Banking New York 1Q 2015

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • FIRST QUARTER 2015 • VOLUME 35

Mobile Payments Finally Gain Traction Apple Pay Heralds Increasing Acceptance in Banking

+ INSIDE: Federal Reserve Proposes Grand Vision for Future of Payment Processing Produced in partnership with the Independent Bankers Association of New York State

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BANKING NEW YORK Volume 35 | First Quarter 2015

20

Mobile Payments Finally Gain Traction

Apple Pay Heralds Increasing Acceptance in Banking

06 PRESIDENT’S MESSAGE

New York Community Banks

08 PUBLIC AFFAIRS UPDATE

New Year Brings

28

Renewed Efforts

04 FROM THE EDITOR

10 LOAN QUALITY

Business Impact Analysis

and Risk Assessment Can Help You Prepare

14

The Shock of the New and Institutional Wisdom

12 KEYS TO THE KINGDOM

Long Live the Lockbox

14 TECHNOLOGY

Hidden Traps of

Payment Processing

16 INDUSTRY NEWS 18 BANK PROFILE 18

CONTRIBUTING WRITERS THIS ISSUE Linda Goodspeed, Scott Van Voorhis TWG STAFF Timothy Warren Jr. PRESIDENT David Lovins ACCOUNTING MANAGER Mark DiSerio CEO & PUBLISHER

EDITORIAL DIRECTOR

CUSTOM PUBLICATIONS EDITOR

EDITORIAL INTERN

Rachel Benoit

DIRECTOR OF BUSINESS MEDIA

CREATIVE/MARKETING

GROUP SALES MANAGER

Richard Ofsthun ADVERTISING ACCOUNT MANAGERS

Bob Holzhacker, Mike Lydon, Claire Merritt

CONVERSATION

Christina P. O’Neill Anna Sims

DIRECTOR OF MARKETING & CREATIVE SERVICES

John Bottini DESIGN PRODUCTION MANAGER

Scott Ellison GRAPHIC DESIGNERS

Amanda Martocchio, Tom Agostino & Tyler Grazio

The Westchester Bank Delivers Big Service on Community Scale

26 STARTING THE

Cassidy Murphy

ASSOCIATE EDITOR

22 THREE’S A CROWD

Definition Critical

EDITORIAL

SALES George Chateauneuf

22

©2015 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

Fed Paper Lays Out Grand Payments Vision, Strategy

28 PLANNING FOR A

DISTANT FUTURE

Postponing Death and Taxes

30 SMALL CHANGE

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

The Shock of the New and Institutional Wisdom

T

his issue’s cover story addresses the growth of mobile payment systems over the last year. After much hesitance on the part of banks and retailers to venture into mobile payments due to a waitand-see attitude about which system would become the most widely used and economical to adopt, Apple Pay came onto the scene.

There’s nothing like the presence of a premier brand to get players off the fence. Large banks – brand names unto themselves – took the first step to adopt Apple Pay. Major retailers such as McDonalds, Walgreens and Whole Foods now accept the payment method. The subsequent growth in consumer usage also marks a growing acceptance of and comfort with mobile pay technology.

But mobile payment isn’t the only technological groundswell in the banking world. Take the advent of in-memory computing, which allows the analysis of big data in real time to gain market information and protect a financial institution against cyberthreats and fraud. The cost of IMC has dropped dramatically

in recent years due to several factors, including the advent of open systems applications for some critical uses.

Such innovations don’t replace human sensibility.

Indeed, they free up human sensibility so individuals can input better data. Compliance officers can be empowered by new technology rather than drowned in a deluge of data noise, as writer Edmund Greene notes in the article on page 14. Also, Sean Carter of NEACH tells of a lending officer’s discovery of a fraudulent operation on the part of its then-biggest ACH debit originator transaction customer. A quick intervention saved the bank millions in losses.

As the cost of technology continues to come out of the stratosphere and into the reach of smaller financial institutions, the expectations on the part of customers and regulators has the potential to become easier to fulfill.

■ Christina P. O’Neill Editor, Banking New York, The Warren Group

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PRESIDENT’S MESSAGE | By John Witkowski

New York Community Banks The ICBA & IBANYS Partnership is Working on Your Behalf The Independent Community Bankers of America is the only national trade association dedicated exclusively to serving the interests of community banks. IBANYS is the only statewide trade association whose sole mission is to representing the interests of community banks in New York. ICBA and IBANYS are staunch partners, working together on the state and national scenes. Together, we work hand-in-hand on key federal legislative and regulatory issues.

N

ew York’s own John Buhrmaster (president of 1st National Bank of Scotia and IBANYS’ current vice chairman) is the chairman of ICBA, providing his vision and leadership to advance the cause and priorities of the community banking industry nationwide. After fulfilling this crucial responsibility during 2014-15, John will assume the chairmanship of IBANYS for 2015-16 and provide that same John Witkowski guidance to our membership and industry in New York.

As president of IBANYS this past year, I can say this with certainty: Working with ICBA has been a tremendous education in what a strong, organized voice can achieve at the national level. IBANYS is continuing to build and strengthen the very same strong voice at the state level.

Advocating for Community Banks in Washington and Albany

As the national voice for community banks in Washington, D.C., ICBA focused on the issues and challenges facing community bankers everywhere, including those throughout New York. They have a remarkable track record of finding solutions involving key issues and challenges. In recent years, they have fought against unfair regulatory burdens, and for community bank tax and compliance accommodations, from Basel III capital standards to the new CFPB mortgage rules, to a more equitable tax treatment of credit unions 6 | Banking New York

and farm credit system institutions. As the industry’s voice in New York, IBANYS led the successful battle for major reforms that will produce significant state tax relief for community banks; for enhanced powers and authority involving municipal deposits and state deposits; and for reduced regulatory burden.

Each year, ICBA’s Washington Policy Summit brings together community bankers from across the country to meet with key legislators and regulators and advocate for our industry’s interests and priorities.

IBANYS leads a delegation of New York community bankers who participate in meetings with leading bank regulators, congressional leadership and with our own New York congressional delegation. It is part of an ongoing effort by both ICBA and IBANYS to keep our legislators and regulators fully informed about the vital role community banks play back home, and about our needs and priorities. IBANYS does the same in New York, reaching out to our state representatives and regulators to achieve the same goal.

Both organizations ICBA help community banks become more competitive and profitable, and provide a wide range of financial products.

Like IBANYS, ICBA is more than just a successful advocacy organization. Both associations provide extensive continuing education curriculum, timely programs and events for management and boards of directors, and – through partnerships with businesses affiliated with our industry – a continued on page 11 

IBANYS Board of Directors Officers Chairman Christopher Dowd Ballston Spa National Bank, Ballston Spa Vice Chairman John Buhrmaster First National Bank of Scotia, Scotia Treasurer/Secretary Doug Manditch Empire National Bank, Islandia Immediate Past Chairman Gregory Hartz Tompkins Trust Company, Ithaca Directors Thomas Amell Pioneer Savings Bank, Troy Ronald Bentley Chemung Canal Trust Company, Elmira R. Michael Briggs USNY Bank, Geneva Brenda Copeland Steuben Trust, Hornell Randy Crapser Bank of Richmondville, Cobleskill Ronald Denniston First National Bank of Dryden, Dryden 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 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 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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PUBLIC AFFAIRS UPDATE | By Stephen W. Rice

New Year Brings Renewed Efforts The 2014 elections are history and the 2015 congressional and state legislative sessions are underway, launched by President Barack Obama’s State of the Union address and Gov. Andrew Cuomo’s combined State of the State message and 2015-16 state budget presentation, entitled the “2015 Opportunity Agenda.”

I

n Washington, Republicans enjoy their largest majority in the House of Representatives since the Hoover administration in the late 1920s, and now also control the U.S. Senate. This means that the GOP now controls both the House financial services and Senate banking committees.

In Albany, Republicans won outright control of the State Senate, obviating their reliance on their coalition with the breakaway Independent Democrats caucus that ruled the chamber the past two years. The coalition continues, but with significantly less influence for the Stephen W. Rice IDC. The Assembly remains overwhelmingly Democratic, but with the resignation of Sheldon Silver there is now a new speaker, Carl Heastie (D-Bronx), for the first time since 1994.

For New York’s community banks, and for IBANYS, the new political landscape means renewed efforts to inform and educate our federal and state legislators and administration officials about the priorities and needs of our industry, and the importance of community banks to our local and state economies, customers and communities.

There are four new members of our New York Congressional Delegation: Lee Zeldin (R-Long Island), Kathleen Rice (D-Queens), Elise Stefanik (R-North Country) and John Katko (R-Central N.Y.). Stefanik is the youngest woman ever elected to Congress. A fifth new member will be added once a special election fills the seat of former Rep. Michael Grimm (R-Staten Island), who resigned.

Four New Yorkers serve on the key Financial Services Committee: Peter King (R-Long Island) and Greg Meeks (D-Queens), Nydia Velazquez (D-Queens) and Carolyn Maloney (D-Manhattan). Meanwhile, Charles Rangel (D-Harlem) and Joseph Crosley (D-Queens) serve on the powerful Ways & Means Committee. In the Senate, Chuck Schumer sits on the Finance and the Banking 8 | Banking New York

committees and is a key member of Senate Democratic leadership, and Kirstin Gillibrand serves on the Agriculture Committee.

In Albany, as the governor begins his second term, we have a number of new legislators, a new state tax commissioner, a new state budget director and many new senior administration officials.

The legislative agendas are now taking shape. In Albany, the governor proposed a $141.6 billion budget that would, among other things, provide property tax relief, small business tax cuts and raise the minimum wage. After a series of 11 legislative budget hearings, the budget process will work toward the April 1 deadline.

Meanwhile, IBANYS will represent the interests of our member banks on, among other things, issues related to taxes, powers, regulatory relief and opposing efforts to further empower tax-exempt credit unions creating an even more unfair playing field.

In Washington, ICBA has unveiled the 2015 “Plan for Prosperity” regulatory relief program for community banks. IBANYS will once again be working to support this important plan.

While the faces and names in power may change, IBANYS’ mission does not. We will work toward an environment that recognizes and supports the crucial contributions of New York community banks, provides them with what they need to survive and thrive, and reduces or removes restrictions and burdens that threaten their ability to serve our communities.

We invite you to join us in this cause, and in our legislative outreach efforts. Together, our voices will be heard loud and clear throughout the halls of Albany and Washington.

■ 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.

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BUSINESS DISRUPTIONS | By Tracy L. Hall

Business Impact Analysis and Risk Assessment Can Help You Prepare Recovering from a business interruption requires planning ahead to keep focus during the aftermath of an outage. Companies can prepare for the possibility of adverse events that interrupt their operations by developing a business impact analysis (BIA) and conducting a risk assessment (RA).

Developing a Business Impact Analysis

Documenting the recovery effort in advance can save crucial time during the critical hours of potentially losing business following an event. Undergoing a BIA involves taking an inventory of current business functions, prioritizing them and then determining what is needed to keep them going in the event of a business interruption.

The first step to conducting a BIA is to list all business functions and determine how important they are to normal daily operations. Next, it is important to figure out how long a company can wait after a business interruption before getting these crucial processes up and running again. This involves documenting what impact the company would experience during the time these functions were not recovered. Would the company suffer Tracy L. Hall significant financial consequences? Would there be regulatory fines imposed? What reputational risk would the company endure if they were not able to operate under “business as usual” circumstances? The processes that would incur the most impact if not recovered would be prioritized as the first to be recovered after a business interruption.

Performing a BIA also documents the critical resources that support these processes, including people, systems, forms, supplies and equipment.

Companies that want to conduct this process effectively might consider utilizing a BIA questionnaire. Running through the questions contained in a BIA questionnaire allows a firm to investigate how it could be affected by a major event. This questionnaire is answered most thoroughly when a company meets with people who have insight into the key operations of the firm.

Conducting a Risk Assessment

Before a BCP is created, a firm must conduct a risk assessment in order to identify the areas of exposure and all possible 10 | Banking New York

threats that could potentially cause a business interruption.

Types of threats that should be considered include natural, manmade, technological, loss of utilities, and pandemic in nature. Threats should be analyzed to determine the likelihood of their occurrence and the level of impact to the organization if they were to occur. Consideration should also be given to what mitigation steps have been taken to lessen the likelihood of occurrence and/or impact.

Threats that result in high risk ratings should be reviewed with management to determine the need for additional mitigation strategies to lessen the possibility of the threat causing a business outage.

Business Continuity Plan

Companies that want to be well-prepared in the event that their operations run into significant challenges will benefit from having a formalized business continuity plan (BCP) in place.

A BCP contains a detailed outline of the processes that a company should implement following an outage, including: • How to respond to specific situations • The best way to assess damages • Deciding whether to declare an emergency • Communicating internally and externally during and following an event • How to recover business operations in an efficient, prioritized fashion • How to restore to business as usual The BIA and RA act as the foundation of the BCP. The RA will help identify what types of scenarios a company should consider while documenting response strategies. Threats that have the highest risk ratings are most likely to cause a business interruption. The BIA will help with documenting recovery procedures for the most critical of processes and the resources that support them. It allows the company to properly document a prioritized recovery.

The Federal Emergency Management Agency (FEMA) has provided best practices, available on its website, on the steps that should be taken once a BCP has been developed. The organization has advised that companies distribute the plan's information to members of management, and also compose a business continuity team among the staff.

It has also been recommended by FEMA that institutions hold several copies of the plan in an emergency operations center to ensure that their staff has access to all the information they need to execute the plan if an emergency arises.

PRESIDENT’S MESSAGE | continued from page 6

Common Operational Challenges

There are a wide range of financial and operational issues that can occur as a result of a business interruption.

Expenses could skyrocket – or alternatively, both sales and revenue could come to a halt.

While these are the types of challenges that will show up on a balance sheet, numerous other problems can happen in the event that a natural disaster or other business interruption occurs. For example, the customer base of an institution could easily be damaged if the company fails to deliver on its contractual obligations. The reputation of a firm could also suffer in the event that the organization is not adequately prepared to respond to a business interruption. While the impact of this particular exposure may not be immediate, it can be substantial over time. Completing a BIA, RA and a BCP in advance will help identify areas of exposure and potential challenges, saving money and time during the recovery process in the event that a business interruption occurs.

■

host of valuable products and services that help our member banks improve their bottom line and continue serving their customers and communities.

Lastly, we all know that information is king. ICBA’s and IBANYS’ publications and communications programs inform our membership, elected officials and other key audiences about the trends and issues affecting our industry – and the important contributions community banks make every day in their local neighborhoods and service areas.

The bottom line is simple. New York community bankers must ensure certain they are doing everything possible to protect and advance their interests. The best way they can do this is to join, support and participate with both ICBA and IBANYS. It’s a partnership that works, and one that remains committed to building an even brighter future for community banks.

■

Tracy L. Hall, MBCP, is IT assurance manager with Wolf & Co. For more information, email thall@wolfandco.com or call (413) 726-6884.

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.

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First Quarter 2015 | 11

KEYS TO THE KINGDOM | By Christina P. O’Neill

Long Live the Lockbox Banks See Merit in Payment System with Human Contact

D

igital online, remote deposit capture and mobile payment systems are growing rapidly, but they haven’t eclipsed the growth of the analog lockbox yet. For some banks – and their customers – the lockbox remains a payment system staple, and not just because of a fondness on the part of banks for retro technologies.

“I do think that lockboxes have some real value still in the marketplace,” said Nancy Atkinson, co-author of a recent study on lockboxes, noting that companies are looking for more efficient ways to handle lockbox service – “if they’re doing their own payment processing as checks [decrease], the per-item cost goes up.”

The study, “North American Lockbox: Outsourcing Viability,” by Boston-based financial services analyst firm Aite, outlines the state of lockbox outsourcing in the country. It determines that $58.3 billion in remittance envelopes were processed via bank lockbox in 2014 and details the likelihood that banks are either outsourcing lockbox services or have already done so.

Lockboxes fall into three categories – retail, in which the end customer, a retail borrower, mails payments to a post office box; wholesale, which handles businessto-business payments; and “whole-tail,” a combination of the two.

The Aite report forecasts a calculated annual growth rate (CAGR) from 2009 to 2016 of 0.4 percent for retail, 2.9 percent for wholesale and 1.8 percent for wholetail. The average for all three categories is 1.5 percent over the same time period.

Atkinson noted that Federal Reserve 12 | Banking New York

studies done in 2012 and 2013 show a significant decline in check use as more businesses migrates to online bill pay, customers’ increasing comfort level for automatic deductions from their account for repetitive bills, and also point-of-sale payments, wherein a customer writes a check at a merchant’s point of sale and the check is converted on the spot to ACH.

DECREASING ELECTRONIC BABEL Lockboxes are only as good as their oversight systems – and the provider’s relationship with the United States Postal Service (USPS). When there’s a glitch with a receivable, the process needs to be reconciled by an individual who determines how to proceed with the receivable in question, and that’s often on a case-bycase basis.

In that way, the lockbox is a relationship-builder. But it has also kept up with technology, Atkinson noted. For years, providers have used equipment that will convert any type of paper document into an electronic solution, she said. Lockboxes can collect payment information from ACH, wire, card and check. They can provide reports in different types of formats, in a file transfer directly to their wholesale customer company, or translate it into a PDF for email, or an online report documenting authorization and entitlements.

The explosive growth of different payment channels make this all the more important. But where lockbox can shine is in the case of payments to wholesale customers that don’t match up with the

receivables list – payments that cover more than one invoice, or which contain deductions due to a dispute over delivery of goods or services – or even overpayments resulting from a dispute of a prior payment that has been resolved.

OUTSOURCING A POPULAR CHOICE Banks and technology vendors are increasingly looking at how to provide better reconciliation, match invoices and payments, and allow wholesale customers to set parameters to accept payment in full or a percentage of the total amount due based on the integrity of the relationship with the payable company.

A full suite of lockbox-supporting technology and staff can be cost-prohibitive for smaller institutions, so they contract their lockbox services to third-party vendors and/or correspondent banks.

The country’s larger banks, which own their own lockbox infrastructure, are doing a steady business providing lockbox services to smaller banks. Among these providers are BNY Mellon and Wells Fargo Bank. [In disclosure, Atkinson said that BNY Mellon, a correspondent bank for many others for decades, contacted some of their correspondent customers to respond to the Aite study. The resulting response rate of 38 banks, while not large, provides a statistically significant base on which to base responses.]

Wells Fargo Bank was included in the Aite study. Justin Freeman, senior vice president of Wells Fargo Treasury Management Product Management, said the continued on page 15 

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TECHNOLOGY | By Sean Carter

Hidden Traps of Payment Processing What Your Staff Doesn’t Know Can Hurt You EYES ON THE STREET, AND ON THE SHEET

F

inancial institutions are expected to be responsible and accountable for the operation of their payment processing systems, regardless of whether that function is handled by a third-party vendor.

Most third-party vendors limit their accountability to failures within their own systems. Errors that originate within a bank or retailer’s system – not their job.

Even verifiable third-party vendor errors can result in a big headache.

Bank customers don’t know the difference. They’ll leave a bank over a botched bill pay, no matter the origin.

For community banks, staff experience and training don’t always keep up with the technological advances in payment processing. It’s a prescription for a perfect storm – and a perfect customer-relations headache.

The efficiency of Automatic Clearing House processes has escalated the 14 | Banking New York

probability of fraudulent transactions, if no one experienced is watching.

And the consequences are expensive: With the advent of the Consumer Finance Protection Bureau, financial institutions are being more closely scrutinized in regards to the handling of consumer disputes and account monitoring activity such as stop payments and over draft program. Over the last couple of years banks have been punished monetarily; fines levied have reached $10 million.

Third-party vendors always push system upgrades. Regulators (and customers, too, if they knew) don’t want to hear that your bank didn’t want to pay for an upgrade. You need to understand all parts of the game.

Here are a few tips on the points of vulnerability in every financial institution, and simple steps to reduce human error, to help you avoid the roughest seas.

In our company’s experience, a signal example of street vigilance is this: Four and half years ago, a loan officer working for a bank that had locations in Baltimore drove out to the address of a property that was the subject of a loan request. The property just next door was a burned-out building. The loan officer recognized the wrecked property as the given address of the bank’s then-biggest ACH debit originator transaction customer, which did $60,000 in debit transactions per month.

Those ACH debits were actually a pay-for-work scam perpetrated by local gangs. The gangs – no strangers to payment fraud – would contact neighborhood folks looking for them to pay a fee in the hopes of landing them a job. The method in some cases for payment was ACH. Gangs throughout the country have gotten into check fraud by buying payroll checks and direct deposit stubs from local folks. They then stole the account numbers on the bottom of the checks or stubs and commit fraud by writing checks drawn on the companies’ account numbers.

If not for the lending officer’s institutional knowledge, the bank might have been out millions. That’s a couple of magnitudes bigger than a botched bill pay.

WATCH OUT FOR CUSTOMERS We’ve all heard about mortgage customers who didn’t understand the conditions of their agreements when they took them out, before the mortgage crisis hit. That problem isn’t limited to mortgage products – it’s also a problem with wire transfers, ACH origination, exception processing for card and ACH disputes, which can leave the bank exposed in the areas of Regulation E error resolution, secu-

LONG LIVE THE LOCKBOX continued from page 12

rity procedures that weren’t followed or stressed enough in cross training, lack of implementation of ACH risk management program components, inexperienced staff failing to catch the signs of increasing returns or issues surrounding a particular customer – and compromise of cross channel risk principles.

IT specialists within banks can track how long a customer opening an online account took to read the agreement. If

check from the customer, and put a limit on the amount and frequency of payments. Identify the tools the vendor is offering including limits are fraudulent transaction detection and implement them. If your third-party vendor does not offer risk management tools, you should implement inhouse controls.

When online customers call the bank to say the site is down, they may be the target of a “man in the middle”

The ACH debits were actually a pay-for-work scam perpetrated by local gangs. If not for the lending officer’s institutional knowledge, the bank might have been out millions.

it took the prospect only a few seconds to read a 52-page agreement, that’s a problem the IT team should monitor – though many legitimate customers might be exhibiting the same behavior.

Customers also need to be warned: Do not discuss your account online!

Most bank websites have posted this type of warning for years. But there are new customers all the time, and we all remember what P.T. Barnum said about who gets born every minute.

Fraudsters target the most vulnerable amongst us and this, in some cases, is the elderly. There has been a big push at the CFPB to help strengthen protections for the elderly. Banks need to understand the signs of fraud and put in procedures to help prevent losses.

FFIEC requires customers to be educated about the risks of online banking and how to protect themselves.

Does your staff know? And of your staff, who needs to be let into the system to monitor activity?

attack. It’s of critical importance to validate the phone numbers of those customers calling in.

Auditors cite financial institutions for returning items as stop payment (R08 that should have been returned as authorization revoked. Stop payments are prepost events; returns for revocations are adjustments, or correction of posted items. To get into compliance with the new rules, one must establish the intent of the account holder. Have the customer check a box for a onetime stop, two times or indefinitely.

Corporate accounts are not afforded the same protections as consumer accounts within the payment system or by federal regulation. Staff must be aware of this, and the bank’s disclosure should be very clear on this matter. Banks that provide the same disclosure to both consumer and corporate accounts maybe increasing their own risk and causing more confusion to both staff and the account holder.

■

VENDOR SAFEGUARDS

bank outsources its retail lockbox business to a third-party supplier, but it retains its wholesale service capabilities and benefits from its position as a largescale player.

“We are not seeing our volumes decline,” he said, adding that it’s a bigticket business that requires multimilliondollar investments on a regular basis.

The returns must be worth it. Freeman said a surge in the bank’s customers’ lockbox use can be attributed to health care related mailings. But it’s not, as one might think, due to payments spurred by the Affordable Care Act. Instead, it’s insurers paying medical providers. In this sphere, the check is still king. Payments by insurance companies to health care providers. “Paper payments are a big part of that vertical [system]. Lockbox is very essential,” he said.

Essential to the process is the bank’s ownership and operation of its own lockboxes and its relationships with the USPS. “We have relationships with the post office that is critical in this business; we are able to set the bar on quality,” Freeman said.

He added that the bank benefits from net acquisition of new customers from its competition, primarily in the health care and energy sectors.

Customer receivable matching facilitates matching the customer’s open receivables file – what was sent out as invoices – with payments coming into the lockbox. Typically, he said, 80 percent to 90 percent of transactions already come in as straight processing that does not require oversight. Receivable matching gets that figure to 99 percent, he said.

Customers receive more timely information to determine how receivables should be treated based on the existing customer relationship. “At the end of the day, it’s a people business,” Freeman said.

■ Christina P. O’Neill is editor of custom publications for The Warren Group, publisher of Banking New York. She may be reached at coneill@thewarrengroup.com.

Sean Carter, AAP, is senior vice president at NEACH.

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First Quarter 2015 | 15

INDUSTRY NEWS

SAVINGS PROMOTIONS ARE POSSIBLE FOR FINANCIAL INSTITUTIONS

DISCRIMINATORY MORTGAGE PRACTICES AT FIVE STAR BANK

A change in federal legislation will make it possible for financial institutions in New York State to offer promotions of savings accounts with the American Savings Promotion Act beginning Sept. 23, 2015.

Gov. Andrew Cuomo signed legislation last September that enabled banks and credit unions to offer savings promotion giveaways, where customers can win prizes from their deposits into a qualifying savings account. But at the time, federal law limited banks from engaging with lottery-related tactics, so banks were unable to take advantage of Cuomo’s legislation.

Soon that restriction will be a thing of the past. The American Savings Promotion Act will allow federal banking laws to utilize “savings promotion raffles” and savings promotion giveaways when it takes effect in September.

New York State Attorney General Eric T. Schneidermann called for New York-based Five Star Bank to end discriminatory mortgage practices that exclude predominantly minority neighborhoods in the Rochester area from the bank’s mortgage lending business.

The investigation conducted by the attorney general found that Five Star excluded predominately minority neighborhoods from its lending area, deemed loans secured by property outside of its lending area to be “undesirable” and imposed a minimum mortgage requirement that made many of the bank’s mortgage products unattainable in minority neighborhoods.

The attorney general began his investigation of Five Star and its parent company Financial Institutions Inc. in November 2012. The investigation found that Five Star had a map of its

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lending areas, where the bank’s lending business was made available to the predominantly white neighborhoods surrounding Rochester but excluded the predominantly minority neighborhoods.

In an agreement between the attorney general and Five Star, the bank is required to open two new Rochesterarea branch offices in neighborhoods with a minority population of at least 30 percent. Five Star is also supposed to create a special financing program that will provide $500,000 in discounts or subsidies on loans for residents of minority communities in the Rochester area. In addition, Five Star is expected to pay $150,000 in costs to the state of New York, to provide fair-lending training to its employees and to allow its business be monitored over a threeyear period.

THEFT RING TARGETING N.Y. BANK CUSTOMERS UNCOVERED, TWO SENTENCED Two men pleaded guilty to participating in an identity theft ring that stole more than $850,000 from personal bank accounts. The Attorney General’s Office announced the conviction of Tyrone “Reece” Lee, 28, and Anthony “Sug” Davis, 29, both of the Bronx.

The thieves reportedly obtained personal information of hundreds of unsuspecting people using corrupt bank tellers, and would then create false identification cards to withdraw money from the accounts.

The identity theft ring operated from July 2010 through June 2014.

Corrupt bank tellers accessed and stole personal information, account numbers and Social Security numbers from customers at Bank of America, JP Morgan Chase, TD Bank and Wachovia in Westchester County and New York City.

Lee pleaded guilty and was sentenced to four and a half to nine years in state prison. Davis received a sentence of two to six years, and was also recently sentenced on a federal identity theft case where he would receive up to 10 years in federal prison.

■

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BANK PROFILE | By Linda Goodspeed

The Westchester Bank Delivers Big Service on Community Scale

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John Tolomer President and CEO 18 | Banking New York

hen The Westchester Bank set up shop in a pair of doublewide trailers in Yonkers in 2008, Collins Brothers, a moving and storage company, was one of its first customers.

“We had always been with large banks,” said Frank Webers, CEO of Collins. “We felt that Westchester offered a more personal relationship.

When you’re an entrepreneur and put every single thing you have in your business, you take it very personally.

Westchester takes a lot of time to understand your business, what makes it tick, and be there with suggestions and solutions. I always felt that no matter what our challenges or needs, they were always there to support us. It’s the best banking relationship we’ve ever had.”

Webers is not the only business owner in Westchester County who feels that way. Since opening in June

2008, The Westchester Bank has become one of the fastest growing community banks in the country. From an initial capital raise of $22.8 million, total assets now surpass $500 million.

Considering Lehman Brothers crashed four months after the bank opened, touching off the worst economic crisis since the Great Depression, Westchester’s success is all the more impressive.

“My philosophy is you can either focus on the problem or on the solution,” said John M. Tolomer, president and CEO. ”It became very clear what the solution was. We had no control over the economy, but we did have control over our message and could deliver world-class banking services in Westchester County. We focused on what we could do and could control.

Ultimately, the strategy paid off.”

The Westchester Bank is a New York State-chartered, full-service and FDIC-insured commercial bank

offering state-of-the-art technology with a comprehensive line of banking products to businesses and consumers including business and personal checking, business lending, commercial mortgages, savings accounts, CDs, money market accounts, interest on lawyer accounts, attorney escrow accounts and tenant security accounts.

The bank, profitable since its second year, has outpaced its most aggressive projections. It helped that there were very few community banks in Westchester County (and Westchester will soon become the only community bank in the county). As larger banks became more internally focused on legacy bad loans during the recession, community banks rushed to fill the void. Technology also helped even the playing field.

“A small bank could offer all the services and technology the largest financial institutions offered,” Tolomer said. “A lot of businesses were taking the brunt of the downturn and looking for financing. We were able to really focus on building new relationships and convincing those small and medium size business owners that we had all the products and capabilities as the largest financial institutions, but could deliver them like a community bank in a highly personalized manner.”

Ave. in Yonkers, and in February 2015 expanded its corporate offices again to White Plains, its second office there.

Other locations include Yonkers (now a branch), Thornwood and Mount Kisco.

The bank has 45 employees.

Tolomer said The Westchester Bank’s success rests on a threepronged model: products, technology and people.

“It’s a combination of having the greatest products and services and being able to leverage the technology to emphasize personal service between the bank and customer,” he said.

As long as it sticks to that model, Tolomer said the bank will continue to outpace projections in all categories.

Currently, the bank has a total loan portfolio in excess of $410 million. C&I loans make up about 53 percent, and commercial real estate and multifamily housing the other 47 percent. Deposits exceed $440 million.

Tolomer said the bank is open to growing through mergers, and also expanding outside Westchester County.

“We will always be opportunistic,” he said.

Looking ahead, he said the biggest challenges facing the bank are people and technology.

“It’s always a challenge to recruit people who can buy into our culture and execute our model, both on the front and back ends,” he said. “We’re always in the process of interviewing people to find the best fit.”

Keeping up with technology is another challenge. “You always want to make sure you have the greatest technology, security and cybersecurity.”

Finally, Tolomer said a third challenge will be to “stick to our knitting” and the bank’s motto of “Business Banking Made Personal.”

■

Consumers Can’t Buy What They Can’t Find.

HOMETOWN BOY Tolomer’s own knowledge and relationships in Westchester County were also instrumental to the bank’s success.

Born and bred in Westchester County, Tolomer spent part of his banking career there at the Bank of New York before eventually becoming president of Commerce Bank in Florida. He was recruited to join Westchester in November 2008.

“I have to admit I had a few laughs, thinking about being president of Commerce Bank and then working in a couple of double-wide trailers,” Tolomer said.

But the trailers were short-lived.

The bank soon moved its corporate headquarters to 2001 Central Park

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First Quarter 2015 | 19

MOBILE GOES MAINSTREAM | By Scott Van Voorhis

Mobile Payments Finally Gain Traction

Apple Pay Heralds Increasing Acceptance in Banking

A

pple Pay had barely reached consumers’ digital wallets last fall when overeager critics pounced, declaring the new mobile payments product a “fizzle.”

To Empire State banks and credit unions, rushing to jump on the latest development in mobile payments technology to stay relevant with techsavvy customers, it was bewildering news indeed. But three months out, the critics are the ones now looking foolish, with Apple making clear it is here to stay with its potentially revolutionary new product.

Despite some early hiccups, Apple Pay is steadily building a network of customers and retailers, industry experts say. That, in turn, has 20 | Banking New York

more than redeemed the decision by financial institutions, ranging from Bank of America and JP Morgan to hometown lenders, to embrace the new product.

In fact, with Apple Pay increasingly under their belts, banks and credit unions across the state are now looking to the next round of mobile payment products as they seek to provide more payments options for increasingly mobile-centric customers.

“Apple Pay has gotten off to a good start and will only get stronger going forward,” said Thad Peterson, senior analyst in the Boston office of the Aite Group. “I don’t think they are in any rush – they know they have a terrific product.”

COME ON IN, THE LIQUIDITY’S FINE The mega banks were the first off the block with Apple Pay, with BofA aggressively promoting its alliance with the mobile payment product on its website. Other behemoths like JP Morgan and Chase Bank are also pushing Apple Pay, with 90 percent of bank cards now linked into the mobile payments system, Peterson said.

But smaller banks and credit unions are not far behind.

Bethpage Federal Credit Union on Long Island, one of the state’s largest, is the first credit union in the state to sign up with Apple Pay, noted Ronald McLean, senior vice president of the New York Credit Union Association.

Another 19 credit unions across the state, from “New York City to Buffalo to the Finger Lakes,” are in the process of joining up, McLean said.

“I think that will accelerate going forward,” he said.

Credit union executives realize offering a mobile payment option can be key in attracting younger members, he said.

“Credit unions understand the need to attract and interact with younger members, [particularly] Millennials,” McLean said. “Apple Pay is right in that wheelhouse.”

Regional banks are also joining up, including Cleveland-based KeyBank, which has a major presence in New

reputation Apple customers have as big spenders. In the eyes of some critics, Apple Pay suddenly seemed to be heading the way of previous mobile payment flops, such as Google Wallet, Softcard and PayPal. “Apple Pay is fizzling,” proclaimed economist David Evans, Market Platform Dynamics, on Dec. 5, “and unless it drastically changes course, Apple Pay will follow the hundreds of other attempts made around the world in the last seven years that have sputtered along at low levels of use or, much more frequently, have just flat-out died.”

Not so fast: Two months later, Apple Pay looks to be steadily gaining traction in the market, industry observers say.

signing up in order to be able to provide Apple Pay to their card holders,” said Tim Sloane, vice president of payments innovation at Mercator Advisory Group in Maynard.

The question now for banks across New York is not whether Apple Pay is fizzling, but rather identifying what the next mobile payment offering they’ll need to get on board with.

Mobile payments are expected to triple by 2019, to $142 billion from $52 billion last year, according to Forrester Research.

WHO’S NEXT? All eyes are now on Samsung, which is reportedly working on a mobile pay-

“There is no doubt that financial institutions are signing up, and they are signing up in order to be able to provide Apple Pay to their card holders.”

— Tim Sloane, vice president of payments innovation, Mercator Advisory Group York State, Providence-based Citizens Bank and Buffalo-based M&T Bank, the Albany Business Journal reported.

Smaller banks that have joined forces with Apple Pay include Glen Falls National Bank and Trust, First Niagara Bank and Saratoga National Bank and Trust, the paper noted.

While connecting with younger customers is great, for smaller lenders, doing nothing isn’t really an option either.

To write off Apple Pay as something the big banks are doing would be a major mistake, adding to the technological edge they already enjoy thanks to their size and assets, Sloane said.

At the moment, it’s not making any meaningful contribution to Apple’s bottom line. And some customers have become frustrated at the still extremely low number of retailers wired to accept Apple Pay, though the growing number includes giants like McDonald’s, Walgreens and Whole Foods, Sloane said.

But both McDonalds and Walgreens have reported a doubling in mobile payments since Apple Pay was launched, while BofA reports that 800,000 customers have signed up for the service, The Wall Street Journal reported.

Apple is also clearly in the mobile payments games for the long-term, with no sign of doing a cut and run like other short-lived innovators, the Aite Group’s Peterson said. (Apple gets a mere 15 cents for every $100 shoppers spend using Apple Pay, so this is not a get richquick-scheme, but rather a long-term market play.)

Roughly 220,000 stores, restaurants and other retail locations allow customers to settle up with Apple Pay, he said.

“There is no doubt that financial institutions are signing up, and they are

OVERCOMING EARLY ISSUES While Apple Pay has clearly won over banks, the whole rollout appeared in danger of imploding late last year, at least according to one of the app’s more overwrought critics.

A survey on Black Friday showed only a small percent of shoppers with iPhone 6s actually used Apple Pay to stock up on holiday gifts. That was a particular disappointment given the

ments product that will work on Android phones, which make up just as little more than half the market. Google may be working on another mobile payment play of its own, reportedly in talks to acquire rival Softcard, which runs a rival system.

“There is a significant opportunity for someone to step in and be the Apple Pay for Android,” Peterson said.

And credit unions are likely to get their own system to offer customers – CU Wallet, which is expected to launch pilot programs over the next few months.

More than 80 credit unions across the country have already signed up, McLean said. That could provide another alternative, especially for those lenders concerned about the central role Apple has suddenly seized in the payments process.

“That will be something obviously that credit unions will consider,” McLean said. “I anticipate over time there will be multiple options for consumers to have those mobile wallets.”

■ First Quarter 2015 | 21

THREE’S A CROWD | By Laura Alix

Definition Critical OCC Turns Up Scrutiny of Vendor Management Guidance From The OCC The OCC issued Bulletin 2013 – 29, providing guidance as to how banks should manage their third-party relationships. The agency lays out a risk management life cycle that includes: • Planning • Due diligence and third-party selection • Contract negotiation • Ongoing monitoring • Termination • Oversight and accountability • Documentation and reporting • Independent reviews Said John R. Eckert, the OCC’s director of operational risk and core policy: “The life cycle concept is well laid out and from our discussions it’s been well received by the industry. If anything else, my recommendation is always talk to your local examiner for any specific questions and maintain that dialogue.”

I

n 2015, vendor management may be the new black. Or, if we’re going to use an industry-specific example, the new QM rule. That is to say, it’s an issue to watch this year.

Of course, vendor management is nothing new for the banking industry. What is new is the increased regulatory scrutiny in this area, which has been ramping up since a joint regulatory review and ensuing enforcement actions in 2011 of several large mortgage servicers.

The most recent turning point, according to many, is OCC Bulletin 2013 – 29, issued in October 2013, which laid out agency guidance on managing risks associated with third-party relationships.

And while community banks aren’t regulated by the OCC, where the Office of the Comptroller of the Currency goes, the other regulators tend to follow, observers say.

“The fear is that if this is implemented in accordance with its terms and it spreads to the FDIC and state 22 | Banking New York

chartering authorities, it’s going to be quite a regulatory burden – not only for the banks involved, but also for the third-party vendors involved,” said Kevin Handly, an independent Boston-based banking lawyer and professor of banking law at Boston University’s law school.

Echoing a theme that tends to reverberate throughout the banking industry, Handly said that burden will be the most onerous for smaller, third-party vendors. A service provider could potentially be asked to open their doors and books to regulators during a bank examination, sucking up time and resources, and smaller companies and startups may ultimately decide it’s not worth it at all to do business with banks.

On the flipside, banks could decide it’s not worth contracting with a promising startup or small business that’s not already entrenched in the financial services industry.

Handly also said he is concerned that the OCC’s guidelines do not

specify just how far regulators or bankers must go in determining whether a given vendor presents too much risk. If, for example, a vice president at a third-party security firm has a 10-year-old misdemeanor, is that grounds for dismissal? Must bankers run all their vendors through the OFAC’s “black list?”

“It is a potential huge can of worms,” he said.

A CRITICAL QUESTION One of the key questions surrounding the subject of vendor management is how banks define vendors as “critical” or not. The OCC has laid down its expectation that banks identify those thirdparty service providers engaged in “critical activities” and hold them to more rigorous standards than those engaged in less critical functions.

While the agency has not laid down exact criteria for what constitutes “critical activities,” it outlines “critical” as meaning engaged in

significant functions, like payments, clearing and information technology, or anything else that could incur “significant risk” if the vendor falls short of expectations, have “significant customer impacts,” or have a major impact on bank operations.

“Our expectations are that management and the board of directors are able to identify what are those critical services,” said Beth Dugan, the OCC’s deputy comptroller for organizational risk. “They must make that determination of themselves for their given situation.”

When asked about how often regulators look into the books of third-party service providers, Dugan demurred, saying, “to be honest, I don’t think it’s a very frequent [occurrence].”

Some community bankers say vendor management doesn’t have to be that complicated or onerous a task.

Belmont Savings Bank, for instance, ranks its vendors A, B or C, according to their exposure to sensitive information, President and CEO Robert M. Mahoney said. The A vendors would be those with access to the most sensitive customer information, like account numbers or balances and Social Security numbers, while B vendors might have some exposure to semi-sensitive information, like customer home addresses, and C vendors would include, say, the guy who clears the snow from the parking lot in the winter.

Whitman-based Mutual Bank does something similar, ranking its vendors according to high, medium, low or non-existent risk, said CEO Glen S. White.

Both CEOs estimated they did business with maybe four or five vendors that warranted the highest risk rating, but neither seemed es-

pecially concerned that regulatory pressure vis a vis vendor management might be unduly burdensome in the year ahead.

That’s partially because, both agreed, for those most critical functions, they tended to contract with service providers heavily steeped in the banking industry – not with vendors who had just two or three bank clients.

Mahoney added, “Vendor management has been top of mind for three or four years; ranking your vendors, determining which have access to highly sensitive information, which don’t, visiting them, monitoring them, understanding their disaster recovery plans … If the OCC had to tell me to do that, then shame on me.”

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

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Fed Paper Lays Out Grand Payments Vision, Strategy

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ositioning itself as a “catalyst for collaboration,” the Federal Reserve System recently laid out its vision for a payments utopia and outlined several strategies for getting there, including the creation of two industry task forces sometime early this year.

The payments system of the future would be fast, safe and efficient. U.S. consumers would have better options for sending payments across borders, and players in the payments system would collaborate to make sure consumers could send payments seamlessly across a myriad of providers, the Fed wrote in its recent paper, “Strategies for Improving the U.S. Payment System.”

Getting there, the Fed said, will mean engaging with stakeholders on initiatives to improve the payments system, identifying approaches to that goal, working to reduce fraud risk and advance safety in the system, achieving end-to-end efficiency for domestic and cross-border payments and enhancing Federal Reserve Bank payments, settlements and risk-management services.

One of the main initiatives underpinning its lofty goals is the creation of two payments-related task forces representing financial institutions, payments processors and other industry players. The Fed said in its paper that it intends to establish the task forces in the early part of 2015.

Speaking in a webcast discussing the Fed’s vision, Esther George, president of the Federal Reserve Bank of Kansas City and a member of the Federal Reserve's Financial Services Policy Committee, said, “One task force will lay the groundwork for developing faster payment capabilities for the United States and to identify solutions for a broadly accessible, faster pay26 | Banking New York

ment system, which could involve creating new systems or enhancing existing infrastructure. A second task force will focus on payment security, with diverse stakeholder representation and will advise the Federal Reserve on security issues and help us identify priorities that require action.”

The Fed’s declaration of intent was met with praise from players in the payment system. The National Automated Clearinghouse Association (NACHA) applauded the Fed’s vision and also sought to draw attention to its own Same Day ACH initiative, its own phased approach toward same-day settlement capability.

Payments tech giant Fiserv also cheered the Fed’s vision.

“We absolutely believe that the Fed is doing the right thing in getting a variety of representatives in the payments industry to have a conversation around these different strategies,” said Matt Wilcox, Fiserv’s senior vice president of marketing strategy and innovation. “I don’t think they’ve outlined a solution to a problem, but they’ve outlined that they can get these groups to come to it and have a conversation.”

ENCOURAGING INNOVATION To be sure, the vision the Fed lays out in this strategy paper is a grand one.

It took two years of putting its head together with just to get to this point, and the Fed stressed in its communications that it was not looking to build its own payments infrastructure unless it could be absolutely sure the private sector would not meet that need.

“There’s a lot of innovation going out there in the private sector, and private sector companies are better set up to innovate and make quick decisions about developments in the market than any government agency is,” Federal

Reserve Board Governor Jerome H. Powell said in the webcast. “We don’t want to unnecessarily broaden our role and thereby unintentionally get in the way of that kind of innovation.”

For its own part, the Fed has pledged to expand the operating hours and capabilities of its National Settlement Service, expand its international payment services and expand its own risk-management services.

For a payments technology provider like Fiserv, one of the big challenges is something Wilcox refers to as interoperability, meaning that users can send each other payments regardless of the network they use. A consumer who uses Fiserv’s Popmoney, for instance, isn’t limited to sending those funds only to others who use Popmoney.

“The reach isn’t what it needs to be,” Wilcox said. “From a barrier to entry perspective, it’s difficult when you have multiple networks and multiple entities involved.”

Describing Fiserv’s own vision as being “in lockstep with the Fed” but stressing that it would not wait on the Fed, either, Wilcox said Fiserv had already partnered with several card networks and other payments networks in an effort to increase that interoperability they want.

“Creating additional collaboration in the industry and having these types of conversations, which I think is what the Fed is going to do. I think that’s exactly what we need their help with,” he said. “We were excited to see what they’ve come out with and we’re excited to participate in the next steps.” ■ Laura Alix is a staff writer for The Warren Group, publisher of Banking New York. She may be reached at lalix@thewarrengroup.com.

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PLANNING FOR A DISTANT FUTURE | By Christina P. O’Neill

Postponing Death and Taxes New Regs Help Hedge against a Longer Retirement

L

ast July, the U.S. Treasury issued regulations allowing qualified longevity annuity contracts as taxdeferred annuity products. The new rules allow deferment distribution of payments, within qualified retirement plans, until up to age 85, far beyond the required minimum distribution (RMD) age of 70 ½.

Now, holders of 401(k) or IRAs can use up to 25 percent of their account balance across all their retirement accounts, or $125,000, whichever is less, to buy a QLAC. Deferred income annuities (DIA) constitute about 1 percent of total an28 | Banking New York

nuity sales now. AIG has been first to gain approval of its QLAC product; other so-called “manufacturers” are seeking approval to bring their QLAC products to market this summer. New York Life is one of them. Ross Goldstein, managing director of annuity business at New York Life said that the firm has seen “tremendous growth” over the last four years in deferred income annuities. The Treasury ruling will raise the profile of these products, opening up the qualified-plan market, he predicted.

In 2010, the annuity market was about $50 million; longevity products

were purchased by clients in their 60s who wanted to defer income to their 80s. “People were looking to recreate a pension,” Goldstein said; they had more skills in accumulating assets than they did in planning how to take distributions.

But within the last year, the market has burgeoned to about $1 billion about a year. Goldstein notes a large concentration in nine- to 10-year income deferrals, as well as a contingent of clients who want distributions to start at 70 ½. No other investment costs less in real dollars than guaranteed income products, Goldstein said.

New York Life’s average client age is 59 for deferred-income products, and that client expects to work for another eight years until age 67. The product isn’t restricted to a one-time lump-sum payment. Clients can invest more over time, with the proviso that the payout related to subsequent contributions will be prorated over the course of the original time window. The later the contribution, the less the rate of return on payouts.

Also, with many DIA products, if the annuitant dies before payment starts, the investment is not refundable and heirs, if any, get nothing. The AIG product reportedly addresses the issue of loss of investment if the annuitant dies before payments begin. Treasury regulations state the death benefit is like a required minimum distribution for that year and is not eligible for rollover.

Late last year when the AIG product debuted, brokers questioned

ifying Longevity Annuity Contracts a Small First Step,” she noted that annuities purchased within qualified plans must use unisex mortality tables, while annuities purchased through IRAs are allowed to use gender-based tables.

Because women have longer life expectancies than men, their individual annuity rates are higher than men’s by approximately four to eight percent.

While group rates are usually lower than individual rates, men’s individual purchase rates may be lower than the

“As more of retirees’ income comes from defined contribution sources, the need to provide a longevity hedge will become more important.”

— Wendy Carter, The Segal Group

HEDGING AGAINST LIFE EXPECTANCY

whether the investment in a qualifiedplan QLAC can be converted to a Roth IRA just before the client starts drawing down. The answer: Once qualified money in a QLAC is converted into a Roth, it’s no longer a QLAC (conversely, longevity annuities bought within Roths are not considered QLACs because Roths have no RMD requirements), so the suggestion was that QLAC investors examine this issue before reaching the maximum qualified-plan distribution age of 70 ½. In essence, they may have to hedge their bets.

Also, brokers inquired who is responsible to determine that the annuity purchase meets the Treasury guideline purchase limits, and whether the QLAC originator would need to code such confirmation into its order entry system. Originators don’t have that information on hand – the IRS does.

Wendy Carter, defined contribution director with The Segal Group, headquartered in New York City, said, “As more of retirees’ income comes from defined contribution sources, the need to provide a longevity hedge will become more important. While a complex decision, a deferred option provides a longevity hedge without having to purchase an immediate annuity.”

Carter said that the dollar and percentage limits on QLAC purchases should allow many participants to purchase a reasonable amount of deferred income. However, she said, survey data shows that most close to retirement have account balances well below the $500,000 that would allow a $125,000 QLAC purchase.

Other real-life dilemmas concerning annuities come from two ends of the life-time horizon spectrum, involving the inevitable death and taxes.

Investors in annuities may find, too early, that they need more cash than their current income stream supports.

They’re faced with paying surrender fees and penalties – and taxes.

GENDER DIVIDE Carter brings up another concern. In a recent article, “Helping Participants Manage ‘Longevity Risk’ in Light of the Increasing Importance of Defined Contribution Plans: New Rules Make Qual

unisex group purchase rates, Carter said in the article. “These pricing differences mean that group purchasing power, frequently referred to as institutional pricing, which is one of the key advantages of retirement plans, is reduced – or perhaps lost entirely. As a result, women generally would benefit from purchasing QLACs within the plan and men might benefit from purchasing them within IRAs.” Rising rates of return might make QLACs more attractive for long-term investors. Also, an increased awareness on the part of younger investors of the value of a future guaranteed income stream; the earlier in their lives they invest, the less they have to invest to get a higher payout, with the potential to draw out far more than they put in.

Other QLAC approvals won't come until this summer from other annuity companies. The deadline for companies to elect to offer QLACs is January of 2016.

■ Christina P. O’Neill is editor of Banking New York. She may be reached at coneill@thewarrengroup.com.

First Quarter 2015 | 29

SMALL CHANGE | News Roundup

ROSS NAMED CFO OF KINDERHOOK BANK’S LEADERSHIP TEAM

Timothy M. Ross

Timothy M. Ross has joined Kinderhook Bank as its new CFO. Ross began his banking career as a commercial documentation manager with the Banknorth Group, N.A., where he quickly became a commercial loan officer. In 1999, Ross moved to Northfield Savings Bank as an assistant vice president and credit officer, and was then appointed senior vice president and CFO in 2008.

ORANGE COUNTY TRUST HIRES BARTOLOTTA AND RUHL AS REGIONAL PRESIDENTS

John Bartolotta

Brian Wright

Tom Harding

John P. Bartolotta and Joseph A. Ruhl have been named regional presidents of Orange County Trust, where they will oversee commercial business expansion in Rockland and Westchester counties.

After this expansion, the bank will operate its first full-service branches in Rockland and Westchester.

Bartolotta joins Orange County Trust from Hudson Valley Bank (HVB) where he was division executive for commercial banking. Before HVB, Bartolotta worked at Union State Bank in Rockland as deputy chief lending officer prior to its acquisition

by Key Bank. Ruhl was an attorney until joining HVB in 2002 as first senior vice president and executive of its legal services division.

Additionally, Kate Hurley has been named the director of trust services. Hurley will manage the bank’s trust department and its trust officers. Prior to her work with the bank, Hurley served as senior vice president and trust services director at Hudson Valley Bank. She also supervised the trust department for the Bank of Millbrook and is a member of the New York State Bankers Association trust and investment division, trust and estate legislative committee.

WRIGHT AND HARDING JOIN COMMUNITY BANK ADVISORY BOARD Community Bank N.A. has appointed Brian R. Wright to serve on its Central Region Advisory Board. As a member of the board, Wright will provide counsel to the senior management within the Community Bank N.A.’s Central Region market area.

Wright recently retired from his position on the board of directors for Community Bank System Inc., where he sat on the corporate governance and strategic planning committees. He retains a position as special counsel for clients and firm members in the Binghamton, Oneonta and Jupiter offices of Hinman, Howard & Kattell LLP. Tom Harding, owner and president of Harding Brooks Insurance, has been appointed to the bank’s Central Region Advisory Board. As a member of the Advisory Board, Harding will provide counsel to senior management within Community Bank N.A.’s Central Region market area. Harding has served as a licensed insurance professional for more than 24 years in the Greater Binghamton and Syracuse markets. He is also a member of the Independent Insurance Agents & Brokers of New York.

DOWD ELECTED CHAIRMAN OF IBANYS Christopher R. Dowd, president and CEO of Ballston Spa National Bank (BSNB), has been elected chairman of the Independent Bankers Association of New York State (IBANYS). Dowd previously served as vice chairman and treasurer at IBANYS. Dowd has been president of the BSNB, an independent community bank that serves the Saratoga County region, since 2004. He is also a past chairman and current board member for the American Red Cross Adirondack/Saratoga Chapter, a current board member of the American Red Cross Northeastern New York Region and a trustee of the Northeast Kidney Foundation. Dowd’s one-year term as chairman of IBANYS begins immediately.

SMITH PROMOTED TO BSA OFFICER FOR BANK OF AKRON Rebecca L. Smith has been promoted to Bank Secrecy Act officer at Bank of Akron. Smith will be responsible for implementing and monitoring the Bank Secrecy Act to ensure that each functional area of the bank complies with all Bank Secrecy Act/Anti-Money Laundering laws and banking regulations.

■

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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