York City.

GOOD LUCK WITH THAT Mt. Gox, a leading bitcoin exchange, lost investors’ money. On March 7, Mt. Gox CEO Mark Karpeles wrote, the exchange “confirmed that an old format wallet which was used prior to June 2011” held a balance of approximately 200,000 bitcoins. That amounts to a little more than $116 million. Mt. Gox filed for bankruptcy in the United States, shortly after filing for similar protection in Japan. That brought Mt. Gox’s loss down to $650,000, but customers aren’t creditors, and the only way they could seek recompense is to file a lawsuit. Aside from that, the other big difference between Bitcoin and mainstream bank deposits is the lack of Federal Deposit Insurance Corporation (FDIC) insurance for bitcoin. But for those seeking the potential for better return on their investment than today’s interest rates offer, it may be well worth the risk. A class-action federal lawsuit against Mt. Gox, filed in Chicago, has been put on hold. A federal judge froze Karpeles’ U.S. assets as part of a customer lawsuit against the defunct bitcoin trading exchange, a result of their inability to withdraw bitcoins and cash from Mt. Gox. U.S. District Judge Gary Feinerman placed a temporary restraining order on Karpeles’ assets, along with a related U.S. company and the Japanese company that operates the bitcoin exchange. The Japanese parent company that runs the exchange was shielded from the order because of ongoing bankruptcy proceedings. Karpeles lives in Japan and has never been to the U.S., according to comments made in court.

CREATING A WELCOMING ENVIRONMENT If banks are hesitant to embrace bitcoin investment, that sentiment doesn’t seem to be shared by Benjamin M. Lawsky, the superintendent of the state’s Department Financial Services. Lawsky recently issued his first public order on virtual currencies like bitcoin, calling for proposals for creating regulated exchanges. “The companies that are now being

asked to comply in this order are going to largely be the companies that say we have the desire, wherewithal and the resources to do this the right way,” Lawsky said. “We are creating a situation where we’ll hopefully be driving consumer confidence in the firms that want to come here now and set up their exchanges with all the appropriate protections in place.” Recently, a New York ad agency took the bait. DiMassimo Goldstein is the first ad agency network to accept bitcoin from clients. Founded as a hybrid digital and traditional agency in 1996, DiGo became the growth partner for several early iconic Internet businesses in the first dotcom boom. The firm has extensive experience working with and launching campaigns for new and currently leading payment systems, including airline miles, credit cards, payment processing systems such as MasterCard, and innovative, non-traditional platforms like Revolution Money, now owned by American Express. Josh Metnick, a Chicago-based bitcoin advocate, says the system is evolving. “There are ongoing connections being made by companies seeking to accept bitcoins as a payment mechanism,” he said. “The ecosystem is highly complex at this point and has grown in many directions in the past year. There are hundreds of software developers. … It’s like Microsoft launching a product and hearing back on how they can improve the functionality. Bitcoin is software that has been out there for over five years. The transaction issue that took down Mt. Gox was a high priority item and, after the breach, patches came out very quickly. All of the exchanges, except for Mt. Gox, were able to survive the transaction issue because they were running [their own version of the bitcoin code, unlike Mt. Gox]. In my mind, that was a fraud. In some ways, it was like the Madoff scam, in which various sets of books were kept. When the software fixes came out, all of the exchanges were able to upgrade their servers and software to repel this attack. I believe bitcoin needs to be regulated and has value as a lowertransaction fee currency.” Second Quarter 2014 | 19

LEGAL NEWS | By Steven Jones-D’Agostino

AGs Have a Reluctant Whip Hand Has the Stage Been Set for More Criminal Charges against Banks?

Urs Rohner, chairman of the board of directors of Swiss Bank Credit Suisse, takes a break during the Swiss International Finance Forum, in Bern, Switzerland, Tuesday, May 20, 2014. (AP Photo/Keystone,Alessandro della Valle)

hen Credit Suisse AG pled guilty on May 19 to federal charges that it helped wealthy clients evade U.S. taxes, it looked as though more criminal charges may follow for other big banks. If so, it would be a while coming. In 2012, the nation’s five largest mortgage servicers agreed to what U.S. Attorney General Eric Holder, New York Attorney General Eric Schneiderman, and a coalition of 33 other attorneys general and state banking examiners hailed as “a landmark $25 billion settlement … [that addresses] abuses and fraud,

provides substantial financial relief to borrowers harmed by bank fraud, and establishes significant new homeowner protections for the future.” However, that settlement had no real legal or financial teeth, according to advocates for stricter mortgage banking laws. The five mortgage-servicing giants – JPMorgan Chase, Citi, Ally Financial, Wells Fargo and Bank of America – got off lightly, they said, while the current mortgage-servicing system doesn’t offer enough protection to distressed borrowers. The May guilty plea from Credit

Suisse AG, a subsidiary of Swiss banking giant Credit Suisse, to charges of conspiring to help U.S. customers dodge taxes included an agreement to pay about $2.6 billion to settle claims brought by the Justice Department, the Federal Reserve and New York state. The penalty, the largest since the Drexel Burnham Lambert case of 1989, came about a year after Holder declared that some banks are too big, too interconnected and too important to the global economy to prosecute criminally. Critics said Credit Suisse’s penalty was too small, considering the bank’s size,

Steven Jones-D’Agostino is a strategic partner of Susan Wagner PR + Best Rate of Climb. Follow on Twitter @SWPR+BROC. 20 | Banking New York

but others say it sets the groundwork for criminal prosecution of other big banks. More recently, Schneiderman latched onto another opportunity to get tough with financial institutions. It came after the publication of The New York Times Best Sellers list entrant Flash Boys by Michael Lewis, about Wall Street’s apparently legal rigging of high-frequency trading to create opaque scalping operations. Schneiderman launched a probe of the so-called “latency arbitrage” practices. In a related matter, his office also announced that “millions in relief are available to victims of illegal loans by high-interest lenders.” The settlement, reached earlier this year with the New York Attorney General’s Office, involved Western Sky and CashCall, which had begun to reimburse victims. Advocates for more consumerfriendly mortgage laws now await the response by Schneiderman and his peers to the more-recently published bestseller Capital in the 21st Century by Thomas Piketty – and its revelations of the rise of the oligarchy in America. The New York AG’s office declined to comment for this article.

his role in a $3 billion scheme to defraud banks through the sale of fake mortgage assets. In New York, borrowers with underwater mortgages tend to have more of safety net than their counterparts in many other states, largely because this is a judicial-foreclosure, which enables the court system, when necessary, to delay or halt the foreclosure process. In fact, seven of the top 10 states for total non-current mortgages are judicial states.

ENDING ‘TOO BIG TO FAIL’ U.S. Sen. Elizabeth Warren (DMass.), hailed as “the champion” of small banks and lower-income families, joined forces with three Senate colleagues – Republican John McCain of Arizona, Democrat Maria Caldwell of Washington and Independent Angus King of Maine – to introduce the 21st century Glass-Steagall Act. The bill seeks to reinstate and modernize core banking protections. It would once again separate traditional banks from riskier financial services and update the original law to include new activities. It is designed to leave no room for regulatory interpretations that would dilute the rules. The bill would also give a five-year transition period for financial institutions to split their business practices into distinct entities and to shrink their size, taking an important step toward ending “too big to fail” while minimizing the risk of future bailouts. However, GovTrack.us gives the bill a “1 percent chance of being enacted.” Unless and until that bill becomes law, the federal Consumer Finance Protection Board – which Warren championed – may be one of the few legal weapons that mortgage borrowers can use to fight off foreclosures. According to the February Black Knight Mortgage Monitor, implemen-

YOUR WINNINGS, SIR One reason for the reticence in prosecution by the AGs – and willingness to talk publicly about it, advocates charge – may be that many state AGs receive campaign donations from large financial institutions. However, it’s not true that no one on Wall Street has gone to jail for their crimes. According to a 2011 posting on HousingPredictor.com, Michael McGrath Jr., former president of U.S. Mortgage Corp., got 14 years in prison for orchestrating a conspiracy that defrauded credit unions and Fannie Mae of $136 million. And Lee Farkas, former chair of Taylor, Bean & Whitaker Mortgage Corp., got 30 years in prison and was ordered to forfeit $38.5 million, for

tation of CFPB rules in 2011 caused a sharp shift in the timing of foreclosure starts. The ratio of serious deterioration to foreclosure starts was at the highest level since 2010; Foreclosure sales hit the lowest levels since 2007, pushing pipeline ratios back up; and the average loan in foreclosure is now 2.6 years past due, versus 0.7 years in 2008. As a result, according to the March Black Knight Mortgage Monitor, “only one in 10 American borrowers [is] underwater … with 55 percent of loans in foreclosure [being] delinquent [for more than] two years.” The data showed that, as home prices have risen over the past two years and many distressed loans have worked their way through the system, the percentage of Americans in negative equity positions on their mortgage has declined considerably. Meanwhile, those loans already in the foreclosure process have been aging substantially, with delinquency for loans in foreclosure at an average 966 days. The data trends point to a healthier housing market, according to Kostya Gradushy, Black Knight’s manager of loan data and customer analytics. “Two years of relatively consecutive home price increases and a general decline in the number of distressed loans have contributed to a decreasing number of underwater borrowers,” he stated in a news release. A Black Knight spokesman declined to comment for this article.

MITIGATE THE MORTGAGE-DEFAULT MESS New York attorney Charles Wallshein, a partner with Melvillebased law firm Macco & Stern, LLP, says the largest mortgage servicers engage too often in confiscatory practices when foreclosing on financially distressed mortgagors. Wallshein scored a major legal viccontinued on page 22  Second Quarter 2014 | 21

CRIMINAL CHARGES | continued from page 21

tory on May 20 when New York State Judge Jeffrey Arlen Spinner ruled in favor of Wallstein's clients, Manfred Scheller and Cheryl Mendenhall. He ruled that the couple had been wrongfully foreclosed on by Aurora Loan Services LLC, which claimed it held a $990,000 first mortgage on their house, because Aurora failed to produce documentation showing it held that mortgage. As for residential mortgage-backed securities, Wallshein reports, 60 percent of the loans in the U.S. are government-backed by Fannie Mae, Freddie Mac and Ginnie Mae. “You need to be a double-A, triple-A rated financial institution that has access to the Federal Reserve window, to be able to service these loans. Just by the very liquidity required to be able to service loans – especially defaulted loans – it narrows who can actually perform that function into a very narrow field,” he says.

So, he observes, the interaction between mortgagors and mortgage servicers has been problematic, because borrowers can’t tell who owns their loan. Owners could be shareholders of Fannie, Freddie or Ginnie. Under current rules, Wallshein indicates that mortgage servicers are not engaging in confiscatory practices. Also, the original lender is usually not in the picture by the time the loan goes into default. Mortagors seeking loan modification, especially delinquents, may find the servicing agent reluctant to modify the loan terms due to investor expectations. Servicing agents also lack the unilateral authority to reject a loan modification bid, Wallshein adds – unless it’s in the best interest of the pool, which is usually a large entity such as a pension fund, insurance company or REIT. The pool may not want an underwater mortgagor's loan to default because it could cost the pool

more money later if the house is worth less at foreclosure, than it would if the loan is eventually paid off. A house worth $400,000 on which mortgagors] owe $500,000, and on which the pool forecloses for the amount of its worth, results in a $100,000 loss, he says, setting up an inherent conflict between loan servicers and investor pools. The problem brings more "illiquidity” into the system, Wallshein reports. The only solution, he says, is to spread the mortgage-default problem out over decades. "If everybody had to realize the actual loss because of foreclosure, it would be devastating,” Wallshein declares. “It would make the too-bigto-fail crisis of 2008 look like a walk in the park.” Editor’s note: a summary of New York foreclosure law, found in New York State Consolidated Laws, Article 13, can be found at Foreclosures.com. ■

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COMMERCIAL LENDING SURVEY | By Laura Alix

Pay up, Recruits down in Commercial Lending Too Few Young Lenders Entering the Field respect. Thirty-four percent of commercial lenders and 47 percent of team leaders surveyed said that co-workers and team were the most important factor in choosing a place to work. Just 20 percent and 14 percent, respectively, put compensation first. “At the end of the day, people want to be compensated fairly, but what they really want is to feel like they’re part of a team and feel that their efforts are appreciated,” said Carll Wilkinson, managing partner at Smith & Wilkinson. Robert M. Mahoney, president and CEO of Belmont Savings Bank, agreed, “The reason pay isn’t so important is that they’re very wellThese are Robert M. Mahoney paid. $100,000-plus jobs with one or two years of experience… Pay is secondary. What matters is: Can I deliver?”

A MATTER OF SUPPORT

t’s a good time to be a commercial lender. So why aren’t more people entering the field? After a few recession-era years of lackluster earnings, base salary and cash bonuses are creeping back up for many commercial lenders; but for many, the pay is only a secondary consideration, according to a new survey from Smith & Wilkinson, a Scarborough, M.E.-headquartered banking executive search firm. Base salaries for commercial lenders increased modestly last year, according to the survey. Commercial lenders in Massachusetts and Rhode 24 | Banking New York

Island (for survey purposes, the two states were counted together) earned an average base salary of $118,549, and almost 89 percent of commercial lenders earned a cash bonus that averaged $23,217. Team leaders, or other individuals in charge of managing other lenders, fared even better, earning an average base salary of $161,511 in 2013. Fully 90 percent of team leaders responding to the survey also earned cash bonuses, which averaged a little more than $40,000. But for many respondents, salary played second-fiddle to having a good work environment with a team you

Lenders seek a predictable environment, according to the survey. The lender wants to know that the credit analysts and loan committee back at the office can back up his or her promises to a potential client, he said. “When you make a promise you can’t fulfill, you’ve lost more than one friend,” Mahoney said. “They’ll tell a friend. They’ll tell everyone at their country club on Saturday morning. That’s the worst thing that can possibly happen to a lender.” And banks are happy to pay those established commercial lenders well, Mahoney said, because they are, collectively, a major profit center.

Location

Average Base Salary

Percent Receiving Cash Bonus

Average Bonus Amount

Connecticut

$125,976

85.71%

$23,722

Massachusetts, Rhode Island

$118,549

88.59%

$23,217

New York, New Jersey

$117,796

85.71%

$33,631

Virginia,Maryland, Washington, D.C., Delaware

$114,543

79.17%

$16,631

Pennsylvania

$103,944

74.07%

$14,974

Maine, Vermont, New Hampshire

$103,036

79.41%

$18,759

Ohio

$95,103

81.48%

$20,662

Arthur Warren, a compensation adviser with the Walpole-based bank consultancy Arthur Warren Assoc., works with approximately 144 community banks across 13 states and specializes in helping banks design compensation packages. In addition to increasing base salaries, bonuses and long-term incentives, community banks are also employing front-end hiring bonuses

lem in the commercial lending field. The percentage of respondents planning to retire in the next five years inched up to 16 percent last year from 13 percent in 2012. While the survey did reveal a slightly greater number of respondents with fewer years of experience, it’s undeniable that commercial lenders on the whole are growing older.

At some point, there seemed to be enough commercial bankers. But “now what everybody does is they just steal bankers from one bank to another,” Mahoney observed. Mahoney, who noted that he has been looking to hire a new commercial lender for at least six months now, was hopeful that universities might recognize the value of an education in

“At the end of the day, people want to be compensated fairly, but what they really want is to feel like they’re part of a team and feel that their efforts are appreciated.” — Carll Wilkinson, Managing Partner, Smith & Wilkinson Carll Wilkinson

for new commercial lenders, he said. “It’s an outright carrot,” Warren said. “The retention bonuses are interesting. We build in future payments to the lender and basically, they don’t own those payments unless they work a requisite number of years.” To entice those lenders to stick with it for the long haul, Warren said some banks also offer defined retirement contributions over and above the bank’s extant pension plan, 401(k) or profit-sharing plan.

Once upon a time, super-regional banks like Shawmut and Bank of Boston hired hoards of new graduates right out of school and into training programs, Mahoney said. That’s how he – and many other commercial bankers who started their careers in the 70s, 80s and early 90s – got their start. Then banks started training and hiring credit analysts, who ultimately helped commercial lenders to become more efficient. With three analysts back at the office, one commercial lender could now do the work that previously required three or four, Mahoney said.

AN AGING POPULATION The Smith & Wilkinson survey also reveals a coming demographic prob

commercial banking and roll out degree programs. Warren, meanwhile, said the shortage of high-quality commercial lending talent is driving many community banks to court their top lenders into staying aboard, or easing slowly into retirement, while they train their successors. Even regulators have turned up their focus on succession plans for key talent within community banks. “This is another form of risk assessment,” Warren said. “If there’s only one lender or one credit analyst at the bank, and they leave, there’s a serious issue.” ■ Second Quarter 2014 | 25

BANK PROFILE | By Linda Goodspeed

Kinderhook Bank Looks to Albany, Latham for Growth Branching out to Meet the Competition

26 | Banking New York

ollowing back-to-back record years, Kinderhook Bank will continue its march northward into the Albany, N.Y., market with two new branch openings this year. “We need a little more critical mass in the Albany region,” said Jeff Stone, senior vice president of retail banking and business development. “We’ve been a Columbia County-based bank. The last five to seven years, the Albany market is where the commercial growth has been.” The branch expansions into Albany and Latham will bring Kinderhook’s network to eight, and counter an industry trend toward fewer bricks and mortar. “The role of the branch is changing,” acknowledged Stone, a 40-year banking veteran. “Customers want to do business when, where, how they want. They want to use technology, and they want to talk to someone if they need to. The average person doesn’t come into a branch a lot, but will make a decision to bank with you based on bricks and mortar. We need to manage that need for branch presence and technology, and deliver great service.” Kinderhook has been successfully managing that delicate balancing act for 161 years. The National Union Bank of Kinderhook, an independent community bank, was founded in 1853. Its sister company, Kleeber Insurance agency, was founded in 1851. But do not be fooled by the bank’s age. After poking along for well over a century, Kinderhook has been on a growth spurt in recent years. For 2013, Kinderhook Bank Corp., the bank’s parent company, reported record net income of $2.537 million, compared with net income of $2.360 million in 2012, the previous record, an increase of 7.5 percent. At Dec. 31, 2013, the company’s total assets had increased to more than $331 million,

up $16 million, or 5 percent, from the same period in 2012. Just 40 years ago, the company’s total assets barely reached $10 million. Kinderhook’s success is rooted in its stable management (10 presidents in 161 years), conservative philosophy and the region’s strong economy. Thanks to a diverse base of government, higher education, medical institutions, and booming high tech and nanotech industries, the Capital Region has grown steadily and consistently, without wild swings either up or down. But the region’s strong economy has also led to a competitive banking and credit union environment. Kinderhook has carved out a niche in commercial lending, particularly commercial real estate. Net loans increased in 2013 by more than 13 percent to $232 million. This follows an 8 percent loan growth in 2012. By the end of the first quarter, 2014, the bank’s loan portfolio was approaching $240 million, said Lee Carman, senior vice president of lending. Seventy-five percent of the bank’s loan portfolio is commercial, with a large chunk commercial real estate, primarily multi-family housing. As an SBA lender, Kinderhook is able to originate loans much larger than typical like-sized banks, and has become an upstate leader in this business line, ranked in the top three SBA lenders in the Capital Region over the last several years. “We have significant strength in SBA lending due to staffing,” Carman said. “We’ve got some very good people and capability and knowledge there.” Kinderhook also provides U.S. Department of Agriculture-backed commercial loans. “We’ve been able to direct people who weren’t able to get financing elsewhere and help them to the finish line,” Carman said.

The bank has been considerably less aggressive on the residential mortgage side, doing mainly portfolio loans. “That’s by design,” Stone said. “Commercial real estate in the Capital Region has been very stable for many years. Credit quality is very strong, and has held up well.” Carman said less than 1 percent of the bank’s total loan portfolio of nearly $240 million is nonperforming. The bank’s two new branch facilities in Albany and Latham, along with its branches in East Greenbush and Delmar, feature the latest in branch design and technology. Traditional teller lines are eliminated with the use of teller pods, cash recycler machines and full functioning ATMs that can accept checks and bulk cash deposits. The branches also feature free coffee and WiFi, comfortable chairs, computer terminals, iPads and coin counters. “Ee want people to come in and feel welcome, not move them in and out,” Stone said. “We’re trying to create a different branch experience.” In addition to the two new branch locations this year, Kinderhook will also introduce a mobile banking app for its customers. As Stone said, “It’s all about balancing bricks and mortar and technology.” Kinderhook has about 70 employees, none of them administrative assistants. “We’re very flat,” Stone said. “Everybody does everything. Even the CEO answers his own phone, does his own spreadsheet.” Robert A. Sherwood, the bank’s 10th and current president, and CEO since 1995, turned over the day-to-day operations of Kinderhook Bank in October 2013 to new CEO John Balli. Sherwood will continue to serve on the board. ■

David Kinitsky

Jeff Stone

John Balli

Lee Carman Second Quarter 2014 | 27

RAISING THE BAR | By Mike Sobba

Quality Service: You Get What You Pay for

anking services have become expensive over the past decade, and fee income to offset the high-quality services that banks provide has eroded in recent years. For most banks, checking account customers in the late 1980s and early ’90s received a checking account, a monthly statement and maybe a debit card if they qualified for one. One by one, financial institutions began adding services their customers wanted, including online banking, bill pay, free ATM transactions, mobile banking and now being able to make deposits by taking a picture of the check with your smartphone. We have enhanced the services we provide without charging fees to cover the cost.

Increased costs associated with compliance have dramatically increased since 2010. Who has to pay for replacing debit cards and credit cards for the recent security breach at Target? Who will pay to update ATMs to allow them to read the EMV “chip” that is required by October 2015? Who will pay for replacing debit and credit cards that have the more secure chip embedded? What other expenses will the banking industry have to endure from a regulatory perspective that we aren’t aware of? It is imperative that we quickly learn what our costs are associated with the services we provide. Checking account costs and the services that are provided to

Where are we going to get the money to pay for the technological and compliance changes our customers and the regulators are demanding? Service charge income in community banks has dropped dramatically since the peak in 2007, in part due to changes to overdraft payment programs and reduced interchange income due to changes associated with the Durbin Amendment to the Dodd-Frank Act. Tremendous overdraft fees and debit card interchange revenue masked the real problem that our industry is facing: Where are we going to get the money to pay for the technological and compliance changes our customers and the regulators are demanding?

consumers are not going to go down. What industry that serves consumers gives their services away for free? Would a bank loan money to a commercial business that didn’t know what their cost of goods sold were? Quality service comes at a cost. Quality products come with a cost. Our industry has prided itself on providing the best customer service and products that money can buy. The problem is no one “buys” them. If someone wants all of the expensive services, then they should pay for them. Free checking should only be provided to customers who

want a basic checking account and don’t want to pay a fee. We all have customers like that. A bigger problem is that we have trained our customers that they should get all of these services for free. So should you just start charging a paper statement fee for those customers who don’t want to sign up for e-statements? No. Just charging fees for the same things that customers previously received for free is not the way to go. The airline industry did this with baggage fees and the backlash was big at first. That is why the bins are always full when you get on the plane. Add value to the customer’s checking account with things they want and need. The Consumer Financial Protection Bureau recently said that all credit card companies should provide credit scores to their clients – for free. But what if a consumer’s credit score is too low? What is the credit card company going to do about it? Providing highly sought after services, such as ID theft protection, credit score, credit bureau monitoring with alerts, and other resolution services is great, but who will buy them? You have to have a strategy to provide these value added services to all consumer accounts, rather than just selling them one by one. If you have the right products, the right strategy, and the right training of your employees, the end product will result in much happier customers and tremendous fee income for your bank. The right strategy will keep customers from closing their account and they will bring additional deposits to your bank. ■

Mike Sobba is president of Strunk LLC, an advisory service for the financial institution community. 28 | Banking New York

THE NEXT BUBBLE | By Laura Alix

Auto Loans Go from Zero to Sixty CFPB Eyes Putting the Brakes on Indirect Auto Lending

ar sales are set to accelerate back to pre-recession levels this year, and with them, a new source of revenue for banks and credit unions who do auto financing – that is, of course, if regulators don’t put on the brakes. New car sales are expected to top 16 million this year, a 6 percent increase over the 15.5 million predicted last year and an effective return to pre-recession levels, the automotive resource website Edmunds.com predicted. Thank the slowly improving job market and economy, combined with a loosening of credit markets for wouldbe car buyers, Edmunds.com Chief Economist Lacey Plache said. That’s not just good news for people who’ve put off replacing the old beater in the driveway. It’s also good news for banks and credit unions who do auto financing, both direct and indirect. Auto loans have been on a steady uptick. The FDIC reported last fall that auto loan balances had risen 3.2 percent, or $10.6 billion, during the third quarter last year, and auto loans accounted for nearly 49 percent of total credit union loan growth through October, according to CUNA Mutual Group. But could auto financing be next on the Consumer Financial Protection Bureau’s agenda? All signs point to yes. Most recently, Ally Financial paid $98 million to settle charges that it discriminated against minority borrowers who were charged more than white customers for auto loans from car dealers. The consumer protection agency, along with the Department of Justice, alleged that more than 235,000 minority borrowers paid higher interest rates than white customers

because of what it characterized as Ally’s discriminatory pricing system. But Christopher Willis, a partner in Ballard Spahr’s consumer financial services group and chair of the firm’s fair lending task force, said the CFPB signaled its interest in auto financing well before the settlement with Ally Financial. For one thing, he said, the agency has made numerous public statements to its belief that dealer rate participation creates disparate impact. Then, in March 2012, the agency released a bulletin outlining fair lending guidance to financial institutions that provide indirect auto financing. Under the indirect auto financing model, the consumer arranges financing through the dealer, who then turns around and sells that loan to a bank, credit union or other finance company that has provided a rate sheet detailing the minimum interest rates it will accept for a customer with a given credit score buying a given age car. The dealer, however, can increase that interest rate, typically between 2 to 2.5 percent, and the financial institution purchasing that loan will pay the dealer a portion of that interest rate differential.

SEMANTICS ARE IMPORTANT While the CFPB has labeled the practice “indirect auto lending,” Willis doesn’t like that term, and instead prefers to say “indirect auto financing.” It may seem like a matter of semantics, but the agency’s choice of words casts financial institutions as creditors under the Equal Credit Opportunity Act, the law that regulators charged Ally Financial with violating. “I think the most likely thing we’re going to see in 2014 is several more consent orders similar to the ones

they just released. They have publicly announced that they have several investigations and it’s no secret that the CFPB does not like this business model,” Willis said. Willis also predicted the market could move toward more of a flat fee or flat rate environment, in which some customers would end up paying more for a car loan and others would end up paying less – in other words, leaving little, if any, room for savvy customers to negotiate an interest rate with their dealer. And of course, there’s the cost of compliance, which could wind up being passed onto the consumer. While the CFPB has outlined a number of steps to limit fair lending risk in indirect auto financing, the most helpful of those might be a statistical regression analysis of your portfolio, Willis said. “Unless you do that analysis, not only will [the government] think you’re not doing a good job, you’ll be totally in the dark about what they’ll find if they come in and audit you,” he said. The agency’s legal theory on which it’s based its cases and investigations also leaves some room for doubt, Willis added. “It is very possible to argue that the [ECOA] only prohibits intentional discrimination and not disparate impact,” he said. The agency has taken the opposite view. That echoes a similar debate over the Fair Housing Act. The Supreme Court has previously accepted two previous cases – Magner v. Gallagher and Mt. Holly Garden Citizens in Action v. Township of Mount Holly – that argued the act prohibited only intentional discrimination and not disparate impact, but both cases settled before the court could rule on them. ■ Second Quarter 2014 | 29

SMALL CHANGE | News Roundup

CATTARAUGUS COUNTY BANK

Mike Wimer

Michael Wimer has taken the post of president at Cattaraugus County Bank, succeeding Salvatore Marranca in that role. Marranca will continue as an active CEO through the rest of this year. He will also remain a member of the board of directors. Wimer most recently served as president, CEO and director of a $300-million rural community bank in central Pennsylvania with seven branches and 80 employees. He held that position for more than 10 years. He previously received extensive experience in middle market, regional and commercial credits, as well as other forms of lending.

EVANS BANK Michael Gilfeather

Anthony Simeone

Evans Bank appointed two commercial loan officers as vice presidents. David Lulas joined Evans in June 2008 as a credit analyst, was promoted to credit manager in 2010 and became a member of the commercial lending team in 2011. He previously served as senior credit analyst with Five Star Bank. Nicholas J. Alberalla joined Evans in December 2013 as commercial loan officer. He previously served as a small business banker at First Niagara Bank, and spent 12 years with KeyBank. Lulas is an active volunteer with Habitat for Humanity, and serves on the board of Crusade Against Drunk Driving. Alberalla serves as treasurer for Ronald McDonald House Charities of WNY and is a member of Rotary Club of Buffalo.

LYONS NATIONAL BANK The Lyons National Bank promoted four employees. Darrin Brentnall, commercial loan officer, was promoted to vice president. He joined the bank in 2005, and manages LNB’s Small Business Administration loan program. Michael Colacino, director of security and facilities, was promoted to assistant vice president. Colacino joined LNB in 2009 and supports all 12 branches of the bank. Jeffrey Friend, district executive, was promoted to senior vice president. Friend has been with LNB for nine years and oversees the Geneva, Canandaigua and Seneca county

offices. Todd Juffs, director of information technology, was promoted to vice president. Juffs has been with LNB for 17 years and supports the bank’s technological efforts.

NBT BANK NBT Bank has promoted Sandra McAlonie to branch manager of the bank’s Clifton Park office. McAlonie has responsibility for the management of all branch banking activities and business development efforts in the Clifton Park area. McAlonie has 35 years of experience in the banking industry. Before joining NBT Bank, she managed the TD Bank office in Clifton Park. Prior to that, she was the upstate New York district operations manager for Bank of America.

ORANGE COUNTY TRUST CO. Orange County Trust Co. has named banking veteran Michael Gilfeather as its president and CEO. He will also serve in the same positions with the bank’s holding company. Gilfeather brings nearly 35 years of banking experience to his new leadership position. He was previously chief administrative officer and executive vice president of Hudson Valley Bank, where he was directly responsible for the branch network, training and development, human resources and the bank’s trust department. Prior to joining Hudson Valley Bank in 2005, he was with The Bank of New York for 20 years, where he was the senior manager for all retail banking in the borough of Manhattan. He also serves in the same positions with the bank’s holding company.

RIDGEWOOD SAVINGS BANK Anthony J. Simeone, executive vice president and chief lending officer, Ridgewood Savings Bank, was honored as Institutional Member of the Year at the 90th Annual Banquet of the Bronx-Manhattan North Association of Realtors. At Ridgewood Savings Bank, which he joined in 2002, he manages and oversees all lending functions including its comprehensive portfolio of residential, commercial and consumer loans. ■

SEND US YOUR NEWS! SUBMIT NEWS FROM YOUR BANK TO CHRISTINA O’NEILL, EDITOR, AT CONEILL@THEWARRENGROUP.COM

30 | Banking New York

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