Banking New York 3Q 2014 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • THIRD QUARTER 2014 • VOLUME 33

Sport The

NAMING RIGHTS

+ INSIDE: BITCOIN UPDATE | MAKING CALL REPORTS EASIER | EFFECTIVE ERM Produced in partnership with the Independent Bankers Association of New York State

BANKING NEW YORK Volume 33 | Third Quarter 2014

Sport The

NAMING RIGHTS 04 FROM THE EDITOR

When the Circus Comes to Town

14 BITCOIN UPDATE

06 PRESIDENT'S MESSAGE

Building the Bridge and Providing Value

20 EFFECTIVE ERM

08 PUBLIC AFFAIRS UPDATE New York State Report

The Top Three Things You Need to Know to Build an Enterprise Risk Management Program

22 MARKET STRATEGY Optimizing the Multichannel

10 THE VALUE OF RELIABILITY FHLBNY Cooperative Works

Banks Struggle with Criteria for New Currency

with Members

Banking Experience

24 BANK PROFILE

Greater Hudson Bank

26 SETTING A PRECEDENT Security is a Two-Way Street 28 PILES OF PAPERWORK ICBA: Call Reports

29 OPERATIONS MANAGEMENT

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 ADVERTISING ACCOUNT MANAGERS

Bob Holzhacker, Mike Lydon, Claire Merritt

EDITORIAL

Increasingly Burdensome

Study Finds Renegotiating Core Services Contracts Can Yield Huge Savings

30 SMALL CHANGE

EDITORIAL DIRECTOR

Cassidy Norton Murphy CUSTOM PUBLICATIONS EDITOR

Christina P. O’Neill ASSOCIATE EDITOR

Anna Sims CREATIVE/MARKETING DIRECTOR OF MARKETING & CREATIVE SERVICES

John Bottini DESIGN PRODUCTION MANAGER

Scott Ellison GRAPHIC DESIGNERS

Amanda Martocchio, Tom Agostino & Tyler Grazio

©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

CORRECTION: The profile of Kinderhook Bank that ran in the second quarter print issue of Banking New York contained a photo of David Kinitsky. He is not connected with Kinderhook Bank. He is senior director at SecondMarket Inc., and general manager of Bitcoin Investment Trust. We regret the error.

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

When the Circus Comes to Town

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

Assisting Community Banks in

Charting a Path to Success Since 1989

Consulting Services Implemented by Experienced Lenders and Risk Managers: Loan review ProgramS • General Loan Review • Portfolio Acquisition Review (Due Diligence) • Specialty/Structured Finance Review

Loan LoSS reServe methodoLogy • Methodology Validation • Methodology Refinement

Loan PortfoLio StreSS teSting

• Bottom Up Loan Level Approach • Top Down Capital Adequacy Assessment

CeiS review ConSuLting • Credit Risk Process Review • Loan Policy Maintenance • Loan and Credit Seminars

888-967-7380 • www.ceisreview.com 4 | Banking New York

THE POWER OF AN ADVANCE

One advance can help fund hundreds of neighborhood needs. FHLBNY advances are a reliable liquidity source for our member lenders to finance home mortgage, small business, and economic development activities. Banco Popular North America, an FHLBNY member, used an advance to help provide permanent financing for Tilden Hall Residence, a New York City Tier II shelter facility in Brooklyn, New York. The eight-story facility, operated by Highland Park Community Development Corporation, provides transitional housing for 117 families who are victims of domestic violence, and helps its residents progress to independent living. Contact us to see how the power of an advance can improve your community. 101 Park Avenue, New York, NY 10178 | (212) 441- 6700 | www.fhlbny.com Note: The Federal Home Loan Bank of New York uses the word â&#x20AC;&#x153;advancesâ&#x20AC;? to refer to the loans it provides to our member lenders.

PRESIDENT’S MESSAGE | By John Witkowski

Building the Bridge and Providing Value It is hard to believe it has been more than half a year that I’ve had the honor of serving as the president and CEO of the Independent Bankers Association of New York State.

t seems like a good time to visit with you to talk about where our association and New York’s community banks have been, and where we’re headed. What a Year We’ve Shared ... So Far!

While the road ahead is surely paved with common challenges, IBANYS has made significant progress so far in 2014. John Witkowski We held our highly successful 41st Annual Convention, bringing together leaders of our industry and businesses closely related to our success. Our program, Sept. 7-9 in Lake Placid, “A Look At Community Banking Today: “Doing MORE With Less,” examined some key questions and challenges we face together: improved bottom line, increasing efficiency, the future of bank branches, regulatory perspective on third-party risk and best practices on a wide array of policies and topics like corporate governance, cyber security and compensation. Special thanks to our sponsors and business show exhibitors for their continued support! We also held two other successful programs for community banks, associate members and preferred providers: our CFO/ Senior Management Conference, and our annual Compliance Seminar. We achieved historic legislative success in Albany by proposing, developing and successfully advocating for landmark tax relief for community banks in the state budget and tax reform process. We participated in the ICBA Washington Policy Summit to urge regulatory relief and passage of the “Plan for Prosperity” and the 6 | Banking New York

CLEAR Reg Relief Act. It was a pleasure to partner with ICBA Chairman and fellow New York community banker John Buhrmaster, president of 1st National Bank of Scotia. And, we’ve held board of directors meetings and discussed new ways to ensure that IBANYS is all about bringing value to our member banks and the communities we serve, to our partner firms and companies who provide the products and services that play such a prominent part in our future success – and to IBANYS as well. What’s Next?

Our objectives are simple: to serve as a bridge, connecting all New York community banks, regardless of location, size, charter or type of ownership, and to bring real, tangible value to our member banks, to the businesses and firms that provide them with key products and services (our partners and allies), and to the association itself. The challenges, issues and opportunities we face unite us, far more than any artificial differences separate us. IBANYS is committed to preserving and strengthening a strong, vital community banking industry which can thrive throughout all of New York State. For example, we all need to work to oppose additional credit union expansion, at both the state and federal levels. They already enjoy an enormous advantage from their tax exempt status, too often “acting like a bank” while paying no taxes. We need to work together on common priorities, whether we are based in upstate New York, the Big Apple, on Long Island or Westchester or Rockland counties. ■ John Witkowski is president and CEO of the Independent Bankers Association of New York State. He may be reached at johnw@ibanys.net or (518) 436-4646.

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

Your building, your vault, your money and your people: Protect them all. At the heart of every community is its bank. And at the heart of every bank are its people. That’s where our coverage starts, but it extends so much further. In one comprehensive package, we provide community banks with everything from traditional property and casualty to management liability insurance. The right policy is still only one part of your insurance carrier’s value. Travelers partners with you to help educate your bank on emerging and potential risks, and provides tools and solutions to better prepare your bank for the future. Contact your independent agent today.

travelers.com © 2013 The Travelers Indemnity Company. All rights reserved. Travelers and the Travelers Umbrella logo are registered trademarks of The Travelers Indemnity Company in the U.S. and other countries. The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183

PUBLIC AFFAIRS UPDATE | By Stephen W. Rice

New York State Report A Summary of 2014 Legislative Session The New York State Legislature adjourned its 2014 session on Friday, June 20. For New York community banks, the session was highlighted by major tax reforms that will generate significant bottom-line savings.

hat landmark victory concluded a process begun at Independent Bankers Association of New York State last fall, when our Government Relations Committee, officers and board of directors authorized our legislative representatives and special tax consultant to develop and advocate for proposals in response to recommendations by the Governor’s Tax Stephen W. Rice Reform Task Force. As originally presented, major new tax burdens would have been imposed on community banks, including the elimination of real estate investment trusts. After numerous meetings with the Legislature and Executive Department, including the State Tax Department and Division of Budget, IBANYS’ proposals were adopted and incorporated into the sweeping 201415 state tax reforms. The session also included numerous other bills supported, opposed or closely monitored by IBANYS on behalf of community banks. These included the extension of the state’s “wild card law” (supported by IBANYS and approved). It could prove even more important in the future if Congress moves ahead and approves new regulatory reforms for community banks contained in ICBA’s CLEAR ACT and Plan for Prosperity – strongly supported by IBANYS. There were a number of foreclosurerelated bills, including one requiring banks to maintain abandoned properties, and another mandating the appointment of receivers (opposed by IBANYS and tabled). One bill that did pass (A.9354 Weinstein/S.7119 Klein) extends for five years legislation enacted in 2009 that pro8 | Banking New York

vides for a settlement conference and preforeclosure notice in mortgage foreclosure actions. Whistleblower legislation that would have expanded protections of bank employees against retribution for reporting alleged violations by their employers was tabled. Meanwhile, legislation to lower the sub-prime threshold rate on FHA loans was approved. A number of bills that were considered involved banks’ responsibilities regarding possible financial exploitation of vulnerable elderly bank customers. All were tabled, but many are likely to return in the future. The Legislature also passed S2933 Farley/A977A Fahy, to allow requirements relating to the preservation of certain banking records to also be satisfied through electronic storage. The 2014 session also included a major push by the state’s credit unions, who aggressively fought for a number of initiatives. There was some sense that the Legislature, having provided significant benefits and relief to community banks over the past two legislative sessions, might well turn to legislation to help credit unions. IBANYS actively opposed and successfully helped to defeat credit union initiatives that would have: • Allowed credit unions to accept municipal deposits. • Given credit unions entree into the State Business Development Districts program and realize tax deductions. • Created a new state Credit Union Deposit Program (modeled after our Community Bank Deposit Program) that would have allowed them to accept state funds.

The Legislature did pass two bills in-

volving state credit unions in the closing days and hours of the session, over IBANYS’ opposition. Both also passed in 2013, but were subsequently vetoed by the governor, at the urging of IBANYS. A.9408 Robinson/S.7112 Griffo (sponsored by the chairs of the Senate and Assembly Banks Committees) would expand state credit unions’ qualifications for membership and enhance their investment powers. The second bill, A.9037A/S.6805B Lanza, would allow credit unions to conduct savings promotion prize giveaways, linked to savings accounts. Both bills were amended in an effort to overcome the opposition expressed by IBANYS and in last year’s veto messages. IBANYS will once again work with the NYS Department of Financial Services and the Governor’s Office in an attempt to demonstrate why these bills should again be vetoed. While it provided some major accomplishments, the 2014 legislative session was also filled with challenges, and there is no reason to expect that future sessions will be any different. Credit unions are perhaps more aggressive than ever, and their political action efforts are now extremely well funded. In announcing the State Department of Financial Services’ “Community Bank Study” last year, Gov. Andrew Cuomo noted community banks represent a strong economic engine that drives growth in New York, and described their performance as remarkable. IBANYS will continue to represent your interests, and demonstrate your importance, to the state and local economies, to the social fabric of our communities throughout New York and to New York’s future success. ■ 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.

Truth is...

you can learn a lot from your customers. Tap into the power of daily, in-depth client data to improve your service and boost your bottom line. DataPak, exclusively from Cetera Financial Institutions, gives you control over an unmatched breadth of client data whenever you need it. Pull data directly into your current systems and use it to give your clients better insight into their finances. Measure the success of your program and uncover opportunities to deliver enhanced solutions for clients. Benefit from this leading technology, along with access to our award-winning wealth management solutions, all backed with the scale and resources from our parent company, Cetera Financial Group. It’s the competitive advantage that your program needs. Explore the possibilities at www.ceterafinancialinstitutions.com or contact Sean Casey at 1.800.245.0467, ext. 65014.

Cetera Financial Institutions is a marketing name of Cetera Investment Services LLC, member FINRA/SIPC. 400 First Street South · St. Cloud, MN 56301

THE VALUE OF RELIABILITY | By José R. González

FHLBNY Cooperative Works with Members Franchise value is a topic on which institutions of all shapes and sizes, and across all industries, are focused. But franchise value has its own meaning for the Federal Home Loan Bank of New York (FHLBNY), with our cooperative structure and a stock that does not trade publicly nor change in price.

ur value cannot be measured in a stock price or an earnings report; rather, as Federal Housing Finance Agency Director Mel Watt put it recently, “the concept of franchise value for an FHLBank relates to delivering the benefits of system membership to its members.” At the FHLBNY, we deliver the benefits of José R. González our cooperative to

our members every day throughout all operating environments. And last month, we made changes to our capital plan that will enhance the value of membership. The FHLBNY is continually looking to determine how best to distribute value to members of our cooperative. A recent initiative led by our Strategic Planning Team studied every aspect of Home Loan Bank membership in order to determine the best way to increase our ability to serve our members.

Currency Automation Solutions and Self-Service Coin Centers Teller Tools for Success

Doing Things the Right Way

ters Cen Coin e c i v -Ser Self

Currency Dispensers

61-201 50 Y E AR S

Currency Recycle rs

All members of the FHLBNY, regardless of their borrowing activity with us, are required to purchase membership stock, which has a par value of $100 and does not fluctuate with market conditions. Each year, we calculate each member’s membership stock purchase requirement, which had been set at the greater of $1,000 or 20 basis points of members’ mortgage-related assets using year-end financial statements. In June, our board approved management’s recommendation to lower our membership stock purchase requirement by 25 percent, reducing the requirement to 15 basis points of members’ mortgage-related assets, from the prior requirement of 20 basis points. For our members, this change in the capital plan – which became effective Aug. 1 – means more capital on hand to meet the needs of their customers, as well as to provide a cushion for everincreasing regulatory and compliance costs. And based on our current projections, we expect that this reduction in capital stock purchase requirements should enable us to pay a higher dividend in future quarters, which means members will receive a greater return on their investment. This will be particularly significant for borrowing members, as we pay a single dividend rate that is applied to the combination of membership capital stock and activity-based capital stock on a daily average basis for the quarter. The 25 percent reduction in the membership stock purchase requirement is a simple and immediate way to add value to membership in the Home Loan Bank, and is part of our ongoing focus on providing value to all of our members. Of course, our true franchise value is measured by our reliability. This reliability was proven during the financial crisis, when the FHLBNY was a continued on page 12 

10 | Banking New York

Still chained to collateral?

ICS can help... With ICS速, you can increase asset liquidity, unfetter your portfolio by repurposing collateral into higher-earning assets, and reduce ongoing tracking expenses. And you can do it all while offering large-dollar customers more: access to multi-million-dollar FDIC coverage, flexibility of daily liquidity, and interest at a rate you set.

For more information about ICS, contact Kevin Hamilton, Regional Director, at (866) 776-6426, ext. 3329 or khamilton@promnetwork.com. Use of the ICS service is subject to the terms, conditions, and disclosures set forth in the ICS agreements, including the ICS Participating Institution Agreement and the ICS Deposit Placement Agreement. Limits and customer eligibility criteria apply. ICS program withdrawals are limited to six per month when using the ICS savings option. ICS is a registered service mark of Promontory Interfinancial Network, LLC.

THE VALUE OF RELIABILITY | continued from page 10

critical, and often times only, source of liquidity for our membership, with advances peaking at $105 billion on Oct. 31, 2008. Today, in a relatively calmer environment, we remain a trusted partner for our members. Last month we announced our operating highlights for the second quarter of 2014. These results included $96.8 billion in advances to members, an increase of $9.1 billion from the first quarter of the year, and our highest level of advances in five years. As the economy continues to recover, the FHLBNY and our members are putting nearly $100 billion to work in communities across New York, New Jersey, Puerto Rico and the U.S. Virgin Islands to drive growth at the local level. Our continued performance and strong balance sheet keep us wellpositioned in the actual environment,

but our cooperative is well-positioned for potential adverse environments, as well. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the FHLBNY conducted a “stress test” using regulatorspecified scenarios and assumptions to determine whether we have the capital necessary to absorb losses as a result of adverse economic conditions. Last month, we posted the results of the Dodd-Frank Act Stress Test to our website (www.fhlbny.com) and, as these results show, the FHLBNY remains adequately capitalized under both the adverse and severely adverse scenarios proposed by the test. The FHLBNY also remains above regulatory capital requirements over the nine-quarter stress test planning horizon. The results of this test should bring comfort to our members in knowing that, regardless of how diffi-

cult the operating environment, their Home Loan Bank will still be there. The changes we have made to our capital plan enhance our ability to provide value to members, and the results of our stress test prove the sustainability of our model, but it is our dependability that is most important. Our advances are available each and every day, and we are proud to be a reliable funding partner for our region’s local lenders. We are there when you need us, and that is the true value of our franchise. ■ José R. González is president and CEO of the Federal Home Loan Bank of New York. He joined the FHLBNY as its executive vice president in 2013, and became president in April of this year. Prior to joining the FHLBNY, he served on its board of directors for a decade, including serving as vice chairman from 2008 through 2013.

We would like to thank our sponsors:

A LOOK AT COMMUNITY BANKING TODAY:

“DOING MORE WITH LESS”

silver dollar

federal Home loan Bank of new York 101 Park Ave., New York, NY 10178 (212) 441-67000 • www.fhlbny.com

t. Gschwender & associates, inc. 311 Montgomery Street, Suite 1 Syracuse, NY 13202 (315) 701-1293 www.tgschwender-assoc.com

pentegra retirement services 108 Corporate Park Dr. White Plains, NY 10604-3805 (609) 584-7400 • www.pentegra.com

iCBa services network 775 Ridge Lake Boulevard Memphis, TN 38120 (901) 762-53330 • www.icba.com

All Covered Finance (General) Bank Financial Services Group (Dime) BBN Bankers’ Bank Northeast (Quarter) Finger Lakes Technologies Group, Inc. (General) Five Star Bank (Quarter) Four Corners Energy (Dime) FPS Gold (Dime)

Harland Clarke (Quarter) KPMG (Quarter) NBT Bank (General) NY Business Development Corp. (Quarter) Roosevelt & Cross, Inc. (Dime) Sandler O’Neill & Partners, L.P. (Dime) Thompkins Trust Company (Quarter)

Half dollar

additional sponsors

2014 ANNuAL CONvENTION

SEPT. 7-9, 2014 • LAKE PLACID CONvENTION CENTER

12 | Banking New York

TODAY WE RISE TO THE OCCASION. It’s high time you overcome your IT burdens. Leveraging a team of cloud experts lets you launch new services faster, strengthen security and turn your focus back to your customers. As the financial industry’s largest, most trusted managed services provider, CSI empowers you to take a new, more powerful stance on IT—and banking. We’ll stand with you, while you stand out.

csiweb.com/riseup

CORE BANK PROCESSING • MANAGED SERVICES • MOBILE & INTERNET SOLUTIONS PAYMENTS PROCESSING • ELECTRONIC & PRINT DISTRIBUTION • REGULATORY COMPLIANCE

BITCOIN UPDATE | By Steve Viuker

DFS Sets Rule Template for Bitcoin Consumer Protection, Anti Money-Laundering and Cyber-Security Top the List

enjamin M. Lawsky, superintendent of financial services, announced in late July that the New York State Department of Financial Services (DFS) has issued for public comment a proposed “BitLicense” regulatory framework for New York virtual currency businesses. The proposed regulatory framework – which is the product of a nearly year-long DFS inquiry, including public hearings that the department held in January 2014 14 | Banking New York

– contains consumer protection, antimoney laundering compliance, and cyber security rules tailored for virtual currency firms. Lawsky stated that the DFS has sought to strike “an appropriate balance” between consumer protection and deterrence of illegal activity, and the need to support beneficial innovation, which the DFS says is vital to the long-term future of virtual currency. In accordance with the New York

State Administrative Procedures Act (SAPA), the proposed DFS rules for virtual currency firms was published in the New York State Register’s July 23, 2014 edition, which began a 45day public comment period. With the end of that period, the rules are subject to additional review and revision based on that public feedback before DFS finalizes them. Lawsky said that New York State, as the first to submit specially tai-

QUESTIONS OF INSURABILITY

lored rules for virtual currency firms, recognizes that continued public feedback is critical to finalizing the regulatory framework. Margo Tank In a July email to tech website Ars Technica, Wedbush Securities Analyst Gil Luria said that New York, with the largest concentration of financial firms and the most active regulation and enforcement action, might encourage other states to adopt a similar framework. “It is also possible other regulators, such as the Securities and Exchange Commission and the Federal Reserve, would decide to adopt this framework or accept the NYDFS standard. If that happens, these companies would be able to conduct business outside of New York as well,” he wrote. Roger Ver, a bitcoin business investor, believes that if adopted, the rules will drive bitcoin-based businesses out of New York. Ver told wired.com, “These men calling themselves government are not asking anybody to do anything. They are making demands, and will put us behind bars if we don’t obey. Bitcoin was specifically designed to strip away power from men who would be so presumptuous to believe that they have the right to rule over others.”

Insurers have been hesitant to provide coverage to businesses that operate on virtual currency. “Insurance companies do not understand bitcoin and even fear it,” Xapo CEO Wences Casares told CoinDesk. Earlier this year Lloyd’s was the first to offer coverage to Elliptic Vault, a bitcoin storage service, but the deal fell through. Other insurers have since joined the arena. In June, Great American Insurance Group announced that it will offer virtual currency coverage through its Fidelity/Crime Division to both commercial and government policyholders. In a statement, Great American said that “Standard crime insurance policies, including Great American’s crime policy, currently do not automatically provide coverage for virtual peer-topeer mediums of exchange. Crime insurance coverage for Bitcoins can now be granted by an endorsement to an existing crime policy.” Coverage is available in most states. Bermuda-based Meridian Insurance offers virtual currency coverage to Xapo, an online bitcoin vault based in California. Senior Vice President of Business Development Ted Rogers told CoinDesk that the company’s policy is “much larger than $15 million” and part of the reserve is held in bitcoins. “In our view, the BitLicense application requirements are exten-

sive – given that the industry is in its early stages of development the requirements or some elements thereof may be challenging for companies to meet,” said Margo Tank, a partner at Buckley Sandler. Tank told Banking New York that “the proposed rule requires a number of significant programs, recordkeeping and reporting requirements regarding consumer protection, cybersecurity and anti-money laundering, including a requirement that SARs be filed with the DFS. As proposed it could necessitate material changes to many businesses – such as changes to an existing product or service requiring prior written approval, and there appears to be no time limit in which to provide such approval. Finally, the rule offers extremely limited exceptions to those who are required to apply for a license, excluding only merchants and consumers, as well as those chartered under New York Banking Law, to conduct exchange services and are approved by the superintendent to engage in exchange activity.” Tank believes the critical issue for the DFS will be striking a balance between ensuring the safety and soundness of entities holding consumer funds/assets and encouraging continued growth and innovation in the virtual currency community. ■

A LONG WAY FROM MAINSTREAM On the business front, Dell announced that customers would be able to make purchases on its website using bitcoins. According to The New York Times, Dell teamed up with Coinbase, a third-party payment processor that converts customers’ bitcoins into dollars. Coinbase, which began with $25 million from the investment firm Andreessen Horowitz, approached Dell about accepting bitcoins as a payment option in early 2014. Dell reached out to Coinbase in July about adopting bitcoin quickly, in time for back-to-school shopping. Companies working with Coinbase pay it a 1 percent processing fee after the first $1 million in sales.

About 35,000 merchants use Coinbase’s payment tools, including Overstock.com, which began working with Coinbase in early January. The travel website Expedia and satellite television provider Dish Network have also partnered with Coinbase to accept bitcoins. But without government regulation, the mainstream has yet to fully embrace the virtual currency. The price of bitcoin has fluctuated wildly, from a few cents to more than $1,000.

Third Quarter 2014 | 15

Sport The

NAMING RIGHTS

BIG BANKS HAVE BECOME HEAVY HITTERS, BUT FOR HOW MANY INNINGS? 16 | Banking New York

BY STEVE VIUKER

ports sponsorship was the theme at a summer panel sponsored by the Financial Communications Society in New York. Jon Last, president and founder of Sports and Leisure Research Group, was the keynote speaker at the event, “Championing Your Financial Brand Through Sports Sponsorship.” Last said sports fans rank five times more influential than the general public. He also noted that media consumption rates run higher among sports fans and they seek out different forms of sports-related content. Sports marketing enables marketers to leverage a trusted heritage and insert their brands into a valued community, said Last. continued on page 18 

Third Quarter 2014 | 17

THE SPORT OF NAMING RIGHTS | continued from page 17

Street view of the New Busch Stadium, which is home to the St. Louis Cardinals Major League Baseball team. This is the First Base entrance.

Home of the Chicago Cubs, Wrigley Field Stadium is one of the oldest baseball fields in the country.

Using sports as a corporate marketing tool is at least 100 years old, if not older. Two early examples are the beerbrewing Busch family of St. Louis, who named the Cardinals ballpark in St. Louis after the family moniker, and the gumchewing Wrigleys, who did the same with their Chicago Cubbies. On another level, companies such as P. Ballantine and Sons, producer of Ballantine Ale, had Yankees announcer Mel Allen call a home run a “Ballantine Blast.” Another call was a “White Owl Wallop,” after the popular White Owl cigar. At iconic Ebbets Field in Brooklyn (named for owner Charles Ebbets), clothing store owner In the 1940s, Ballantine Beer became (and future Brooklyn the New York Yankees’ first TV sponsor. Ballantine Beer ads became part of borough president) Abe the scenery at Yankee Stadium. Sports Stark had a billboard writer and announcer Mel Allen became that said: “Hit Sign/Win the voice of the Yankees on radio and Suit,” a premium prize TV, and he also plugged Ballantine Beer at the time. The catch: during the play-by-play, calling each the sign was placed Yankee home run a “Ballantine Blast.” in a position nearly impossible to hit. Jump to the present and everything from replays to walkoff, game-ending hits to goals scored, touchdowns made and hoops hit, now has a sponsor. Perhaps the biggest change over the past few decades has Abe Stark billboard at Ebbets Field. been the emergence of financial firms as sponsors. As American affluence grew after World War II, brokerage houses and banks became

an advertising force. Golf and tennis were two major beneficiaries, but in recent decades the major leagues have jumped on the bandwagon. Many venues now sport corporate names, in contrast with the old model of the team name.

18 | Banking New York

ON THE WRONG SIDE OF HISTORY The process is not without some heavy cultural and emotional freight; the bigger the economic clout, the bigger the backlash can be when history goes wrong. The economic emergence of firms that became household names after World War II was accompanied by questions on the source of their growth. Allianz, for one, didn’t survive the vetting process in its quest to put its name on the New Jersey stadium being built by the Giants and the Jets in the Meadowlands. Allianz had reportedly supported the Nazi regime, to the detriment of their Jewish insurance policyholders. Allianz is hardly the only company to have wartime ties to the side that didn’t win, but its issue played out on the sports field, drawing criticism from Jewish organizations, Holocaust survivors and football fans. Ultimately, Met Life was named the stadium’s sponsor. The financial meltdown of 2008 recast controversy to more current, but no less polarizing, issues. The New York Mets were criticized for cutting naming-rights deals with firms such as Citi. Previously, the Houston Astros changed their ballpark name from Enron Field to Minute Maid Park, rivaling Tropicana Field in Tampa for the juiciest-named venue. In Brooklyn, the new arena is named Barclay’s Center; in Newark, it’s Prudential Center or The Rock. And after numerous mergers, the venue for the NHL Philly Flyers and record-losing NBA Sixers is now Wells Fargo Center. In Boston, the Celtics and the Bruins call TD Garden – formerly the Fleet Center – home.

CHASING GLORY Some venues remain pure, meaning they keep the venue name but splash the exteriors and interiors with branding. The Madison Square Garden Co. and Chase expanded their marketing partnership, making Chase the “official card” of MSG and providing Chase credit and debit card members with exclusive access to events and experiences across MSG’s venues and sports and entertainment franchises.

Citi Field Stadium in Queens, home of the New York Mets.

Madison Square Garden, a landmark, multi-purpose indoor arena located above Penn Station, opened in February 1968.

The long-term marketing partnership naming JPMorgan Chase as MSG’s first-ever Marquee Partner was announced in September 2010, making JPMorgan Chase the preeminent multi-platform, multi-venue, multi-media partner of MSG. The multi-platform partnership is fully integrated across MSG’s sports, entertainment and media properties, and includes MSG’s iconic venues (Madison Square Garden, Theater at Madison Square Garden, Radio City Music Hall, Beacon Theatre, The Chicago Theatre), entertainment brands and events (Radio City Christmas Spectacular),

dubbed the 1879 Club presented by J.P. Morgan, opened as part of the first phase of the transformation. At the summer panel sponsored by the Financial Communications Society, John Coombes of Liberty Mutual emphasized that brand awareness, in a competitive category, is the company’s biggest market challenge up, pitting them against Geico, Progressive, State Farm and Travelers. Liberty Mutual sponsors Team USA and said its CEO seeks positive reinforcement among its employees in terms of brand recognition. Liberty Mutual also sponsors FIFA and the World Cup on the fieldboards during games, and has sponsored an invitational, 70-event golf tournament that raises monies for various charities, over the last four years. Downtown Brooklyn had already become a hub of activity before the advent of Barclays Center, with a new shopping mall, an upgrade to the LIRR terminal, and upscale condos and rental units in nearby communities. Barclays Center was the controversial aspect of the massive Atlantic Yards development, as it was located near an existing residential neighborhood. Since its recent opening, Barclays has created noise and traffic problems, but has also increased the visibility of its prime tenant, the NBA’s Brooklyn Nets. The team relocated from the Prudential Center and will be followed in 2015 by the NHL’s New York Islanders, who are moving from the Nassau Coliseum.

SHORT-TERM IMPACT VERSUS LONG-TERM EXPECTATIONS

professional sports teams (New York Knicks, New York Rangers, New York Liberty), regional television networks (MSG, MSG Plus), and digital platforms. A central part of the relationship is Chase’s integration in Madison Square Garden Arena’s three-year remodeling of several signature elements, among them the Seventh Avenue entrance, which becomes Chase Square at Madison Square Garden, featuring interactive kiosks, new retail locations and a broadcast area. Two viewing platforms, called Chase Bridges, are to be suspended above the floor to offer an advantageous view. An exclusive space for event attendees,

Sports sponsorships have morphed from the one-liner, brand-name endorsements of the 19th century to the bigtime knock-on additions of real estate, shopping malls and all the other accessory enterprises, right down to kiosk hawkers of team memorabilia. Due to changes in the world of big bank sponsors, some venue names are up for grabs every few years, and sometimes on quick notice. This may be at odds with the long-term expectations of the retail and real estate developments riding on the coattails of sports teams. “There’s always next season” should probably be the disclaimer for any sponsor or community seeking long-term prospects. But for financial sponsors who can weather the volatility, sports endorsements are still a unifier. ■ Third Quarter 2014 | 19

EFFECTIVE ERM | By L. Randy Marsicano

The Top Three Things You Need to Know to Build an Enterprise Risk Management Program

ommunity-based financial institutions are facing big challenges today. There are more compliance and risk management processes, policies and regulations present than ever before, while the environment grows more competitive. By following three basic principles that cover operation, finance and governance, your institution can create and implement an effective and efficient enterprise risk management program that can stand up to today’s challenges.

BUILD TEAMWORK Randy Marsicano

Getting the ball rolling starts with looking at how your people are working to assess and mitigate risk. Effective risk management relies on teamwork, which means overcoming silos. The people and departments in your financial institution must be committed to enterprise risk management, working together to identify and mitigate risk, and eliminating silos. One way to create an enterprisewide view of risk is to structure your approach as a bottom-up risk management program. That means starting with the technologies, vendors and functions used in each of the products and services you offer. Once you have this inventory, you can be effective in performing risk assessments across functional areas and weigh the risks and controls using common criteria. Now, you can optimize efforts to allocate control resources, conduct control testing, and align management’s expertise to develop risk mitigation strategies for the entire institution.

MEASURE YOUR RISK ASSESSMENT COSTS A simple rule of thumb for risk management is this: If you can measure the cost of risk management, you can make it cost less. There are several ways to measure the cost of risk management. You can start with the hard costs like facilities, equipment and technology vendors and consultants, but don’t forget about the soft costs of people’s time. A common approach here is to take an average hourly rate for a mid-level or grade of managers, and add to it an hourly component that includes administrative costs, benefits, taxes, and other costs directly linked to the cost of the employee. This “fully loaded” hourly rate can be applied to the hours a resource spends on risk management to produce a soft cost of that resource. Once you have this soft cost, you can determine the fully loaded costs of time spent on internal audits and other internal risk management activities. When you have an understanding of the blended hard and soft costs of each risk management area, you can then match this to your organization’s functional risks, like credit, information security and regulatory compliance, to create an accurate picture of your risk and risk management spending. The CRO or risk management committee can then make adjustments and compose strategies to make your risk management program more effective and cost-efficient.

INSTALL STRONG GOVERNANCE Strong risk management governance is crucial to the success of your enterprise risk management program. Every community-based financial institution needs a chief risk officer, whether

it is a dedicated role or part of an exciting executive’s responsibilities. This individual is the evangelist about the benefits and best practices of enterprise risk management for the entire institution. Without this role, the effectiveness of the program will diminish over time. There are various internal and external forces that drive the need for this valuable role. Internally, there are numerous risk indicators that require monitoring, changes to the business that require evaluation and emerging risks that need to be evaluated. Externally, there are regulatory changes, growing competitive pressures, new product introductions and increased scrutiny as an organization approaches and crosses the $1 billion mark. Strong risk governance is needed to set the institution’s risk appetite, establish the key risk indicators and determine the resources to be allocated to assess and mitigate risk. The risk management governance team should do a thorough assessment of current practices for assessing risk, work to “convert” everyone in the institution to be more risk-minded, create a common language to communicate risk and decide if the institution needs more resources and technology to address risk. Creating a robust and highly effective enterprise risk management program will bring significant change to your institution. Enterprise risk management isn’t just another compliance requirement. It’s not another management practice. And it’s not going away. ERM is a powerful and effective approach to risk management that will make your institution stronger, sounder, and more successful in achieving its current and future business goals. ■

Randy Marsicano is the manager of professional services at WolfPAC Integrated Risk Management, a secure, web-based enterprise risk management solution used to automate the identification of risks, threats and control gaps. 20 | Banking New York

MORTGAGE MARKETSHARE REPORTS See How You Compare.

Data Solutions | www.thewarrengroup.com

Monitor, Analyze And Track Lending Activity With Mortgage MarketShare Reports. The Warren Group gives you the ability to dissect and analyze the mortgage lending market as you define it: by time period, loan type, geography, mortgage type, mortgage amount, and more. Our flexible reports allow you to view market trends, monitor competitors and measure your own performance throughout NY, MA, CT, RI, NH and ME. Tell us your objectives and we’ll supply the comprehensive reports that tell you what you want to know.

The Information You Need And More:

New: Mortgage MarketShare Module

• Measure sales performance against competition and market activity

• Interactive web-based reporting

• Identify high-performing competitors

• On demand results

• Locate and target emerging markets

• Custom regions and sophisticated searching

• Determine sales territories and quotas

• Save select queries

• Benchmark the productivity of originators and offices • Track market share trends and rankings • Demonstrate compliance with the Community Reinvestment Act

Mortgage MarketShare Reports - See How You Compare! Call 617-896-5348 to speak with one of our data specialists or email dlovins@thewarrengroup.com.

MARKET STRATEGY | By Graham Clark

Optimizing the Multichannel Banking Experience Providing a Seamless Customer Interface is no Longer Merely an Option specific products to each individual. Analyze your customer experience at an overall level with metrics like NPS, CES or CXi and at an individual interaction and channel level with tools like Fizzback, Foresee and customer sat scores.

MOBILE INNOVATION IS A MUST Just two years ago, consumers purchased 37 percent of their products online and 40 percent in a branch. Sixty percent of bill pay, balance/ transaction views, statement views, and money transfers occurred via the Web. Mobility interactions are growing at the rate of more than 30 percent per year. For many, the mobile banking experience is their only point of contact. Invest in the mobile channel.

PRIORITIZE PAYMENTS AND TRANSACTIONS

oday’s consumers demand multiple methods for interacting with banks, a strategy that requires more than just a website and a mobile app. Each channel needs to be optimized and managed to provide a seamless customer experience. Here are 10 critical areas to master for a successful multichannel banking strategy.

IMPROVE THE PHYSICAL EXPERIENCE The in-person experience retains its value; Branch transaction volumes may be falling but remain critical, requiring more convenient hours, more intelligence, more local community atmosphere and more technology, including more advanced people-less banks or interactive ATMs and kiosks.

TAP CUSTOMER EXPERIENCE ANALYTICS PERSONALIZE THE DIGITAL EXPERIENCE For the past 10 years, the banking and capital industry has providing all products and services from one easily accessible branch, ATM, website or contact center. In digital, this is not enough. SmartPhone users in particular want to see only a few personalized products that are relevant and useful to them, and to interact with and message them when it’s to customers' advantage. 22 | Banking New York

Know your customers. Whether they visit a branch, call an agent, approach your website or use your mobile app, they expect you to understand their needs and serve them better. Use internal banking data and external data, such as transactions, social media profiles and shopping habits. Apply proven customer experience analytics to respond to each customer intimately, targeting

The most important banking functions are payment and transaction processing interactions, whether merchant payments, credit card transactions, customer bill pay, trading stocks and moving funds – whether through cash, checks or online. Digital and mobile technologies are transforming payment expectations, capabilities and experiences. Make these functions seamless for consumers.

ENHANCE SELF SERVICE Self-service capabilities, specifically voice-based interactive voice response systems (IVRs), continue to grow in sophistication and importance, aligning tightly with web service and other assisted and selfservice capabilities. Align them with your digital capabilities.

ARM YOUR CONTACT CENTERS AGENTS Voice agent interactions may be declining, but they’re more critical and complex than ever before. To-

day's customers rarely pick up the phone unless it’s an escalated concern. Contact center agents increasingly need to become specialists with added tools (SWATs), taking advantage of intelligent call routing based on customer profiles and behaviors; desktop tools that provide predictive recommendations based on previous actions, prompted to action by customer analytics and enabled to deliver improved experiences through speech analytics better knowledge applications; and collaborative chat, email and social messaging capabilities.

or thousands of interactions at a time – all in the channel and language of the customer’s choice. Typically IVAs apply most easily in text-based interactions such as iChat, email or social media messaging. Interactive speech IVAs are emerging driven by customer expectations originating from the popularity of Siri and similar tools.

GET SOCIAL Social media is increasingly important channel for sentiment and reputation analysis, market monitoring and promotion. It's rapidly becoming necessary for targeted outbound messaging and connecting to communities. The real results don’t come from monitoring or understanding, but from acting on the insight. Re-

INCREASE EFFICIENCY AND EFFECTIVENESS Supplement live agents with intelligent virtual agents (IVAs) to answer questions. IVAs remember every coaching moment, have no attrition or sick days, and can handle hundreds

spondi to and engage with individual customers and building collaborative communities where customers help each other, and your bank.

TRANSITION FROM A MULTICHANNEL TO AN OMNICHANNEL STRATEGY Focus on maximizing the customer experience across multiple channels using powerful operational tools, and transform your call center to a customer experience command center. The customer experience command center uses advanced analytics to monitor and manage customer experience across all channels, all media, all segments and all geographical locations to not only achieve targets, but predict the impact of actions on enterprise achievement. ■

Graham Clark is vice president and head of customer experience management for the industry solutions group at Mphasis.

StonieR

To be the best, learn from the best.

Send Your Rising Stars to Stonier In partnership with the renowned Wharton School, Stonier provides an unparalleled executive education experience. Now accepting applications for Stonier 2015. The ABA Stonier Graduate School of Banking June 4–11, 2015 University of Pennsylvania Philadelphia, PA First. Best. Next. Visit abastonier.com for details.

Third Quarter 2014 | 23

BANK PROFILE | By Linda Goodspeed

Greater Hudson Bank Beating the Odds after 2008

Edward T. Lutz 24 | Banking New York

pening a bank three weeks after the collapse of Lehman Brothers sent the financial markets into a tailspin and the country into a deep recession hardly seems like good timing – but since Greater Hudson Bank opened for business on Oct. 8, 2008, the bank has racked up five straight years of profitability. “Despite Lehman’s collapse, we went ahead with the deal,” said Edward T. Lutz, president and CEO. “We like the banking business, and thought a commercial bank in this market could be successful.” Up until then, the bank’s predecessor had not been successful. The Community Bank of Orange, founded in 2002, was floundering when Lutz and Kenneth J. Torsoe, a well-known developer in the Hudson Valley, and a small group of investors took over the bank. At the time, the Orange bank had $69 million in assets and two branches.

“They were just never able to get traction,” Lutz said. Lutz and Torsoe’s group injected $23 million of their own funds into the Orange bank, changed its name, brought in a new management team and opened a third branch in Bardonia in Rockland County. Today, Greater Hudson Bank has five branches in three counties (Rockland, Orange and Westchester), total assets of $360 million, and five years of profits. For the first quarter of 2014, the bank reported net income of $654,000, compared to $519,000 for the 2013 first quarter. Loans, net of unearned income, increased $14.7 million, or 6.6 percent, to $235.4 million, and deposits increased $18.4 million, or 6.9 percent, to $285.7 million. The new team hit the ground running with more marketing and larger loans, including construction loans, “something other banks weren’t doing,” said Lutz. “Viable projects were

“It will remain competitive, but if you use your head and work hard, you can get a share of business.” — Edward T. Lutz, president and CEO, Greater Hudson Bank Net Income Loans

being tossed out of other banks. We did due diligence, and with our larger lending limit, were able to take them on.”

cated are well-banked, and have a diverse economy and scattered industry. “We market ourselves as one of the few remaining community banks,” Lutz said. “People want more of a relationship than some other banks are able to provide.” He said Greater Hudson is primarily a business bank, appealing to business advisors and owners and their families and employees. The bank also has a suite of retail products and technology offerings, including mobile, tablet and online services, and a remote deposit service for businesses.

INVESTING IN THE COMMUNITY The new team, led by board Chair Torsoe, also brought in considerable new business. Today, Lutz said 15 percent of the bank’s $235 million loan portfolio is construction loans. The portfolio also includes about $100 million in commercial real estate loans, C&I loans, and a smattering of retail loans, home equity and residential mortgages. The percentage of non-performing loans in the portfolio is “a little higher than we’d like,” Lutz said. “Maybe 12 or 13 loans in that bucket. But we’re satisfied we’ve got those assets appropriately reserved, and are working them out.” The three New York City bedroom counties where Greater Hudson is lo-

KEEPING THE CURRENT, LOOKING FOR NEW Lutz said the goal for this year is to grow the bank’s assets to $400 million through its existing network of locations. No new branches are planned in the short term. “We’ve got the infrastructure, people and controls in place,” he said.

Deposits

(in millions)

2Q2013

$513,000

$201.9

$252.9

2Q2014

$986,000

$232.3

$295.3

“We’ve got to find ways to put good earning assets on top of that structure.” To that end, in April Greater Hudson began sending out teams to call on existing and new customers in its three-county market. “We’re sending out teams of two to three people to call on existing customers. We call that retainage,” Lutz said. “We’re also visiting new customers. We think that effort will bring new business to the bank and keep what we have. We’ve got a variety of deposit products and lending products to sell. We have technology, and can offer a lot to help a business person conduct their business, and in turn, help us generate revenue and keep the wheel turning.” He said he’s excited about the future of banking: “It will remain competitive, but if you use your head and work hard, you can get a share of business.” With more than 40 years of experience in the banking industry, including several years as a bank regulator, Lutz is able to provide Greater Hudson’s board valuable insight and guidance on governance and compliance issues. “My background helps me understand what regulators are thinking or might be thinking,” he said. “It’s a common sense business. You need to stick to your knitting, build a good team of people, and spend a lot of time emphasizing internal controls and compliance.” ■ Third Quarter 2014 | 25

SETTING A PRECEDENT | By Laura Alix

Security is a Two-Way Street Eighth Circuit Case Affirms Balance in UCC

bank does not bear responsibility for making whole a commercial customer that lost more than $400,000 to a phishing scam, because the customer declined the bank’s “commercially reasonable” security measures, according to a recent appellate court decision that some Boston attorneys say could set a precedent for the industry as a whole.

Brenda Sharton

26 | Banking New York

Lynne Barr

Furthermore, the Eighth Circuit Court of Appeals also ruled that Tupelo, Miss.-based BancorpSouth Bank may seek attorneys’ fees from the commercial customer in question, Missouri-based Choice Escrow and Land Title. The decision turned on Article 4A of the Uniform Commercial Code (UCC), which governs funds transfers. Under Article 4A, a bank would ordinarily bear the risk of loss when an unauthorized transfer occurs, except when the bank has offered a “commercially reasonable” security measure or when it can prove that it accepted the payment order in good faith and “in compliance with the security procedure and any written

agreement or instruction of the customer.” In this case, the appeals court decided that BancorpSouth’s security measures were commercially reasonable and that Choice Escrow should bear liability for the loss because it rejected those security measures. “I think it’s a very measured opinion that shows that the justices understand the banking system and the business side for banks in a way that I think strikes a fair balance, which is what the legislature was trying to do in Article 4A,” said Brenda Sharton, a litigation partner at Goodwin Procter and chair of the firm’s business litigation practice. “I think this recognizes that balance in a way that shows some business acumen on the part of the justices.”

FOOL ME ONCE …

“We think of regulatory burden being a specific piece of legislation that Congress passes, but there’s a lot more to regulatory burden, and the call report is a perfect example of that.”

At the root of the case was a phishing scam that befell one of Choice Escrow’s employees and infected their computer with a virus. That virus gave an unscrupulous third party access to that employee’s username and password and, additionally, allowed the thief to mimic that user’s IP address, effectively fooling the bank’s device authentication software. That’s how a hacker was able to conduct a fraudulent wire transfer of $440,000 from Choice Escrow’s account to a bank account in Cypress. Choice Escrow sued BancorpSouth for the loss of funds, and BancorpSouth counterclaimed for its attorney’s fees. BancorpSouth offered Choice Escrow a dual control security measure, in which any payment order submitted through the bank’s online account platform would have to be approved by a second authorized user with a unique username and password before the bank would make the payment. Choice Escrow declined the use of dual control – not just once, but twice. First, Choice declined the measure when it first opened its trust account with BancorpSouth, and then again in November 2009, when one of the company’s underwriters alerted a Choice executive to the threat of a phishing scam and said executive wrote the bank asking whether it could limit wires to foreign banks. BancorpSouth couldn’t stop wire transfers only to foreign banks, a banker wrote back, but perhaps Choice might like to implement dual control now? The Choice executive declined, saying it would be “really tough unless we all shared passwords.”

— Terry Jorde, senior executive vice president and chief of staff, Independent Community Bankers of America In March 2010, scammers targeted a Choice employee and made off with the cash.

A TWO-WAY STREET The case bears some similarities to a previous appellate court case, PATCO Construction Co. vs. People’s United Bank, in which a Mainebased construction company brought a suit against Bridgeport, Conn.based People’s United Bank after it lost more than $500,000 in a series of fraudulent ACH transactions. Choice Escrow vs. BancorpSouth is “an important case because it is a second Circuit Court of Appeals opining on facts that are similar to the First Circuit case, but coming to a different – and in my opinion, correct – conclusion,” said Lynne Barr, partner at Goodwin Procter and chair of the firm’s banking and consumer financial services practices. “The efficient operation of the payments system is dependent on certain compromises among the party and recognition of the fact that security measures that are appropriate for

one bank and its customers may not necessarily be appropriate for another.” In the PATCO case, while a lower court initially ruled in favor of the bank, the First Circuit court overturned the summary judgment and remanded it back to a lower court. The case settled shortly thereafter. Other cases, certainly, have dealt with Article 4A of the UCC, but many settle well before reaching the circuit court of appeals. That may be in some measure because the money in question wasn’t worth the attorneys’ fees to bring the case very far, but it may also be that bankers are unwilling to potentially set a negative precedent for their industry, said Sharton, who represented People’s United in the First Circuit case, but declined to comment on the particulars of that case. The Choice Escrow case applies only to commercial customers, of course, but it establishes an important precedent: Customer security is a two-way street. ■

Laura Alix is a staff writer for The Warren Group, publisher of Banking New York. She may be reached at lalix@thewarrengroup.com.

Third Quarter 2014 | 27

PILES OF PAPERWORK | By Laura Alix

ICBA: Call Reports Increasingly Burdensome

egulatory paperwork is a little bit like water dripping onto a rock: A few drops don’t seem so profound, but let the water keep dripping and 10 years later, that rock looks completely different. Or, if you follow the analogy, your quarterly call report winds up being nearly 80 pages. That is more or less the point the Independent Community Bankers of America (ICBA) is making in a recent member survey intended to illustrate the burden on community banks in Terry Jorde one universal example: The quarterly call report. “We think of regulatory burden being a specific piece of legislation that Congress passes, but there’s a lot more to regulatory burden, and the call report is a perfect example of that,” said Terry Jorde, senior executive vice president and chief of staff at the ICBA. Jorde notes that in her own career preceding the ICBA, she was a community banker for more than 32 years, and one of her chief responsibilities was to prepare the bank’s quarterly call report. In the early days of her career, she said, the call report typically averaged about 18 pages. Today, it totals nearly 80 pages, and every new schedule means more man (or woman) hours to prepare. So when the ICBA put out word to its member banks that it would be conducting this survey, the response was overwhelming. Jorde said the organization received nearly 600 responses within 72 hours and notes that “it was not a short survey to complete.” According to the ICBA’s survey, more than three-quarters of respondents spent more than $60,000 annually preparing the call report, much of that on personnel salaries for people 28 | Banking New York

responsible for preparing it. A majority of responding banks, 37 percent in each category, said just one or two people were directly responsible for preparing the report, and while the number of employees involved in preparing the call report remained relatively flat at a majority of banks (64 percent) over the past 10 years, most banks said the number of hours required to complete the call report had increased, with the 90th percentile of respondents saying that figure averaged out to about 240 hours annually. Economies of scale don’t exactly work, either. Banks over $500 million in assets and those under $100 million responded in approximately equal measure that the time and money spent to prepare call reports call reports had increased as regulatory pressures intensified. And the RC-R schedule for regulatory capital earned the dubious distinction of the most burdensome schedule, with 75 percent of respondents ranking it above all others. RC-C Part 1 and RC-E took second and third place, respectively.

TECHNOLOGY EASING THE BURDEN But not so fast, say some community bankers. Sure, the call report can be a pain to prepare, but it pales in comparison to the Bank Secrecy Act or Home Mortgage Disclosure Act in terms of regulatory burden. “I’m kind of surprised that they spent so much effort on the call report, because there are so many other examples of regulatory overreach,” said Julieann M. Thurlow, president and CEO of Reading Co-operative Bank. “Every time there’s a crisis, they do add another schedule, because it’s another byproduct of another failing in the system, but I don’t think I would choose

the call report as one of the regulatory burdens I would attack first.” While it’s true that the regulatory burden is ever increasing, so, too, are the technological capabilities for handling call reporting requirements. “If you have the software or you take the time to go in and build a template that will each month extract the information you need, it will be a lot easier to prepare on a quarterly basis,” said Glen S. White, chairman and CEO of Mutual Bank in Whitman, Mass. Further, Thurlow and White both said they rely on the FFIEC’s Uniform Bank Performance Report, into which that data is fed, to measure their own banks’ performance against their peers. “I like the reports,” White said. “I love looking at them for other banks, and it’s a great way to keep track of the industry.” Still, White said a short-form call report might provide some welcome relief from the mountains of schedules and paperwork required quarterly of every bank. That’s what the ICBA has proposed on the heels of this survey: that wellcapitalized and highly-rated community banks be allowed to file a shortform call report covering the first and third quarters, alternated with the traditional long-form call report covering the second and fourth quarters. At this stage, however, that’s simply a proposal, Jorde said. “Right now it’s a fairly quiet time of year in Washington, so we are in the process of setting up some meetings with regulators to talk with them about our survey findings,” she said. “We do believe the regulators have the ability to make changes in the call report and filing requirements. That’s where we’re going to start first.” ■

Laura Alix is a staff writer for The Warren Group, publisher of Banking New York. She may be reached at lalix@thewarrengroup.com.

OPERATIONS MANAGEMENT | By Christina P. O’Neill

Study Finds Renegotiating Core Services Contracts Can Yield Huge Savings

anks and credit unions between $100 million and $5 billion in asset size could save an average of $1.2 million over fair market value during a five-year contract life if they sought to renegotiate outsourced core processing and IT services contracts during a critical time window. That’s according to “The Core Way Forward,” a report issued last week by the Business Dave Murray Performance Innovation Network. The ideal window turns out to be between 24 and 18 months before the expiration of the contract, the report finds. Small to midsized financial institutions are increasingly squeezed by low margins and regulatory pressure, as well as increased difficulties in making sound new loans, says David Murray, director of thought leadership at BPI Network. At a time when they’re spending more per staffer on compliance than their larger counterparts, they’re also seeking to add new services to stay competitive. They must trim non-interest expenses without compromising their internal operations. The study findings are partly based on national data on contract pricing, terms and conditions supplied by research and consulting firm Paladin fs, which tracks pricing data for core and IT services for community financial institutions. In addition, it incorporates a national survey of community financial executives conducted in the first half of 2014, and interviews with leading executives and advisors. Paladin conducted a blinded survey of 54 banks and credit unions across the nation that renegotiated their core IT

contracts. The report details how some achieved significant fair market value reductions. The analysis demonstrates that institutions in every part of the country can significantly reduce the cost of vendor services by negotiating based on fair market pricing.

SURVEY SAYS Seventy-seven percent of study respondents said they expect to add services in the areas of Internet and mobile banking and fraud protection, but only 30 percent said they believed they are paying what they should for their core processing and IT services; 37 percent believe they’re overpaying and 33 percent said they feel they lack sufficient information to know whether or not they are overpaying. That “don’t know” figure results from a combination of factors. First, there has already been significant consolidation in the third-party core business/IT processing market, with three providers controlling 85 percent of the market, compared to dozens of competitors 20 years ago. Secondly, the IT personnel at most banks and credit unions only negotiate contracts a few times in their entire

careers, while vendors do so day in and day out. Finally, there’s a lack of overall information on processing industry pricing – equivalent to the auto industry’s Kelly Blue Book. (Paladin has dubbed its metadata information on contracts, invoices and terms and conditions that went into the report a “Blue Book.”) “IT people lack negotiating skills because they have no reference point,” Murray said, adding that the dearth of core-processing vendors takes the teeth out of the RFP process. “The alternative: to confer with one’s existing vendor and restructure the contract to bring it more in line with what national pricing says you can get.” The downstream consequences of not renegotiating spill over into the domain of mergers and acquisitions, Murray said. Contracts that are not cost-efficient, and/or those with materially-significant termination fees, could compromise or even kill M&A deals. The study found that 69 percent of executives responding expect increased M&A activity over the next two years, with 36 percent saying they expect to enter that arena as a buyer; 21 continued on page 30  Third Quarter 2014 | 29

SMALL CHANGE | News Roundup

James W. Fulmer

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

NEW YORK COMMUNITY BANCORP

TOMPKINS BANK OF CASTILE

Westbury-based New York Community Bancorp Inc., parent company to New York Community Bank and New York Commercial Bank, appointed Lawrence Rosano to the boards of directors of the company and its subsidiary banks. He currently serves as the president of two New York real estate development and management corporations, Associated Development Corp. and Associated Properties Inc. He was appointed by former New York City Mayor Michael Bloomberg in 2006 and 2007 to serve as an industry representative on two task forces under the aegis of the city’s Department of Environmental Protection.

James W. Fulmer will retire as president and CEO of Tompkins Bank of Castile, based in Batavia, at the end of the year, after 26 years serving in those roles. He will remain as chairman of the bank’s board of directors. He will also retain several other corporate roles, including vice chairman of Tompkins Financial’s board of directors, chairman of the board of Tompkins Insurance Agencies, and member of the boards of Tompkins Financial Advisors, Tompkins Mahopac Bank and Tompkins VIST Bank, all affiliates of Tompkins Financial Corp. Fulmer is active in a variety of professional organizations, including the board of directors of the Federal Home Loan Bank of New York, and was recently appointed to the Federal Reserve Bank of New York Community Depository Advisory Council. John M. McKenna will succeed Fulmer as president and CEO. McKenna has been a senior vice president at Tompkins Bank of Castile for five years, concentrating in commercial lending. McKenna brought more than 20 years of banking experience to Tompkins Bank of Castile when he joined the organization in 2009. Active in the community, he is a board member of the Bishop’s Stewardship Council for the Diocese of Rochester, Medical Motor Service of Rochester and Monroe Community Hospital Foundation, and treasurer of Al Sigl Community of Agencies. ■

TD BANK John M. McKenna

TD Bank has named William M. Cooke as assistant vice president, regional sales representative in TD Merchant Services in Brooklyn. He is responsible for providing a range of customized solutions for cashless payments, including credit card processing, e-commerce, mobile payments and gift and loyalty card programs, to new and existing retail and commercial customers at 13 TD Bank stores throughout the bank’s Brooklyn East Region in New York City. Cooke has 20 years of experience in sales, marketing and account management. Prior to joining TD Bank, he served as an account manager at Brinks Inc. in New York City.

CORE SERVICES CONTRACTS | continued from page 29 percent said they’d be a buyer or seller depending on the opportunity, while only four percent identified themselves as probable sellers.

A STARTING POINT Murray cited a $320 million institution that signed a letter of intent, but because their core services had been auto-renewed, the deal was called off due to the exposure to a termination penalty. “More often, the deal has much less accretive value early on,” he said, particularly if the cost of services is not tiered to reflect growth. “Some of these contracts just don’t stipulate that the 30 | Banking New York

cost per transaction comes down after a certain point.” Community banks and credit unions in the $100 million to $5 billion asset size are paying between 10.2 and 41.4 percent above what the study determined could be fair market value for outsourced core processing and IT services. In order to recover $1.2 million on the interest income side, they’d have to make $6.4 million in new loans on day one of the contract, based on the average net interest margin of 3.7 percent earned by community banks at the end of 2013, according to the report. “Savings are all over the map,” Murray said, citing an institution under

$500 million in assets that saved more than $2 million over five years in the Northeast. The bad news: institutions often overpay. The good news: They can address that. Having the insight into what a bank or credit union across the country, of the same size, and with the same set of services and sales volume is paying for core processing services “is a really important starting point, instead of negotiating blindly based on just asking for a deal,” Murray said. The report is not meant to be vendor-adverse, he emphasized. “But having some transparency as to what pricing looks like, nationally, is important.” ■

Our Difference: Insights from a bank retirement plan specialist.

Your Advantage: A competitive edge and improved bottom line.

At Pentegra Retirement Services, our difference is your advantage. With more than 70 years of experience built working with banks like yours, Pentegra can help you design a retirement plan and benefits financing solution that helps improve your bottom line while positioning your bank to attract, reward and retain the talent key to your successâ&#x20AC;&#x201D;to help your bank strengthen its competitive advantage. Learn more about our approach to retirement plan solutions and benefits financing strategies using BOLI. Contact us at 800-872-3473, or visit us at www.pentegra.com.