Banking New York 2Q 2015 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SECOND QUARTER 2015 • VOLUME 36

Staying Close

by Working Remotely Produced in partnership with the Independent Bankers Association of New York State

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BANKING NEW YORK Volume 36 | Second Quarter 2015

Staying Close

by Working Remotely

06 PRESIDENT’S MESSAGE

New York Community Banks

08 PUBLIC AFFAIRS UPDATE Making Our Mark

at the ICBA Summit

10 MAKING MODELS Building Risk-Protective Models 12 DUE DILIGENCE Vendor Management Compliance

04 FROM THE EDITOR

‘The Toughest Cop on Wall Street’

14 REGULATION

Recent Internal Audit Trends in Banking

16 REGULATION UPDATE Liquidity Coverage Ratio Primer 30 CONTRIBUTING WRITERS THIS ISSUE Linda Goodspeed, Scott Van Voorhis, Steve Vivker 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

24 BANKING NY CONFERENCE 25 COMMUNITY BANK HEROES

EDITORIAL EDITORIAL DIRECTOR

Cassidy Murphy CUSTOM PUBLICATIONS EDITOR

30 BANK PROFILE

Christina P. O’Neill ASSOCIATE EDITOR

Anna Sims EDITORIAL INTERNS

Rachel Benoit, Katelyn Conley and Jessica Pitocco CREATIVE/MARKETING DIRECTOR OF MARKETING & CREATIVE SERVICES

©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

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32 CYBERSECURITY Are Our Red Flags Red Enough?

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Scott Ellison GRAPHIC DESIGNERS

Amanda Martocchio, Tom Agostino & Tyler Grazio

36 INDUSTRY NEWS 38 SMALL CHANGE

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

‘The Toughest Cop on Wall Street’

s this issue was going to press, news broke that Benjamin Lawsky would step down from his post as the first superintendent of the state Department of Financial Services in June. By the time you get this issue, his successor may already have been announced. Lawsky held the superintendent’s post for four years in what had been a newly formed agency that combined banking and insurance oversight during the worst economic crisis in 70 years, in the hotbed of the country’s – and the globe’s – financial operations. A Columbia School of Law professor described him to The New York Times as “The toughest cop on Wall Street.” During the time that federal oversight on the financial industry was starting up, Lawsky was the cop on the beat. He was the subject of the cover story in the third-quarter 2013 issue of Banking New York, “Hitting Your Mark vs. Doing the Right Thing.”

Two months before his announced departure, he had established an initiative to bolster cybersecurity initiatives for the financial industry (see story, page 32). His pending departure had been reported in the national media months ago. But in more recently officially announcing his exit date, he went on to break the revolving-door mold of regulators moving to the legal and/or lobbyist arena, by announcing he’d be starting his own consulting firm. Critics might surmise that he did so because no one in the legal or lobbying professions wanted him because of his uncompromising stances. But is that necessarily a bad thing? Maybe it’s an undisguised blessing for many of the rest of us. We wish him well. ■ 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 What Has IBANYS Been up to on Your Behalf? The winter and spring of 2015 have been very busy times at IBANYS. We have been extremely active on the education front, offering a number of major programs for community banks.

his year, we have initiated a new approach: presenting conferences on a regional basis or at central locations to facilitate travel and make it more convenient for our bankers and associate members to participate. We’re also pleased to be able to offer continuing professional education John Witkowski credits to those who participate in our meetings and conferences. • We planned and held regional compliance seminars in Rochester and in the Capital District, with great input from our Compliance Peer Group. • We hosted a regional Security Conference in Binghamton and will hold another in the Capital District later this year. • We held our Annual CFO/Senior Management Conference in Rochester, with the expert guidance of our CFO Peer Group. • We launched our inaugural Lending Conference in Watkins Glen. • We held two meetings of our IBANYS board of directors (in February and May) under the leadership of Chairman Chris Dowd (Ballston Spa National Bank). • We continued to meet with current and prospective member banks, associate members and preferred providers throughout New York State, as we work to develop new ways to provide real value – to our member banks, as well to our supporting partners and the association. • We have added a number of new associate member firms to our mix, 6 | Banking New York

including Continuity Control and Strategic Resources. • We launched a partnership with the Buffalo Bills Alumni Foundation to support their “Cure the Blue” program to raise funds and awareness regarding prostate cancer research. We hope you’ll join us in this long overdue effort. We’ll have more to say on this effort soon, including how community banks can help support this very worthwhile cause. We have also been extremely active on the government relations and advocacy front in both Albany and Washington: • We have monitored and provided input on legislative and regulatory developments at the state and federal levels and hosted regular conference calls of our Government Relations Committee with follow-up summaries and updates to keep our member banks informed and engaged. • We have worked with the new chair of the NYS Senate Banks Committee, Sen. Diane Savino (IDC, Staten Island), and her senior staff to inform her of our priorities and ask her support on our legislative proposals. • We continue to monitor all committee meetings and hearings, as well as Senate and Assembly sessions, and generate memos of support or opposition to bills as deemed appropriate by legislative counsel and our Government Relations Committee (which includes our officers). • We led a delegation of New York 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

Making Our Mark at the ICBA Summit Earlier this spring, Independent Bankers Association of New York State (IBANYS) Chairman Chris Dowd (Ballston Spa National Bank) and President and CEO John Witkowski led a group of New York community bankers to Washington, D.C., to participate in ICBA’s 2015 Washington Policy Summit. The summit included two intensive days of meetings and congressional meetings “on the hill” with members of the New York Congressional Delegation.

BANYS scheduled appointments in the offices of 11 New York representatives as well as Sen. Chuck Schumer’s and Sen. Kirsten Gillibrand’s. Among the visits was a session with Rep. Elise Stafanik, the youngest congresswoman ever elected and a champion of small business and community banking interests. We also met in the offices of House Financial Services Committee members Reps. Peter King and Carolyn Maloney. We also discussed small business lending and regulatory relief proposals with Rep. Richard Hanna, who is a member of the House Joint Economic Committee and Small Business Committee. Stephen W. Rice We advocated for a number of our federal legislative priorities, including ICBA’s “Plan for Prosperity” and “Clear Act” – both urging regulatory relief for community banks and strongly endorsed by IBANYS; data and cyber security measures, and opposition to expansion of credit union powers. We also continued to spread the news that more than 160 New York community banks (with their 1,200 branches and more than 25,000 employees) are the lifeblood of New York’s economy and communities, in rural areas, the suburbs and big city neighborhoods. New York’s community banks: hold $127.4 billion in assets; $25.8 billion one- to four-family residential mortgages in portfolio; and make a disproportionately high percentage of small business and small agricultural loans throughout the state. We also reiterated how Gov. Andrew Cuomo and State Financial Services Superintendent Benjamin Lawsky noted our contributions and our value in the NYS DFS Report on Community Banking. During the general sessions, we heard from Senate Banking Committee Chairman Richard Shelby (R-AL). He stressed he is working to develop regulatory relief legislation that will have bipartisan support and will be “doable.” Other speakers included Rep. Randy Neugebauer (RTX), who chairs the House Financial Services Subcommittee on Financial Institutions & Consumer Credit. He noted how excessive regulation on community banks impacts our 8 | Banking New York

customers and communities: “When we start impacting the health of our community banks, we impact the health of our economy.” Federal Reserve Board Governor Daniel Tarullo focused on the need for federal banking regulators to explore simplifying capital rules for community banks, noting the Basel III rules may be particularly costly for them. (IBANYS and ICBA are supporting H.R. 1523, which would exempt community banks with $50 billion or less in assets from Basel III.) As is the case in Albany and back home in the districts, personal advocacy by community bankers has a major impact on our legislators in Washington. We urge you to reach out to your congressional and state legislative representatives on a regular basis to make your voice heard! As always, thanks for your participation and support. ■ 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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MAKING MODELS | By Meredith F. Piotti

Building Risk-Protective Models In this highly regulated and risk-focused environment, financial institutions are relying more on applying models to important procedures such as identifying risk within the financial institution, and complying with regulatory reporting requirements. However, using models can increase risk since there are a number of factors that could cause them to be inaccurate and lead to financial loss.

nderstanding what model risk is, how to build better models and verifying their accuracy will reduce risk and losses at your financial institution while instilling best practices that can be refined and replicated to help the organization become more secure and successful. Understanding Model Risk

Model risk is quite simply the risk that results from decisions made based on misused or incorrect model output reports. These errors can lead to financial loss, poor business and strategic decision making and long lasting damage to the financial institution’s reputation. Model risk occurs when there are fundamental errors in the model that result from poor quality of input data, which of course, leads to poor quality output data on which decisions are based. Model risk also occurs when a model is used incorrectly or inappropriately, such as when models are used in a different way from what was originally intended. How to Prevent Model Risk

There are steps you can take to reduce the chance of model risk. The most important step is to put an “effective challenge” process in place. This is done by ensuring that there is ongoing critical analysis by objective, informed parties who can identify model limitations and assumptions and apply appropriates changes. There are three areas to look at in the people who will 10 | Banking New York

be doing the effective challenge. • Incentive – Having a person who did not build the model lead the effective challenge will produce better results as they will have an objective view of the model, they will not hesitate to question of any assumptions in the model, and they will not be tempted to hide any flaws in the model that could be revealed and reflect poorly on them. • Competence – The people overseeing the model and raising the effective challenge must be competent and have knowledge of the model process. This can be accomplished through selecting people with this knowledge as well as by providing training on how the modeling works, what the outcomes should look like and what indicates potential problems. • Influence – You want the people who are overseeing the effective challenge process to have influence in the institution so they can provide leadership on implementing the needed changes and be heard by the board, management and staff. In-House Modeling vs. Outsourced Modeling

There is no question that your institution must create the best models possible to continue operating successfully. Depending on your institution’s size and available resources, there are two ways to get the modeling done:

have your internal team build the model or outsource the work to experts. There are some things to consider when deciding to do the modeling in-house or to outsource. In-House Modeling

Before undertaking modeling in your institution, you will need to assess if the team that would work on the model has the time and skills to build an accurate model that will produce solid output data. You will also want to consider how much control and customization is required for your modeling needs. One of the main benefits to inhouse modeling is the amount of control you will have because you are the one building the model. However, the drawback to in-house modeling is that you could be limited by time and availability of staff, the complexity of the model that is needed and not having the knowledge among your team to build an accurate model. When developing your model inhouse, there are important things to consider to make sure it's as effective as possible: • You need a clear statement of purpose that lays out what the model should be performing. • Make sure the components in the model work as intended, are appropriate for the business goal and are conceptually sound and mathematically correct. • Have a good assessment of data quality and relevance, and that the appropriate documentation is available. • Undertake periodic testing during development to make sure that the calculations within the model are accurate, that the model is stable and robust, that limitations are assessed and that there is constituent behavior over a range of inputs.

PRESIDENT’S MESSAGE | continued from page 6

Outsourced Modeling

The validation should be performed by people who do not have oversight of the model. They should have the skills, experience and authority to accurately validate the model and ensure that changes are made throughout the institution. The ongoing monitoring of model validation is one of the most robust periods of testing for your models. It should include checking for mathematical accuracy, ensuring that the model is performing as expected and assessing if it’s meeting regulatory requirements and best practices. It should be noted that one regulatory hot button right now is the override of assumptions, which can be used to manipulate outcomes. It is considered a best practice today by regulators to fully document any assumption override decisions. The final step of the validation process is the outcomes analysis. In this step, you want to compare the model’s outputs to benchmarks and industry norms, but most importantly, to the actual outputs created by the institution. This will allow you to more accurately evaluate the performance of the model. You will also want to look for some early warning metrics that indicate any flaws in your model.

Outsourcing modeling allows your institution to seek out the best experts available to suit your needs and build the model for you without being limited by knowledge or complexity. It also means that the outside experts are working on the model, which frees up precious time for your staff to address other issues in the institution. An outside expert brings a wealth of knowledge to the modeling process, as it’s their job to make the most accurate models possible. They not only get to know the particulars of your institution, they have also experienced and gathered a range of best practices from the many different financial institutions and can apply them to your needs. Testing Your Model

Understanding if your model is working effectively is an ongoing process. To get an accurate understanding of the model’s accuracy and ensure that it reflects reality, you should seek out and utilize user feedback and insights and ask senior management to question assumptions and methods. If the model is not working correctly and you are developing it internally, you may want to consider hiring a professional team to move the process forward. If you are already outsourcing the work, you can work with your current vendor or change vendors.

Building a Stronger Future by Building Better Models

Validating Your Model

All models in the institution – as well as all parts of each model – should be subject to validation. Validation is a set of processes and activities intended to verify that the models are performing as expected and are in line with their design objectives and business uses. The frequency of the validation depends on the complexity of the model and how often it’s used. The rigor of the validation depends on the potential risk.

community bankers to Washington, D.C., in late April to participate in ICBA’s Washington Policy Summit. There, we met with nearly a dozen New York congressional offices and our two U.S. senators’ offices to discuss key regulatory relief and other priorities (see Steve Rice’s public affairs column for details). As the days have grown longer, so has our list of activities on behalf of New York community banks. • While summer is just underway, we are actively putting the final touches on our signature meeting of our association year: Our Annual Convention Sept.16-18 at The Hotel Thayer at West Point. It’s an exciting new venue for us, and we will have a terrific lineup of speakers and activities on tap, including State Financial Services Superintendent Benjamin Lawsky. (As we know, DFS is moving toward a major new initiative on cyber security matters related to the banking industry and its third party vendors.) • We’re also working on the Albany Regional Security Conference in early October (date TBA), our Regional Bank Directors Conferences Oct. 21 in Rochester and Oct. 22 in the Capital District, and an autumn downstate Lenders Conference, as well.

Building, testing and validating accurate models is important to your financial institution’s financial wellbeing. By building a strong team around the modeling process, utilizing best practices and seeking expert consultants when needed, you can create strong models that will serve your financial institution well into the future. ■

The work goes on, and it’s important to emphasize we’re in it together. We need the continued active involvement of our member banks and our partner organizations at every level to succeed and to help keep New York’s community banking industry strong, vibrant and engaged. As always, thanks for your support. ■

Meredith F. Piotti, CPA, CIA, is internal audit supervisor for Wolf & Co. She can be reached at 617-933-3353 or via email at mpiotti@ wolfandco.com.

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. Second Quarter 2015 | 11

DUE DILIGENCE | By Lori Peterson

Vendor Management Compliance Get Ahead of the Curve If you’ve felt the list of regulations impacting vendor management grow longer every quarter, you may be wondering what you can do to stay current and keep the examiners at bay. Horror stories abound of examinations of vendor oversight taking longer and longer, and of examiners asking for increasingly complex documentation and evidence of vendor programs. This article shares three tips for improving and right-sizing vendor management compliance programs.

ompliance and vendor management have become increasingly intertwined. Today’s financial institutions are not only accountable for their own actions, but for the actions of the various vendors that provide services on their behalf. As community banks outsource more activities to third parties, and more of those activities are subject to regulations, the stakes are higher. It feels as though “know your vendor’s vendor’s vendor” is the phrase that rules the day. Examiners are scrutinizing vendor management programs heavily, across every facet of financial services – from mortgage to credit card operations to information. Like the mega-banks, community banks are also at risk as they outsource more activities. In fact, they may be exposed to more risk. A community bank could not weather the financial and reputational impacts of an enforcement action as well as a larger bank. Like most compliance mandates, interpretation varies. Is every type of vendor subject to the same regulations? Does it make sense to have a one-size-fits-all vendor management program? What are the cost implications? Community banks must revamp their vendor management programs to make sure they identify risks ahead of time, and protect against costly regulatory enforcement actions and civil monetary penalties. 12 | Banking New York

Here are three tips to help your bank improve its efficacy and efficiency around vendor management: Right Info, Right People, Right Time

Most community banks have developed vendor management programs exclusively for IT and information security compliance. Today’s compliance requirements impact a myriad of activities from mortgage servicing to marketing. Your vendor management program must ensure that the people appropriate to make vendor-related decisions are involved in the process. It’s no longer wise to have everything handled in just one department. Organize vendors by the activities they perform, and then identify how different regulations affect that vendor and its activities. Those personnel in your bank who know the vendor and deal with its products or services daily are best equipped to evaluate the risks a particular vendor poses to your institution. Standardize Vendor Management Processes

Once your bank understands the specific impact that different regulations have on each vendor, you must create a formalized process for risk assessment, vendor training and risk management. Assign oversight of each vendor relationship and each contract to a specific management official within your bank. Also,

ensure that your initial consideration of vendors, due diligence processes and ongoing vendor risk assessments and contract compliance reviews follow a consistent structure, schedule and format to ensure nothing falls through the cracks. Apply Reasonable Judgment

Not every vendor requires the same level of risk management and oversight. A payment-processing provider is subject to significantly more regulations than a landscaping service. Factors that influence a vendor’s risk profile include the degree of impact to your performance: is this vendor “mission critical” to your operations, or could they be easily replaced if they do not or cannot perform satisfactorily? Likewise, how sensitive the data is that they may handle or come into contact with plays a big role in the degree of risk the vendor poses. A holistic and consistent approach to your vendor management practices will provide the ability for your bank to understand which vendors and activities need the most oversight and enforcement. A smart first step is to determine which vendors pose the greatest risk to your institution, and ensure that a thorough evaluation of their capabilities and performance happens throughout the relationship. Initial and ongoing due diligence are key to ensuring proper oversight. Vendor compliance will become more complex as financial institutions rely more heavily on third-party service providers. Having the processes and tools in place so you can easily assess and mitigate vendor compliance risks will be critical! ■ Lori Peterson, CRCM, is director of regulatory infrastructure at Continuity (www.continuity.net), an IBANYS Preferred Provider. She can be reached at 866-631-5556 or lpeterson@continuity.net.

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REGULATION | By Wesley Allen and Lori Charlebois

Recent Internal Audit Trends in Banking How to Stay One Step Ahead

bank’s internal audit function faces a myriad of evolving trends and regulatory scrutiny. Staying ahead of the curve is a challenge. Here are a few key trends to keep top of mind, as state and federal regulators display a renewed focus on rigorously evaluating the internal audit function. Competency or experience – As an institution continues to grow, products and services become increasingly complex, requiring experienced personnel to complete the audits. Internal auditors need to ensure audit work-programs for highly technical audits (e.g., Bank Secrecy Act, information technology and trust operations) are robust and commensurate with the size and risk profile of the institution. Ensuring that internal audit personnel are credentialed or appropriately experienced in the audit areas is key to avoiding regulatory scrutiny over competency. Risk assessment process – The risk assessment narrative should be business-line specific with an audit universe at a sufficiently granular level to ensure all legal entities and potential audit areas are identified, assessed and audited in a timely manner. The risk assessment should be tailored to an appropriately disaggregated level to allow risk identification at the appropriate level. The conclusion reached must be document14 | Banking New York

ed both quantitatively and qualitatively. Finally, the audit plan should align with audit area rotations and the hours allocated to each area. Sampling – There is no right answer to the question: “What is an appropriate sample size?” Each audit is unique. However, regulator consternation tends to occur when the sample size does not appear to be representative of the population. With the Sarbanes-Oxley Act, internal audit’s focus has turned to auditing internal control over financial reporting (ICFR). Certain industry-accepted sample sizes have emerged for auditing ICFR that may not be appropriate when applied to a non-financial reporting audit. Pick a sampling methodology, properly document it and stick with it throughout the audit cycle. If a deviation from the mandated sample size is required, robust documentation should be included in the audit work papers to support that conclusion. Tracking and remediation of audit exceptions – Exception tracking and reporting exceptions to the audit committee should include all findings, including findings identified by: regulators, management, third-party vendors, internal audit, external audit, systematic deficiencies identified through the loan review function, 401(k) auditors, compliance auditors or others. Also, bank

regulatory agencies are focusing on the timeline for correcting audit issues and whether appropriate follow up actions occurred to validate closure of the issue. The process for validating management’s remediation efforts of deficiencies should occur in a timely manner. In many instances, validation of remediation of a significant finding will need to occur before the next regularly scheduled audit, which may not be for another 36 months. Outsourcing – The administration and oversight of the internal audit function is a significant area of focus and review by the regulatory agencies, including banks that outsource certain internal audit tasks. Regulators have continually emphasized that audit committees cannot delegate responsibility of the internal audit to a vendor. Therefore, regulators will be evaluating how the bank oversees the outsourcing relationships. In closing, one of the key trends in internal audit at financial institutions is the renewed regulatory focus on the internal audit function. Careful attention should be paid to ensure that the right amount of resources are invested in the internal audit function to make it as effective as possible. Addressing staffing competency, the risk assessment process, exception tracking, outsourcing and sample sizes may require additional investments in training or resources. The audit committee, management and the internal audit function must come together and collaboratively strike the right balance between addressing regulatory concerns and the ever present constraint of limited resources. ■ Wesley Allen is a Director in DHG Financial Services. He can be reached at Wesley.allen@dghllp.com. Lori Charlebois, Partner, DHG Financial Services, can be reached at lori. charlebois@dhgllp.com.

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REGULATION UPDATE | By Stephen Brown Klinger

Liquidity Coverage Ratio Primer Guidance for Community Banks

he liquidity coverage ratio was first put into place by the Basel Committee on Banking Supervision in January 2013 with the publishing of “Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools.” With liquidity talk still lingering as one of the main causes for the financial crisis, the rule migrated to the U.S. banking system later that year in October when the Federal Reserve Board proposed the regulation as a method of strengthening liquidity positions at large financial institutions. On Sept. 3, 2014, Liquidity Coverage Ratio (LCR) Rule was finalized by the Federal Reserve (12 CFR Part 249), OCC (12 CFR Part 5), and FDIC (12 CFR Part 329). Generally applicable only to the largest banks, here are the key components: • There are two versions of the LCR: the LCR for banks above $250 billion and the modified LCR (for banks below this threshold, but above $50 billion). • The liquidity coverage ratio is measured by dividing high quality liquid assets (HQLA) by the total net cash outflows over the next 30 calendar days. • For the HQLA measure calculation assets are separated into different levels (Level 1, 2A, and 2B), with different haircuts applied to the fair value of each. Level 1 assets are the most favorable, they do not receive a discounted multiple. However, they are limited to securities with only the lowest risk profile, extremely large markets, and the best pledging status at central banks for intraday liquidity needs. • The total net cash outflows are calculated by subtracting the expected outflows minus inflows. The expected inflows are fairly predictable, while projecting the expected 16 | Banking New York

Exhibit 1 Company Name

Total Assets ($billion)

2013 Q4

2014 Q1

JP Morgan Chase Bank

2014 Q2

2014 Q3

2014 Q4

2,075

7.4

5.7

6.6

14.9

12.8

Bank of America

1,574.1

6.2

35.9

54.9

66.8

Wells Fargo Bank

1,532.8

0.5

6.3

18.2

37.8

60.7

Citibank

1,356.8

68.6

82.4

87.8

94.7

109.9

U.S. Bank

399.0

2.7

1.5

2.2

3.3

PNC Bank

335.1

3.6

4.1

4.9

4.8

4.9

Bank of New York Mellon

304.2

14.5

15.2

16.5

23.2

22.6

State Street Bank and Trust Company

269.8

1.3

2.8

10.1

Capital One, National Association

255.0

0.8

1.9

104.3

144.3

175.7

245.9

292.8

17.2

31.3

70.2

193

237.4

272.7

345.6

404.3

33.9

44.4

35.3

72.9

58.7

Large Bank Sub-Total Change from previous quarter Industry Total Change from previous quarter

outflows is more speculative as it combines contractual obligations and the product of outstanding balances of liabilities times expected run-off rates. • There is a transition period for the calculation of the ratio and the minimum required threshold. Banks subject to the LCR must calculate the ratio on a monthly basis starting in Jan. 1, 2015, and maintain a ratio above 80 percent for 2015. This stair-steps into calculating the ratio on a daily basis starting July 2015, a minimum ratio of 90 percent in 2016, and tops at 100 percent in 2017. Banks subject to the modified LCR have it slightly easier: needing to calculate the ratio starting January 2016 on a monthly basis, maintaining a ratio of 90 percent for 2016, and then 100 percent for the calendar year of 2017 and thereafter.

So the question begs to be asked; why should community bank executives and boards factor the Liquidity Coverage Ratio into their strategic planning? There are two primary reasons: The shifting of big banks’ balance sheets to increase HQLA has supplemented demand for Treasury securities in 2014 as the Fed has tapered purchases. According to FinPro research, the banking industry increased its total holdings in U.S. Treasury Securities from $193 billion at end of 4Q 2013 to $404.3 billion at the end of 4Q 2014. More than 85 percent of this increase comes from the nine largest banks in the U.S., all of which are over $250 billion and are subject to the LCR (see Exhibit 1). The industries’ net increases time within a quarter of the Fed tapering its asset purchase program,

Exhibit 2

stabilizing the demand for Treasury securities and shifting some of the power to control the stability of yield to be contingent on the continued demand from big banks (see Exhibit 2). However, their appetite is not likely to continue as they build HQLA for the LCR. Subsequently, the yield on Treasuries may increase from their historic low as demand drops; an important point for community banks’ interest rate management, product pricing and strategic planning. The ratio is pretty simple to recite, but there are many nuances to the calculations for the numerator and denominator. This is evident in the fact that the financial institutions qualifying for the modified liquidity coverage ratio are given a break and only need to calculate the measure on a monthly basis. So while the calculation may not be mandatory for community banks, within the calculations are key insights into how regulators view assets eligible for liquidity and assess an institution’s future potential cash continued on page 18 

THE BANKING INDUSTRY INCREASED ITS TOTAL HOLDINGS IN U.S. TREASURY SECURITIES FROM $193 BILLION AT END OF 4Q 2013 TO $404.3 BILLION AT THE END OF 4Q 2014.

Second Quarter 2015 | 17

REGULATION UPDATE | continued from page 17 Exhibit 3a Source: Liquidity Coverage Ratio: Liquidity Risk Measurement Standards Final Rule a. Retail funding outflow amount. A [BANK]’s retail funding outflow amount as of the calculation date includes (regardless of maturity or collateralization): (1) 3 percent of all stable retail deposits held at the [BANK]; (2) 10 percent of all other retail deposits held at the [BANK]; (3) 20 percent of all deposits placed at the [BANK] by a third party on behalf of a retail customer or counterparty that are not brokered deposits, where the retail customer or counterparty owns the account and the entire amount is covered by deposit insurance; (4) 40 percent of all deposits placed at the [BANK] by a third party on behalf of a retail customer or counterparty that are not brokered deposits, where the retail customer or counterparty owns the account and where less than the entire amount is covered by deposit insurance; and (5) 40 percent of all funding from a retail customer or counter party that is not: (i) A retail deposit (ii) A brokered deposit provided by a retail customer or counterparty; or (iii) A debt instrument issued by the [BANK] that is owned by a retail customer or counterparty.

Exhibit 3b Stable retail deposit means a retail deposit that is entirely covered by deposit insurance and: (1) Is held by the depositor in a transactional account; or (2) The depositor that holds the account has another established relationship with the [BANK] such as another deposit account, a loan, bill payment services, or any similar service or product provided to the depositor that the [BANK] demonstrates to the satisfaction of the [AGENCY] would make deposit withdrawal highly unlikely during a liquidity stress event.

flow relative to deposit relationships. Perhaps the most interesting is the classification of deposits in how “stable retail deposits” are defined. Whether or not a retail deposit is “stable” or “all other” makes a big difference within the calculation, as the multiplier for projecting “stable retail deposit” run-off is three percent while the multiplier for “all other retail deposits” is 10 percent (see Exhibit 3a). This means a large institution that has smaller and more wellrounded accounts has a competitive advantage over others, as it does not have to maintain a smaller portfolio of lower yielding assets in order to satisfy a higher need for HQLAs. For the purposes of calculating projected outflows and multipliers, “stable retail deposits” are defined 18 | Banking New York

as “the entire amount of which is covered by deposit insurance, and either (1) held in a transactional account by the depositor or (2) the depositor has another established relationship with a covered company, such that withdrawal of the deposit would be unlikely.” The last part of the definition is a departure from the historic regulatory definition of a “core deposit,” in that it acknowledges there is more to a stable/core/loyal deposit than just the balance. As a best practice for community banks, this definition should be a minimal consideration when developing modeling assumptions and projections. FinPro’s research has found that when six variables are considered in totality, two of which are account size and number of client relationships, a probability for renewal retention for retail deposits is able to

be calculated with a high degree of certainty. The original Basel Accords were founded primarily to establish a uniform capital framework for large financial institutions as a means to reduce international counterparty risk. The primary focus of Basel III remains true to its roots, with a focus primarily on capital, but the recent financial crisis necessitated a liquidity component as well. While the rule does not apply directly to community banks, the aspects above should be taken into consideration when community banks discuss strategic planning. ■ Stephen Brown Klinger is director and responsible for industry research at FinPro Inc. For more information about FinPro’s regulatory, planning, or strategic modeling services, contact Stephen at (908)-604-9336 or sbrownklinger@finpro.us.

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. M&T Bank, an FHLBNY member, used an advance to help Emmanuel Missionary Baptist Church acquire a 39,923-square-foot commercial structure that houses a school, offices, church, rectory, and five-car garage. The larger facility allowed the organization to expand its outreach programs, including a food pantry and substance abuse counseling to benefit low-to-moderate income individuals in Rochester, New York. 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.

Second Quarter 2015 | 19

Staying Close

by Working Remotely How One Bankâ&#x20AC;&#x2122;s Experience with Long-Distance Telecommuting Keeps a Valued Talent

20 | Banking New York

By Scott Van Voorhis

commercial credit analyst for Tompkins Mahopac Bank, Gemma Graham works 8:30 to 5, with a floating half hour for lunch. All in all, a pretty typical schedule, except for the fact that Graham analyzes office building loans for the Hudson Valley-based bank from her home office in Atlanta. The decision that led Tompkins and Graham to work out this somewhat unusual working arrangement came about more by happenstance than any grand plan, but the success of the arrangement has created a newfound comfort level with telecommuting arrangements at the nearly $1 billion financial institution, which, like many community banks, had been cautious about embracing the work-fromhome revolution. And it has provided the Tompkins Mahopac with a potentially valuJerry Klein able retention and recruiting tool as it competes in an increasingly tight labor market. “So far, it has been fantastic,” Graham said. “It takes a certain type of person to work from home and be productive, and it’s good the bank recognized that in me and gave me the opportunity.”

HOW IT HAPPENED There is no dearth of employees out there lobbying for the flexibility of a telecommuting schedule. But that’s not how it happened at Tompkins, where Graham found herself courted by the bank with a proposal that she telecommute full-time, not the other way around. A credit analyst at the bank, Graham got engaged and made plans to move with her fiancé to Atlanta. But after she gave notice and started packing to leave, Graham was pleasantly surprised to find that Gerald Klein, the bank’s chief executive,

wasn’t ready to let her go so easily. The bank came back with a proposal that Graham couldn’t refuse – stay with them and work full-time out of her new home in Atlanta. It wasn’t that the bank suddenly had the urge to start experimenting with telecommuting, Klein explained. In fact, some employees in the bank’s marketing department have worked remotely a day or two here or there, with some facing long commutes to work or between the company’s offices, spread across the state. Rather, capable credit analysts are hard to find these days, especially in the Empire State, he said. Mergers and upheaval in the banking industry has decimated the ranks of credit analysts, with many having bailed out of the industry altogether. So, having found a capable and talented credit analyst like Graham, and then having grounded her in the Tompkins Mahopac culture, the bank was ready to pull out all the stops to keep her. “She had been a really good employee, and we hated to lose her,” Klein said. “It is very difficult to find talented people in lending and credit nowadays.” Still, it took some convincing of the board, Klein noted, who had to overcome some initial reservations. There were typical security concerns as well as worries about how other employees might view this arrangement and whether they too would want similar deals. “It is something that quite frankly we debated,” Klein said. But in the end, the technology has simply progressed to the point where a credit analyst like Graham no longer needs to be in the bank office to do her job, he noted. Gone are the days when you continued on page 22  Second Quarter 2015 | 21

WORKGIN REMOTELY | continued from page 21

Community banks, which have long prized their close ties to their local towns and cities, have been slower to respond to the attractions of telecommuting. That may be poised to change. needed to be near cabinets full of paper files – everything now can be sent, stored and received electronically, Klein said.

NEW LOCATION, SAME ROUTINE For all the miles between her and the bank’s home office in Brewster, N.Y., Graham’s day isn’t all that much different than other Tompkins Mahopac credit analysts. When she starts her workday, Graham logs onto the bank’s virtual private network, or VPN, which encrypts data when it is sent out and decrypts at the other end. Graham has a dedicated workspace on the second floor of her house with an office phone that is wired into the bank’s system, complete with its own extension. Financial statements, credit reports, everything she needs to do her job can be sent to her electronically. And no, Graham doesn’t work in her pajamas, or even her sweatpants, a question she often fields. Rather, Graham comes to work in her home office dressed to meet the world – or at least huddle with her boss or co-workers over Skype. Of course, productivity is where the rubber meets the road at any job, whether it involves telecommuni22 | Banking New York

cating or not. And there are no complaints from Graham – or, more importantly, the bank – on that score, which can pretty easily track what its credit analysts are up to from the volume of the reports they produce, Klein noted. While at times she misses having co-workers, Graham said the fact she has no commute – and none of the typical office distractions – has made her that much more efficient. She is also handy with technology, and getting the system up and running if router or VPN goes down – essential if there is no helpful IT guy down the hall to lend a hand. “My commute was 45 minutes – it is a huge time savings,” Graham said. “I can be ready to go instantly instead of going in, talking to my co-workers and getting a cup of coffee.” “There also no snow days down here,” she added.

GROWING INTEREST Telecommuting is not new to the financial services sector. Bank of America signed up thousands of employees for telecommuting jobs under its “My Work” program before taking a more targeted approach a few years ago. Capital One, Citigroup and American Express have

all embraced telecommuting to one degree or another. But community banks, which have long prized their close ties to their local towns and cities, have been slower to respond. That may be poised to change, though. Tompkins Mahopac right now is out in front of many community banks when it comes to telecommuting, said John Witkowski, president and chief executive of the Independent Bankers Association of New York State. He believes the bank’s example may inspire more experimentation. There are certainly solid dollars and cents reasons for other banks to look closely at what Tompkins has done, he noted. It takes lots of a face time to train an employee and get them up to speed with the culture at a bank. That can take months and involve a significant commitment in time and money as the employee doing the training juggles two jobs. And there is not necessarily a long line of qualified applicants to tap for a replacement. Even now, Tompkins Mahopac is taking things slowly, with plans to continue to review telecommuting arrangements on a case-by-case arrangement. Some jobs just can’t be done remotely, with the most obvious example being a public-facing job like a loan officer, Klein noted. That said, the ability to offer telecommuting has already made Tompkins Mahopac more competitive in the labor market, at least when it comes to hanging on to Graham’s services. She noted that she has been approached by a number of potential employers since she came to Atlanta, eager to tap her services as a credit analyst. But along with her loyalty to Tompkins Mahopac, the thought of saddling up for a 45-minute commute each day doesn’t exactly thrill her now. “I have had many calls since I moved down there, but I have politely declined,” she said. “With the Atlanta traffic, it’s not worth it.” ■

CONGRATULATIONS Celebrating the hard work and dedication of our friend and colleague

Nancy Foster

Senior Vice President Credit Administration 2015 Community Banking Hero

Branches in Suffolk and Nassau Counties | Lending Offices in Riverhead and Manhattan 631.537.1000 | www.bridgenb.com | Member FDIC Second Quarter 2015 | 23

& Community Bank Heroes Awards

The Banking New York Conference, presented by The Warren Group and Banking New York, was held on April 12 in Tarrytown, New York. We thank all who attended. To see video of the recipients sharing what community banking

Photos by Laura Alix

means to them, please visit www.thewarrengroupevents.com/bankingny.

COMMUNITY BANK

APRIL 2015

LEADERSHIP. INTEGRITY.

COMMITMENT.

Photos by Laura Alix

The Community Banking Heroes Award honors the achievements, commitment and dedication of financial professionals who go above and beyond for their institution and community. Community bankers are often the most philanthropic of their peers in the financial services sector. Dedicated to service and reinvestment in the community, these select few make charitable giving a priority. Despite the burden of financial regulation and competition with “big banks,” these community bankers never lose focus of building goodwill with their neighbors. Our independent panel of judges select the very best and honor the most exceptional examples with our Community Bank Heroes Award. Gold Sponsors

Silver Sponsors

Bronze Sponsors

Second Quarter 2015 | 25

COMMUNITY BANK

LEADERSHIP. INTEGRITY.

APRIL 2015

COMMITMENT.

To me, [community banking] means that our customers end the day with more help in their pockets than they started it with. We have small business owners trying to hire more people and grow their business and we have people trying to save money to support their families, and at the end of the day, if we do our job well, then our customers end up just feeling happier about their lives and more comfortable. How did you come to community banking, and why do you stay? Community banking allows me to be a good neighbor, day after day, and be happy. Name: Brian A. Blake Age: 35 Title: Vice President, Corporate Secretary Bank: Spring Bank Bank location: Bronx

— Ralph Branca’s award nomination How did you come to community banking, and why do you stay? I started working in a community bank when I was going to college, serving as teller, head teller, mail room, supplies,

I started my career at a much larger commercial bank, and like many commercial banks, they decided to move operations out of state, so my first job was moved to Houston. Then I was with another midsized regional bank, [and] they were acquired by a larger bank, and they went to Texas again. About six years ago, I had the opportunity to come work for a community bank and I love it. I wish I would have done it 30 years ago when I started my banking career; it’s been a wonderful experience.

Name: Nancy Foster Age: 54 Title: Senior Vice President Bank: Bridgehampton National Bank Bank location: Hauppauge

26 | Banking New York

How do you see technology changing the banking industry over the next 10 years? We’ve made serious investment in customer acquisition and retention. As a two-branch bank in metro New York, technology is the most important tool for us as we grow and look for customers outside of our physical branch footprint. If you weren’t a community banker, what would you be doing? Teaching literature somewhere with mountains.

What do you consider your biggest success? Spring Bank opened in the South Bronx in late 2007, just as the financial crisis really hit its stride. I’m proud to work with the team that built this bank in a neighborhood others said was unbankable. We did it in the toughest circumstances,

“His devotion to the local community permeates his work for his bank. When Staten Island was hit by Superstorm Sandy a few years ago, he was instrumental in waiving late charges and other fees that the bank could have collected from customers who were in distress. He provided a working example for how community bankers can help their community in times of need and also strengthen their reputation, and thus their business profitability, in the long run.”

Name: Raffaele (Ralph) M. Branca Age: 50 Title: President and CEO Bank: Victory State Bank Bank location: Staten Island

and now we’ve come out the other side with a true success on our hands in a very underserved, low income area. (Note: your bank can receive CRA credit for rolling CDs over Spring Bank because we are a certified CDFI.)

How did you come to community banking, and why do you stay? The previous bank I worked at was acquired by a very large bank and many back-office credit functions were relocated to another state. I have stayed in community banking because I am working with a great team of individuals who constantly strive to provide our customers with outstanding products and services.

consumer loans, etc. The bank CFO left for another institution and asked me to join his new bank. I worked on my MBA, and rose to the post of vice president of finance and investments. I went to another bank and helped start Victory State Bank, a de novo bank. What do you consider your biggest success? The formation of a de novo bank. You watch the bank grow, expand and become profitable, which then allows you to hire more people and continue the cycle. It is, in a sense, your child and that makes it so satisfying. If you weren’t a community banker, what would you be doing? I probably would have remained in my original field of study, physics. I would be a professor and researcher, trying to mold young minds while trying to unlock the secrets of the universe. I would have missed out on the social and business interactions with my customers, colleagues and peers.

What do you consider your biggest success? My greatest success is building a strong, knowledgeable, dedicated team in the credit area, capable of supporting the lending team at the bank. We have developed a strong credit culture with an emphasis on insuring the highest level of asset quality, which enables the bank to continue to grow and expand into other markets. How do you see technology changing the banking industry over the next 10 years? Technology will continue to change the way that banks can deliver their products and services to their customer base, but will not replace the importance of customer relationships. While customers like the convenience of remote deposit capture and mobile apps, they still like to know that they have a banker that they can meet and talk with when necessary. Community banks do an excellent job in establishing and maintaining relationships, that regardless of the technological changes, will always be essential in banking.

[When I heard I was a Community Bank Hero], I was surprised and I was humbled. It’s an amazing honor and to be able to represent M&T Bank in this venue was very special. Community banking to me is banking that is very regional and very local. It’s about giving back to the community and working in the community that you represent and being there to supply what they need. How did you come to community banking, and why do you stay? M&T Bank is the only bank I have ever worked for. It is their culture and the community bank philosophy that drew me in and keeps me.

What do you consider your biggest success? Personally, my four children. Professionally, succeeding in the mortgage business over the past 15 years with its highs and lows. How do you see technology changing the banking industry over the next 10 years? Less personal interaction for day-to-day banking, with greater ability to bank online and offsite. If you weren’t a community banker, what would you be doing? Pursuing a political career.

Name: Drew Kessler Age: 34 Title: Vice President Bank: M&T Bank Bank location: Hudson Valley Region

“She literally lights up the room she is in. She is the definition of multi-tasker, involved in a vast amount of initiatives and shows enthusiasm for everything she works on. … Businesses know they can count on her to deliver when she is working on their behalf.” — Marilyn Lipton’s award nomination How did you come to community banking, and why do you stay? My background is in international banking and finance. I enjoy solving problems and dealing with diverse cultures and backgrounds on a day-to-day basis.

What do you consider your biggest success? Serving our customers with the highest level of integrity and partnership to meet their individual goals and objectives. How do you see technology changing the banking industry over the next 10 years? The direction is to have most products and services offered virtually and electronically. either via smartphone or a secure web-based application. If you weren’t a community banker, what would you be doing? I would work in a capacity to motivate and encourage people to reach for their goals and provide professional training both hard and soft skills.

Name: Marilyn Lipton Age: 50 Title: Vice President Bank: Citi Bank location: New York City

A lot of people always say, “Find a cause, get behind it … Find something you’re passionate about.” My cause found me. I do a lot of work with autism services. My son has autism, so I’m very passionate about this. I became an advocate, a champion, a cheerleader, for over 10 years now. I’ve met so many great people fighting the good fight, and I’m always looking to do more, whatever I can do to promote awareness.

Name: Brenda Mikolajczak Age: 42 Title: Retail Sales Leader/Bank Officer Bank: Evans Bank Bank location: Corporate Office, Hamburg

What do you consider your biggest success? Thinking outside of my job description, and raising my personal bar, to add value on a variety of levels. I’ve been sought out to lead and collaborate on significant initiatives resulting in improved ways of conducting business organization-wide. I am also dedicated to community involvement with many area nonprofits, while juggling family responsibilities.

How do you see technology changing the banking industry over the next 10 years? I see real opportunity for community banks to distinguish themselves as advances in technology continue to level the playing field. Alternative delivery channels are making it easier for individuals to bank whenever, wherever and however they want. As face-to-face banking becomes more challenging in the mobile-user age, banks must maintain individualized service to customers through personal outreach and relationship management. If you weren’t a community banker, what would you be doing? I don’t ever see myself straying from my beliefs of seeking out ways to think a little differently and add personal value at every opportunity.

Second Quarter 2015 | 27

COMMUNITY BANK

LEADERSHIP. INTEGRITY.

APRIL 2015

COMMITMENT.

Community banking is kind of an old style of banking where we know our customers, we know the business they’re in and we’re trying to help them grow with the products and services we can provide for them. Outside of the banking sector, it’s very important to help out the communities you serve in. We love to be part of charity events and different promotional events in our community.

Name: Matt Nartowicz Age: 34 Title: Vice President/Regional Manager Bank: American Community Bank Bank location: Glen Cove

How did you come to community banking, and why do you stay? Six years ago I worked for one of the largest banks in the U.S. Seeking to make a career change, I felt the best fit for me would be a locally based bank, where I could see the outcome of my efforts. American Community Bank represented an environment where I could achieve my career goals while benefitting the surrounding neighborhoods in which I work.

“She has a very positive impact on those around her, especially her branch staff and peers. She’s highly visible in her community, and has an uncanny knack for showing up and helping wherever there is a need. Day in and day out she puts forth an inspiring effort with her professional responsibilities and self-imposed community responsibilities.” — Susan Proper’s award nomination

Name: Susan Proper Age: 57 Title: Branch Manager Bank: National Bank of Coxsackie Bank location: Athens, New York

How did you come to community banking, and why do you stay? I started many years ago as a part-time teller with two small children. The bank was in my hometown and convenient for me. Being close to home made it easy to handle both work and my family. Shortly after starting in banking, I found that I loved it, and wanted to learn more and more. I set personal goals for myself and have successfully completed them. I

COMMUNITY BANK

LEADERSHIP. INTEGRITY.

What do you consider your biggest success? My biggest success is watching the investment I’ve made in people pay off as they achieve professional goals. Helping to develop part-time tellers into branch managers or teaching team members selling techniques that have aided them in exceeding sales goals, resulting in personal financial gain, gives me a sense of accomplishment. If you weren’t a community banker, what would you be doing? I’m interested in politics and holding some type of local office would allow me to make positive change on a wider scale in the communities in which I live, work and raise my own family. My recognition for my philanthropic involvement is what led me to this conclusion some time ago.

like knowing my customers and growing with them. I have been fortunate to work in my hometown, where everyone knows each other. What do you consider your biggest success? My biggest success is my family. Without their support I could not have accomplished my career. How do you see technology changing the banking industry over the next 10 years? I see the next 10 years as less and less people coming into the branches and more and more electronic banking. No one likes to wait any more and they don’t seem to need that personal touch. This is one thing I will miss. If you weren’t a community banker, what would you be doing? If I didn’t do banking I would be a teacher. I love to help people learn new things.

APRIL 2015

COMMITMENT.

To see video of this year’s Community Bank Heroes discussing what the award means to them,visit VIMEO.COM/128943589. 28 | Banking New York

Most of the members of the bank that I belong to have, in one way or another, encouraged me, starting with our president and CEO. It all started with his encouragement and faith in me that I could take something that didn’t exist and evolve it and grow it, and today we have 14 planners throughout the bank. It’s all about team. None of us could succeed without our teammates.

Name: James Terwilliger Age: 72 Title: Senior Vice President, Financial Planning Manager Bank: Canandaigua National Bank & Trust Bank location: Canandaigua

How did you come to community banking, and why do you stay? This is my second career. I retired from Kodak Research Labs as a research scientist and manager in 1999. I retooled myself by completing requirements for my CFP certification and began working at CNB in 2002 as a personal financial planner. I enjoy the technical challenges involved in developing unique plans for individual clients, the satisfaction in helping clients achieve their financial and life goals, and the satisfaction in mentoring the younger financial planners in our

organization. What do you consider your biggest success? Developing and implementing a new business model in our bank that integrates financial planning into our IRA and investment account relationships in our Wealth Strategies Group and in our retail branch office network. How do you see technology changing the banking industry over the next 10 years? New technology, including social media, will continue to make it easier and faster for customers to access our services, but that will not replace the personal relationship model that our business is based on. If you weren’t a community banker, what would you be doing? I would be retired but still involved, somehow, in meaningful day-to-day activities.

Community banking is being empowered to do what’s right, for not only for our employees and our teams, but for our customers … and being part of an organization that allows you to do what’s right in your community, being involved in volunteer work and giving back to people.

How do you see technology changing the banking industry over the next 10 years? Technology will definitely play a bigger role in making banking more accessible and convenient for our customers. It will optimize the customer service experience from onboarding new customers, cross-selling additional products and retaining relationships with existing customers no matter where they are located geographically.

What do you consider your biggest success? Helping my team succeed. Whether it’s helping an individual team member develop in a new position or gain a skill set to succeed in their current job or gain a promotion they have been working toward, I take pride in helping them to reach these individual goals.

If you weren’t a community banker, what would you be doing? While I feel as if I’m in a job I truly enjoy coming to every day, if I were not a community banker I would probably be a teacher. One of the favorite parts of my job is helping new employees to grow and develop in their careers and I feel that would be an attribute that could also be used in the teaching field.

Name: Terri Vertalino Title: First Vice President/Area Manager Bank: First Niagara Bank Bank location: Buffalo

Congrats

to all the

Winners!

Second Quarter 2015 | 29

BANK PROFILE | By Linda Goodspeed

Five-Star Banking First National Bank of Groton Perseveres

Gobel Stephen President and CEO

Just in time for its anniversary year, the bank received Bauer’s 5-Star Superior rating, an indication of strength and security, and earned the added title of “Best of Bauer Bank” for maintaining the 5-star rating for 25 years.

TYPEWRITERS, BUGGIES AND BRIDGES

Hot Dog Day at the bank – Gary Watrous, senior vice president and senior lending officer, at the grill.

30 | Banking New York

hen the First National Bank of Groton initially applied for a banking charter in 1865, the controller of the currency at the time turned down the petition, saying he did not think the community needed a bank. The bank tried again. Again, the controller of the currency turned it down. Finally, on the third try, the charter was approved. On May 1, 2015, First National said, “Told you so,” with a month-long celebration to kick off its 150th anniversary.

Groton (population 5,500) is located about 15 miles from Ithaca College and Cornell University. A thriving manufacturing center in the late 1800s and early 1900s, Groton was known as the typewriter capital of the world. In addition to Smith Corona portable typewriters, the town also built buggies and bridges. As those industries faded, Groton slowly evolved into a bedroom community. First National Bank, the only bank in town, has $150 million in total assets and one other branch nine miles away in Moravia. Its motto, “Customers for life, one day at a time” could apply to its employees as well. The bank’s top four officers, who all graduated from Groton High School, have a combined 180 years of experience, and its 39 employees have a combined 750 years at the bank.

“We have a lot of employees for our size,” said Stephen Gobel, president and CEO. “We overindulge our customers with service. I think it’s part of our success.” Gobel, who started as a teller at the bank in 1967, remembers writing loans for customers right at the teller line from a note pad he carried in his back pocket. Today, First National’s loan portfolio of $76 million is about the same size as its deposit portfolio. About half its loans are residential mortgages, with the other half split among small businesses and municipalities. The bank keeps all of its mortgage loans. Like most banks, it suffered losses during the mortgage meltdown, but its ratio of nonperforming loans, slightly above 1 percent of its total loan portfolio (which peaked at about 2 percent during the downturn), is below its peers. “We have a conservative lending philosophy, and our area never had the meteoric rise in real estate values that some other areas had,” Gobel said. “It was more slow and steady, not risk-free, but we plodded along and were able to maintain earnings at decent levels.”

manager is amazing. He knows all about me and my business. For me, it’s about local and service.” Cronk, who started C&D 23 years ago with $2,000, has grown the business, with First National’s help, to 30 employees. Gobel says staying small and local is not easy, particularly as fixed costs for technology and regulatory compliance continue to rise. Like many small independent banks, First National outsources for expertise in these areas. “Most of us are outsourcing to some degree. It’s not unique to us,” Gobel said. “But it’s a very difficult thing to determine how much control you still want.”

CHANGING DEMOGRAPHICS The low rate environment has also been a challenge, as has changing demographics.

“In our rural area, we’re not as young as Ithaca,” Gobel said. “We’re concerned about the generational change. It requires planning.” He said keeping up with technology is important in this generational change. “We don’t want to be on the bleeding edge. On the other hand, we don’t want to lag so far behind we become irrelevant.” To this end, First National has a task force working on a mobile platform which should be up and running within the year. Gobel said the board is committed to remaining independent and to serving the community. Noting the bank’s rocky start and two rejections, Gobel said, “We’re still here. We persevered. We feel there’s a need for us to be here in this community.” ■

WE U NDE RSTAND

GROWTH

WHERE EVERYBODY KNOWS YOUR NAME

Well-managed growth is a cornerstone of success. That’s why we are continuously building our practice so that we can deliver the highest quality service and never leave our clients seeking more.

First National is proud of its hometown roots. It has hosted an annual art show for more than 40 years, and also invites local artists to display their works in the lobbies of its banks. Every summer, employees don aprons and host an annual hot dog cookout for customers. This summer, in honor of its 150th anniversary, the bank will also host a picnic at the American Legion and the whole community will be invited. Jeff Cronk, president and owner of C&D Assembly Inc., a small contract manufacturer in Groton, said the bank’s commitment to the community is why he does business there. “I’m proud of the fact that I’m here. First National supports everybody in this town, and I support them. I walk into that bank, and everybody knows me, and I know everybody. My account

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Second Quarter 2015 | 31

CYBERSECURITY | By Steve Viuker

Are Our Red Flags Red Enough? Lawsky Cautions on Cybersecurity

enjamin M. Lawsky, superintendent of financial services for New York state delivered remarks on financial regulation at Columbia Law School on Feb. 25. His message: Regulatory leadership at the state level should not hesitate to speak up if they see federal regulation as ineffective on their home turf. Here are edited comments: Ineffective regulation can sometimes be worse than no regulation at all since it breeds a false sense of security. And, as we saw during the financial crisis, it is everyday consumers and workers who usually end up paying the biggest price. State financial regulators, then, can and should play a similar role to the state-level reformers of the early 20th century. But states also should not be afraid to speak up and act if we spot new risks emerging in the market [that are insufficiently 32 | Banking New York

overseen at the federal level]. It should be noted that federal regulators have to deal with an extremely broad expanse of issues. Put simply, no matter how well intentioned, they have a lot on their plate. So there is a risk that certain issues fall through the cracks. While NYDFS does not have authority to bring criminal prosecutions, it has taken a number of actions to expose and penalize misconduct by individual senior executives – including all the way up to the C-Suite, when appropriate. For example, NYDFS required the COO of France’s largest bank, BNP Paribas, and the chairman of one of the United States’ largest mortgage companies, Ocwen Financial, to step down as part of enforcement actions brought against those companies. … [M]y second topic: The somewhat obscure but vitally important is-

sue of transaction monitoring and filtering systems. Let me explain: Every day, hundreds of millions of transactions through the bank payments system move hundreds of billions of funds around the globe. Naturally, bank employees cannot manually check every one of those transactions for evidence of criminal or illicit activity. The volume is just too high. As a result, banks rely heavily on automatic transaction monitoring and filtering systems to help flag suspicious payments for further review by compliance personnel. Transaction monitoring works by running transactions through various detection scenarios that are designed to create alerts that show patterns of money laundering or red flags, such as high-volume transaction activities. But – and this is a truly frightening question to ask – what if those monitoring and filtering systems are flawed or ineffective? That would create a gaping loophole in our financial system that terrorists, drug dealers and other violent criminals could exploit. Problems with transaction monitoring and filtering systems can be the result of one of two situations: First: Through inadequate or defective design, or programming of the monitoring and filtering systems, faulty data input or a failure to regularly update these detection scenarios, which may be attributed to lack of sophistication, knowledge, expertise or attention by the management and/or employees. [Additionally], willful blindness or intentional malfeasance by bank management or employees – who, for example, turn down the sensitivity of the filters so the systems do not generate enough alerts and therefore suspicious transactions go undetected. We have already seen an example of faulty filters at one large bank we regulate – when an independent monitor we installed found that the firm failed to flag millions of suspicious transactions. As continued on page 34 

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CYBERSECURITY | continued from page 32

a result, last year, we brought a significant enforcement action against that bank for those failures. We basically ran the company’s transactions through our own filtering system and compared the results. This was a new approach. In the past, regulators have largely relied on self-reporting by firms that discover – one way or the other – that banned transactions occurred for some reason. What regulators have not done is actively tested the effectiveness of the filtering systems banks are using. That needs to change. First, we are considering random audits of our regulated firms’ transaction monitoring and filtering systems, employing the same methodology our independent monitor used to spot deficiencies. Second, since we cannot simultaneously audit every institution, we are also considering making senior executives personally attest to the adequacy and robustness of those systems. This idea is modeled on the Sarbanes-Oxley approach to accounting fraud. We expect to move quickly on these ideas and – to the extent they are effective – we hope that other regulators will take similar steps.

CYBERSECURITY IN THE FINANCIAL SECTOR At DFS, we believe that cyber-security is likely the most important issue we will face in 2015 – and perhaps for many years to come after that. … I am deeply worried that we are soon going to see a major cyber attack aimed at the financial system that is going to make all of us shudder. Cyber hacking could represent a systemic risk to our financial markets by creating a run or panic that spills over into the broader economy. In particular, we are focused on ways to incentivize market participants to do more to protect themselves from cyber attacks. Given the magnitude of the problem, we need all the ideas and proposals we can get. [The DFS has several 34 | Banking New York

initiatives]. First, we are revamping our regular examinations of banks and insurance companies to incorporate new, targeted assessments of those institutions’ cyber security preparedness. The idea is simple: If we grade banks and insurers directly on their defenses against hackers as part of our examinations, it will incentivize those companies to prioritize and shore up their cyber security protections. Second, we are considering steps to address the cyber security of thirdparty vendors, which is a significant vulnerability. Banks and insurers rely on third-party vendors for a broad range of services. … Those thirdparty vendors often have access to a financial institution’s information technology systems – which can provide a backdoor entrance for hackers. In many ways, a company’s cyber security is only as strong as the cybersecurity of its third-party vendors. As such, we are considering mandating that our financial institutions receive robust representations and warranties from third-party vendors that those vendors have critical cyber security protections in place. In other words, those third-party vendors will have to strengthen their cyber-security or risk losing out on business from those financial institutions. Our Internet [architecture’s username and password system has proven to be] a very vulnerable system. The password system should have been dead and buried many years ago. And it is time that we bury it now. All firms should be moving towards – and many of them already are – a multi-factor authentication system [which still contains] a username and a password, but there is also a second layer of security. For example, when you attempt to log in, you could receive an immediate, randomly generated additional password that is texted to your phone. As a result, if someone steals or guesses your password, they would not

be able to get into the system unless they also have your cell phone. That simple, extra step can actually prevent a significant amount of hacking. And it is something all firms should do.

REACTION TO COMMENTS CEO Darren Guccione of Keeper Security noted that banks’ fiduciary role as managers of the liquid and marketable securities defining our global net worth should require a zero-knowledge security architecture to protect and safeguard their sensitive information and digital assets. He recommends platforms using strong encryption that store the encryption key separate from the banking records. All major systems, for example email, banking sites, vendor sites and EMM access points, should utilize a two-factor authentication to prevent unauthorized third-party access. He recommended that vendors that are engaged to execute on banking systems or those who may have access to sensitive information should have deep expertise in cyber-security protection, threat detection and encryption, and they should also have security and confidentiality certifications including, without limitation, SOC 2 compliance, he said. Matthew L. Schwartz, a partner in the Boies, Schiller & Flexner LLP firm’s New York City office, noted that Lawsky’s most consequential proposal by far would be to make senior bank executives “personally attest to the adequacy and robustness of anti-money laundering (AML) and transaction monitoring systems, an idea modeled on the Sarbanes-Oxley requirement that CEOs and CFOs personally attest to the adequacy of accounting and finance controls. … If this proposal is enacted, as seems likely, senior executives will personally be on the hook for faulty AML controls, a potentially scary prospect, and one that should cause them to become as personally involved in AML compliance as they are in financial reporting.” ■

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INDUSTRY NEWS

PUTNAM COUNTY SAVINGS BANK BUYS CMS BANCORP. Putnam County Savings Bank (PCSB), based in Brewster, successfully completed its acquisition of CMS Bancorp Inc., holding company for CMS Bank, at the end of April. As part of the agreement, CMS, including its wholly-owned subsidiary CMS Bank, merged with and into PCSB. The former locations of CMS Bank will be operated as financial centers of PCSB. As a result of the merger, PCSB now has 15 banking centers in the lower Hudson Valley and assets of approximately $1.3 billion, PCSB stated.

COMMUNITY BANK SYSTEM, ONEIDA FINANCIAL SIGN MERGER AGREEMENT Community Bank System Inc. (CBS) and Oneida Financial Corp. (OFC) signed a definitive agreement in mid-February in which CBS will acquire OFC, parent company of Oneida Savings Bank in Oneida, for approximately $142 million in CBS stock and cash, or $20 per share. Terms of the agreement allow shareholders of OFC to elect to receive either 0.5635 shares of CBS common stock or $20 in cash for each share of OFC common stock they hold, subject to an overall 60 percent stock and 40 percent cash split. The merger agreement had been unanimously approved by the board of directors of both companies.

GOLD COAST BANK FILES FOR SIXTH BRANCH, EXITS DE NOVO STATUS Gold Coast Bank filed an application in mid-April with the New York State Department of Financial Services (NYSDFS) and the Federal Deposit Insurance Corp. (FDIC) to open its sixth Long Island branch in Southampton. The opening is subject to the approval of the NYSDFS and the FDIC. Gold Coast Bank also emerged from de novo status, as defined by the state, in late February.

KINDERHOOK BANK OPENS NEW BRANCH Kinderhook Bank opened a new, full-service banking center in Latham at the end of April, its third in Albany County. Jeff Eckert, vice president/branch manager and business development officer, heads the branch team. The building’s second floor houses a commercial lending center.

ELMIRA SAVINGS BANK OPENS NEW BRANCH Elmira Savings Bank has opened a new branch office in Watkins Glen. The opening represents the bank’s 13th fullservice branch and its first in Schuyler County. ■

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36 | Banking New York

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SMALL CHANGE | News Roundup

EVANS BANK ADDS MROZ Nikolas Mroz has joined Evans Bank as an assistant vice president and business development officer. The bank has also promoted Mark Tillmanns to branch manager. He is a Nikolas Mroz bank officer, and previously served as assistant branch manager. Additionally, the bank has hired two new business development officers, Wendy Blamowski and Mike Woods. The Evans Agency LLC, the property and casualty inMark Tillmanns surance subsidiary of Evans Bancorp Inc., has welcomed four new account executives: Reeny D’Costa, Lauren E. Huson and Randy Glenn who will serve as personal lines account executives. Joshua Merewether has joined The Evans Agency as a company officer and commercial lines account executive.

LYONS NATIONAL BANK HIRES NASELLO, PROMOTES NINE The Lyons National Bank has appointed Carl A. Nasello as its newest mortgage specialist. Additionally, the bank Carl A. Nasello has promoted nine employees: Anna M. Bridger, commercial loan officer, promoted to vice president; Julie B. Downey, branch manager, promoted to assistant vice president; Ryan M. Hallings, commercial and agricultural loan officer, promoted to vice president; Valorie A. Heinzman, Mortgage Specialist, promoted to banking officer; Karen D. Lombardozzi, systems administrator, promoted to banking officer; Raymond K. Smith, credit analyst, promoted to banking officer; Corey A. Stulpin, credit analyst, promoted to banking officer; Trevor Thomas, operations manager, promoted to vice president; and Lynnette M. Zelias, commercial loan operations supervisor, promoted to assistant vice president. 38 | Banking New York

ORANGE COUNTY TRUST CO. ANNOUNCES HIRES, NEW MANAGEMENT ROLES

Timothy McCausland

Gustave Scacco

Kim Griffith has joined Orange Bank and Trust Co. as a relationship manager. Additionally, Orange County Trust Co. has appointed Senior Vice President Timothy McCausland as chief administrative officer. Hudson Valley Investment Advisors, Inc. a subsidiary of Orange County Bancorp, Inc., has hired Gustave Scacco as its new president and CEO. Scacco succeeded Thomas V. Guarino, who retired at the end of 2014.

PATHFINDER BANK NAMES MCMANUS ASSISTANT VP Joseph McManus has been named assistant vice president/ computer operations manager at Pathfinder Bank.

Joseph McManus

TIOGA STATE BANK HIRES RAYLE, BOYNTON Sarah Harrison Rayle has joined the marketing team at Tioga State Bank. Additionally, Jessica L. Boynton has joined the mortgage origination team. ■

SEND US YOUR NEWS! SUBMIT NEWS FROM YOUR BANK TO CASSIDY MURPHY, EDITORIAL DIRECTOR, AT CMURPHY@THEWARRENGROUP.COM

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