Banking New York 2Q 2017 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SECOND QUARTER 2017 • VOLUME 44

State Expands

Cybercrime Oversight Responsibility to Board Members

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

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State Expands

Cybercrime Oversight Responsibility to Board Members

04 PRESIDENT’S MESSAGE

An Exciting Time To Be A New York Community Banker

06 PUBLIC AFFAIRS UPDATE A New Climate Provides Hope To Community Banks 08 RISK MANAGEMENT Community Banks Have a Timely Opportunity to Monetize Capital Losses 06

CONTRIBUTING WRITERS Linda Goodspeed and Steve Viuker TWG STAFF CEO & PUBLISHER Timothy Warren Jr. PRESIDENT David Lovins ACCOUNTING MANAGER Mark DiSerio

10 INSURANCE INFLUENCE 18 FROM BANK LOBBY When Life Insurance Impacts the Deal: TO BANK LOUNGE

Considerations for Lenders

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22 INDUSTRY NEWS

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SALES DIRECTOR OF BUSINESS MEDIA George Chateauneuf PUBLISHING GROUP SALES MANAGER Claire Merritt SENIOR ADVERTISING ACCOUNT MANAGER Mike Lydon ADVERTISING ACCOUNT MANAGERS Jon Patsavos & Megan Kurtz ADVERTISING & SALES COORDINATOR Tori Blanchard EDITORIAL EDITORIAL DIRECTOR Cassidy Murphy ASSOCIATE EDITORS Malea Ritz, Mike Flaim CREATIVE/MARKETING DIRECTOR OF MARKETING & CREATIVE SERVICES John Bottini SENIOR BRAND DESIGN MANAGER Scott Ellison COMMUNICATIONS MANAGER Michael Breed PUBLIC RELATIONS & SOCIAL MEDIA SPECIALIST Joe Kourieh GRAPHIC DESIGNERS Amanda Martocchio, Elizabeth Rennie & Tom Agostino ©2017 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

PRESIDENT’S MESSAGE | By John Witkowski

An Exciting Time To Be A New York Community Banker In 2017, there are a number of reasons for New York community banks to feel optimistic about our industry’s future – and, their membership in IBANYS.

or the first time in many years, the political climate in Washington seems poised to recognize the full value of our institutions, and the many contributions we make to the economy and social fabric of our local communities. • The new administration in Washington has pledged to seek regulatory and legislative changes that would ease some of the overwhelming compliance burdens imposed on our banks by the mandates of Dodd-Frank and other. Congress is receptive to many of the ideas we have long advocated. IBANYS John Witkowski has worked long and hard with our allies at ICBA to advocate for our positions, and we have begun to see results. (Take a look at Steve Rice’s Public Affairs column for details.) • In Albany, we have had productive results from our dialogues with the State Legislature and the Department of Financial Services (DFS). We saw reasonable revisions to the initial mandates related to cybersecurity and abandoned property, and have engaged in discussions on community bank needs and concerns. • Over the past few months, we brought together an array of expert speakers to bring their expertise and insights at regional conferences for compliance officers, directors and lenders. Soon, we will hold our annual CFO/Senior Management Conference. Our objective in these – and, all – IBANYS meetings is to provide our members the opportunity to review and discuss 4 | Banking New York

IBANYS Board of Directors Officers Chairman Doug Manditch Empire National Bank, Islandia Vice Chairman R. Michael Briggs USNY Bank, Geneva Treasurer/Secretary Thomas Amell Pioneer Bank, Albany Immediate Past Chairman John Buhrmaster First National Bank of Scotia, Scotia Directors Thomas Carr Elmira Savings Bank, Elmira Brenda Copeland Steuben Trust, Hornell

the latest developments, trends and issues impacting their banks, and to network with their peers and colleagues. • We also have continued to seek new programs, products and services to enhance our member banks’ operations, strategic planning and bottom line. Through our new Innovation Committee, our preferred providers and our associate members we have established relationships and provided accessibility to bring value to all parties. I’m happy to report that efforts – developed with the input and guidance of our officers, directors, peer groups – are paying dividends! Our numbers are up. We have retained and added members – including banks and associate members. Attendance at our meetings and conferences is up, as is participation in our online webinars. The association is financially sound, politically effective and cost effective (lean and mean) in our operations. Most importantly, IBANYS has a fully engaged membership. Our New York community bankers are proactively involved in the governance and decision making of their association. Our committees, peer groups and leadership believes in what we are doing – and has played an continued on page 9 

Randy Crapser Bank of Richmondville, Cobleskill Ronald Denniston First National Bank of Dryden, Dryden Christopher Dowd Ballston Spa National Bank, Ballston Spa Robert Fisher Tioga State Bank, Spencer E. Peter Forrestel II Bank of Akron, Akron Stephen Gobel First National Bank of Groton, Groton Gerald Klein Tompkins Mahopac Bank, Brewster Richard Koelbl Alden State Bank, Alden Paul Mello Solvay Bank, Solvay G. William Ryan Cayuga Lake National Bank, Union Springs Anders Tomson Capital Bank/ a division of Chemung Canal Trust Co., Albany Kathleen Whelehan Upstate National Bank, Rochester Michael Wimer Cattaraugus County Bank, Little Valley IBANYS STAFF John J. Witkowski President and CEO Stephen W. Rice Vice President of Government Relations and Communications William Y. Crowell III Legislative Counsel Linda Gregware Director of Administration and Membership Services

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PUBLIC AFFAIRS UPDATE | By Stephen W. Rice

A New Climate Provides Hope To Community Banks With a new administration in Washington and key legislative and regulatory issues on the horizon, it is a time of change and action in our nation’s capital. In May, the Independent Bankers Association of New York State led a delegation of more than 20 New York community bank CEOs, senior executives and directors to Washington to meet with our U.S. Senators and members of the New York Congressional Delegation, and participate in the Capital Summit hosted by our partners and allies at the Independent Community Bankers of America (ICBA).

number of IBANYS Members joined with colleagues from throughout the country for a visit to the White House Rose Garden to meet with President Trump, Vice President Pence and the President’s National Economic Council Director Gary Cohn. In a session awash with familiar red caps, now altered to read, “Make Community Banking Great Again,” the President noted he wants to “do a big number” on DoddFrank by paring it back and repealing parts of the law. The Capital Summit also featured Treasury Secretary Steven Mnuchin, Stephen W. Rice who said the administration is focused on regulatory relief and tax reform to stimulate small-business lending and economic growth, and stated that more sensible streamlined regulations would help community banks meet customer and community needs. We met with New York’s senior U.S. Sen. (and Senate Democratic Leader) Chuck Schumer in his U.S. Capitol Leader’s Conference Room, as well as with a number of New York Representatives who serve on such key committees as Financial Services, Ways & Means, Agriculture and Work Force issues. In our meetings, we stressed issues, priorities and concerns that have a direct bearing on the ability of independent community banks to survive and thrive in today’s challenging competitive and regulatory environment. We concentrated on regulatory provisions involving: • Automatic qualified mortgage (QM) for mortgages held in portfolio. • Home Mortgage Disclosure Act (HMDA) relief • Basel III exemption for non-systemically important financial institutions. • Repeal of CFPB small business loan data collection. • We urged support of the Financial CHOICE Act (H.R. 10), which was being marked up by the Financial Services Committee as we met outside the hearing room with New Yorkers on the Committee. We also supported a more targeted community bank relief bill, the CLEAR Relief Act (H.R. 2133). • We urged reauthorization of the National Flood Insurance Program that expires this Sept. 30. With so many 6 | Banking New York

New York community banks and homeowners in coastal and inland river and stream communities, IBANYS urged Congress to ensure that flood insurance is affordable and readily available to all homeowners and business owners. On tax reform, we stressed the need to assure that any reform should provide significant rate relief for individuals, corporations and pass-through businesses, and that it should not increase the cost of credit for small businesses by continued on page 9 

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RISK MANAGEMENT | By Tom Boczar and Jeff Markowski

Community Banks Have a Timely Opportunity to Monetize Capital Losses Community banks invest in and lend to tax credit-financed projects (low-income, historic, etc.) to help meet the credit needs of the areas where they operate. Banks receive Community Redevelopment Act (CRA) consideration for doing so, and can earn reasonable returns on these investments.

owever, they can also generate capital losses. For banks that are C corporations, capital losses are deductible only against capital gains [Code Sec. 1211(a)]. If a bank can’t generate sufficient gain during the tax year the loss was realized to fully use the loss, it’s carried back three years, then forward five, when it expires worthless if sufficient gain hasn’t been realized to absorb the entire loss [Code Sec. 1212(a)(1)(B)]. Often, banks aren’t able to generate enough gains to fully utilize their losses. For financial reporting purposes, management may take a valuation allowance, meaning they’ve determined it’s more likely than not such losses will expire worthless. Since the presidential election, interest rates have risen along the yield curve. Many bank executives believe this is the beginning of the long-anticipated “normalization” of the curve. There are many reasons why a sustained rise in U.S. interest rates may not occur, or occur as quickly and substantially as some expect. That said, if management expects rates to rise, there are many tools a bank might use to guard against, or take advantage of, rising rates. Case Study

ABC Bank, a publicly-traded community bank and C corporation, generates income of $2.5 million per annum and pays tax at 35 percent. It realized a capital loss of $2.5 million in December 2013, which expires December 2018 unless sufficient gain is generated to absorb the loss, which seems unlikely. As such, management has taken a valuation allowance against the losses. 8 | Banking New York

Nevertheless, investors remain mindful of the bank’s capital loss carryforward, asking detailed questions during quarterly conference calls, shareholder meetings and investor conferences to gain insight into what plan management might have to utilize them before expiration. The bank’s capital structure includes floating rate debt, and it holds a portfolio of corporate fixed income investments. Believing the yield curve will normalize, and concerned by the impact that would have on the cost of the bank’s floating rate debt and the value of its fixed income portfolio, management meets with its advisors to explore how the bank might position itself to guard against the risk of rising rates in the most cost-effective and tax-efficient manner. Solution

Management decides to establish a short position in U.S. Treasury Bonds (UST Bonds) with a fairly short duration (about 24 months). With rates near historic lows, the bank’s worst-case scenario can be measured and is limited, as the bank benefits from what’s akin to free put protection currently offered by the market. If rates normalize, as management expects, the bank is positioned to benefit handsomely. Worst case, if rates decrease, the bank can keep the short open until just before maturity of the UST Bond. This strategy also addresses the bank’s capital loss carryforward. Given current rates, if structured properly, a short position in a two-year UST Bond would generate both capital gain and interest expense. Interest rates are near historic lows, but many UST Bonds were issued

years ago when rates were higher. These seasoned “off-the-run” UST Bonds trade at a premium over par because today’s interest rates are much lower than when issued. By shorting UST Bonds trading at a significant premium, the bank will generate both capital gain (as rates rise and the UST Bond is “pulled to par”) and interest expense (as “in lieu of ” coupon payments are made to the lender of the UST Bond). Gain realized on closing the short position is short-term capital gain [Code Sec. 1233(a) and (b)]. The “in lieu of ” coupon payments are treated as interest expense (Rev. Rul. 72-521 and Rev. Rul. 62-42). For a C corporation like ABC Bank, interest expense is deductible without limitation against any form of income, including operating income. The bank’s loss is deductible against the gain created by closing out the short position, while the interest expense generated is deductible against the bank’s ordinary income. This strategy effectively converts the bank’s non-deductible capital loss carryforward into currently deductible interest expense. Results

Management entered into this strategy believing the one-year U.S. Treasury rate would rise significantly during the next 12 months. Management’s view on rates was correct and the short was closed one year after it was established, generating $2.75 million of capital gain and $2.5 million of net interest expense, with a profit of $250,000. The bank’s $2.5 million capital loss carryforward is deductible against $2.5 million of capital gain and fully utilized. The $2.5 million net interest expense is deductible against $2.5 million of ordinary income. The bank earned a profit of $250,000 on a cash investment of $750,000 (cash margin required for a transaction of this size/duration) to generate a 33 percent

continued from page 6

limiting the deductibility of business interest. We discussed the unfair tax subsidy received by credit unions, which often compete in the same neighborhoods and offer the same products and services as community banks, yet pay no federal, state or local taxes – and, are not subject to Community Reinvestment Act (CRA) mandates with which banks must comply. We urged that Congress not allow expanded powers for credit unions (such as expanded commercial lending authority, field of membership and ability to raise outside capital). In short, too many large credit unions no longer stick to their original mission. If credit unions wish to operate as banks, they should pay their fair share of taxes – or, community banks should receive the tax same treatment. The federal tax subsidy alone was valued at $27 billion in a recent Office of Management and Budget estimate. Lastly, we urged passage of a new Farm bill to help support prosperity in rural America. USDA guaranteed loans should be enhanced to help struggling farmers survive critically

pre-tax return, while effectively converting its non-deductible capital loss which would have expired worthless, into deductible interest expense. Besides helping protect against inflation and the deleterious effects of rising rates, the strategy accomplished two important objectives: 1. Enabled management to satisfy its corporate governance obligations. Sound corporate governance policy and best practices recognize that management has a duty to prudently manage a company’s assets, including determining if deferred tax assets can be utilized in the interests of shareholders, creditors and other stakeholders. 2. Assisted management in its efforts to maximize the value of the bank’s stock price. The bank was not only able to utilize its deferred tax assets and thereby increase its aftertax cash flows, but also, through the transmission of this information through the investor relations function to the investment community, helped contribute to the bank’s securities achieving fair (higher) value in the market.

low commodity prices. Current funding should be maintained for crop insurance, a vital risk-management tool. Multibillion dollar Farm Credit System lenders have seen runaway growth and non-mission focus. This should be curbed. The FCS should return to its mission of serving bona-fide farmers and ranchers. All in all, there is a different, more promising legislative and regulatory environment for community bankers in Washington. We were received warmly, and our positions were welcomed. In our session with Sen. Schumer, he reiterated that community banks are essential to the national, state and local economies, highlighted our significant contributions to small business, agricultural and consumer lending and stated: “We value you.” At IBANYS, it was a trip that underscored our policies and positions, and energized us for the future. ■ 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.

Summary

Whether the result of investments undertaken to comply with CRA or otherwise, banks sometimes incur non-deductible capital losses. Management facing this dilemma might wish to consider the strategy of establishing a short position in U.S. Treasury bonds with a fairly short maturity if they believe interest rates will rise. Aside from protecting against inflation and the harmful impact of rising rates, the strategy helps management fulfill its corporate governance obligations, and through the investor relations function contributes to the bank’s securities achieving fair (higher) value in the market. ■

continued from page 4

essential role in the process. They have a real sense of ownership, and a commitment to our common future. When IBANYS was formed in 1974, it was because New York’s smaller independent community banks wanted a voice of their own. They believed that they had a special niche – and had their own unique and specific needs and priorities. They still believe that is true – regardless of whether they operate on Long Island, like our Chairman Doug Manditch’s Empire National Bank, or in rural upstate Geneva like our Vice Chairman Mike Briggs’ USNY Bank.

Tom Boczar is CEO of Intelligent Edge Advisors and can be reached at tboczar@intelligent-edge.com. Jeff Markowski is managing director at Intelligent Edge and can be reached at jmarkowski@intelligent-edge.com.

From one end of New York to the other, we share a common experience and agenda: to strengthen community banking. And, we share a common association dedicated to advancing their agenda: In Albany, Washington, our localities and in the public arena. That hasn’t changed since 1974. We’re here to ensure it won’t change in the future. ■ 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 2017 | 9

INSURANCE INFLUENCE | By Dan Doran and David Hillelsohn

When Life Insurance Impacts the Deal: Considerations for Lenders

or those of us entrenched in the business valuation experience, there is nothing more satisfying than seeing good deals get done. Taking time to properly assess the value of a project not only reduces the cost to the borrower; it can positively impact some of the ancillary expenses related to the project. One of those ancillary expenses we often see associated with larger transactions is the purchase of life insurance, which can be used to protect the interests of the lender and all parties connected to the borrower and other key members of the transaction. Unfortunately life insurance as a Dan Doran requirement of a loan agreement can be an impediment to closing more business. Commercial lenders should keep these important tips in mind when broaching the subject of life insurance with existing and potential clients.

CONSIDERATIONS FOR COMMERCIAL LENDERS It’s a positive. Having a life insurance policy or life insurance policies in place on the life of a borrower or a key person to a project should be a positive sign – they value themselves and the people who depend upon them for survival. When considering the credit-worthiness of an applicant, we believe that having existing coverage in place, regardless of type, provides insight into the borrower. The duration of coverage is also relevant. There are many parties involved. Insurance can ensure that the financial responsibilities aren’t left to others who lack the skills or preparation to succeed, and focusing on the impact to others takes the focus away from requiring life insurance as an expense associated with a loan. Understand that there are other people that depend on the borrower for financial support, and having adequate levels of life insurance protection is good for everyone. It is normal for a lender to take the position that you want to be repaid for the loan, and you likely take the necessary steps to have proper collateral and strategy for potential loss recovery. De-risking the business adds value. As a valuation professional, we’re constantly seeking to understand what risk factors influence value in a company. Overdependence on a key employee or owner represents a single point of failure and negatively impacts value. Insuring against this risk can positively impact value by mitigating that risk factor. Understand the need and terms. The better you understand the actual need, the more targeted the solution can be for the borrower. This includes aspects such as dependence on a key David Hillelsohn

10 | Banking New York

person, the age of the borrower and/or the magnitude of the project. For example, a 64-year-old who needs $5 million to complete a construction project that takes 15 years may not need $5 million of protection for the entire duration of the project. A term life insurance layering strategy could be utilized to deliver the appropriate amount of coverage for different stages of a project reducing the financial burden to the borrower; in some cases, like a 64-year-old borrowing $5 million, this savings can be significant. A loan from you is better than a loan from their insurance policy. While term life insurance of different durations from 10 years out to 30 years or longer is the product de jour for most people, there are still individuals, especially high income earners, who may own permanent life insurance with significant cash value. The cost of a loan from a commercial lender is typically less expensive than a loan from a life insurance policy. Most people believe that because the cash value in their policy is already their money that they can take a loan without any tax or expense exposure, but this is not the case. Unpaid loan interest is considered additional economic benefit derived from the contract, which increases the return above basis. This could lead to a tax liability even though the cash value has been stripped from the policy. Thus we advise you consult with your tax adviser and insurance professional before taking loans against the contract. Cash value is collateral. Cash value in a life insurance policy can be considered collateral to be assigned against the value of the loan. Not only is this asset a dollar-for-dollar increase to business value, but also it’s an opportunity to reward the borrower for owning liquid and non-depreciating assets. Be mindful that the policy is properly owned and that there are no other rights to the policy values. Typical loan value is 90 percent of the value in the policy. A sound financial team. This may be obvious, but an experienced team of professionals who can assess the value and scope of the project and then use knowledge of the insurance marketplace to find the best solution is a value added component to the lending process. When clients feel that you’re sitting on the same side as them, looking for ways to help them succeed with a focus on not only getting it right today, but getting it right every step along the way, it shows that you have a well thought out concept of their vision with a strategy to deliver the desired results. ■ Dan Doran, CVA, is founder of Quantive Valuations, a certified valuation practice serving privately held businesses nationwide. David Hillelsohn is president of DHill Financial LLC, an independent insurance agency focused exclusively in protection solutions for businesses and the people they support.

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By Christina P. O’Neill

States Expand

Cybercrime Oversight Responsibility to Board Members

The global cyber-hack in mid-May that disrupted companies and institutions in 150 countries only served to drive home the need for the groundbreaking cybersecurity regulations that went into effect in New York state on March 1. The new regulations, Cybersecurity Requirements for Financial Services Companies, have been hailed as first-in-thenation rulings of their kind. They focus on preventing data breaches more than system hacks, but the weak spots that allow both breaches and hacks through the cyber-door are in many ways similar. The new regulations call for banks and insurers to surveil the security of third-party vendors that provide information technology goods and services. This is an emerging issue for financial institutions, with increasing demands for increased oversight of not only third-, but fourth- and fifth-party vendors that handle financial data. The regs don’t affect third-party vendors for two years after implementation, and financial firms with less than 10 employees and/or that do less than $5 million in annual business in New York are exempt. Essentially, the new regs are a start. They require banks, insurance companies and other financial-services companies regulated by the New York State Department of Financial Services to establish and maintain cybersecurity programs to protect consumer private data and ensure the safety and soundness of the financial-services industry. They require companies to establish cybersecurity programs that are adequately funded and staffed, overseen by qualified management and reported on periodically to the organization’s senior governing body. Annual audits of the program are required – and require the sign-off of the financial institution’s board of directors. Michael Baukes, co-CEO of UpGuard Inc., a cyber resilience platform addressing operational issues for complex IT environments, said the regular resiliency tests and risk measurements are a good step. The drawbacks, at least for now, are the breadth and frequency of the reviews. Yearly or quarterly tests, he told the Recode Newsletter at the end of Febru12 | Banking New York

ary, are “akin to checking the weather forecast once a year and hoping it holds relevance for the other 364 days.” He also noted – presciently, as it turns out – that while the financial sector is the first to be regulated this way, cyberattacks are a threat to all organizations. The second concern is the increased responsibility of financial institution’s boards of directors to authorize approval of the cybersecurity plan. Dottie Schindlinger, vice president and governance technology evangelist at New York City-based Diligent Corp., a provider of secure corporate governance and collaboration solutions for boards and senior executives, said that while more directors are now alert to cybersecurity issues, many do not have the necessary expertise to address them. “There is now tangible pressure for board members to be involved and be held accountable,” she told Banking New York. “To ensure that these new procedures are successful, financial institutions not only need to audit [their current] practices and set formal policies in place, but also provide the necessary training and oversight to ensure it happens.” And while digital technology has eased the burden of director communications, particularly for directors who hold multiple board seats and travel frequently, “even using secure digital board software does not eradicate cyber risk from board communications, nor does it absolve directors from the need to understand, mitigate and monitor related cybersecurity issues,” Schindlinger said in a report issued by Diligent.

RISKY BUSINESS A recent survey conducted by Diligent revealed that nine out of 10 directors use an unsecured personal email account – such as Gmail, Yahoo or Outlook – to communicate with fellow directors and management at least occasionally, making it the second most common method of director communications, behind-face to-face meetings. But that’s too risky for board business, Schindlinger cautioned. Personal email accounts, as are any other unencrypted or ill-encrypted digital gateway, can be an entry point to an individual’s computer, tablet or device. A compromised point

Directors' Preferred Methods of Communication Face-to-face meetings

100%

Personal email accounts

92%

Corporate email and network

83%

Third-party board portal

74%

Couried/print books

71%

Source: NYSE Governance Services/Diligent Survey Report of entry “endangers all stored materials therein, regardless of the channel through which these materials were originally received,” she said in a Diligent report. Directors’ personal emails are outside corporate firewalls and beyond the purview of a corporate secretary, putting it beyond the company’s record-retention policy. She recommends implementing a closed-loop, secured and controlled messaging system, preferably integrated with the company’s existing secure board portal system. What directors lose in the convenience of personal email, they gain in cybersecurity, risk mitigation and reduced personal liability. Closed-loop systems are tools where only those authorized to use them have access, ensuring that when they message one another, there’s no chance of selecting a wrong address, she said. Diligent has such a tool, which also allows the corporate secretary to archive messages, reducing the risk that board members could be personally subpoenaed in the case of e-discovery in the event of litigation. A full 49 percent of Diligent’s survey respondents acknowledge that it’s common practice for board members to download board meeting materials, reports and other company documents onto personal computers and devices. While some methods don’t require storing documents outside a secure, controlled environment, the Diligent survey revealed that 22 percent of respondents are saving/storing board materials on personal or external drives outside a secured environment, Schindlinger reported. But 47 percent of respondents “agree the move to digital file sharing has increased the risk of improper handling of sensitive information, and their comments indicate better guidance might be desired.” Downloaded files stored on external devices over the long term are another risk. It’s better to save them to a folder or application over which the company retains control. The Diligent survey revealed that only eight percent of respondents report that their company’s IT, IS or data security team “has any role in sanctioning or authorizing the board’s method of communication; rather, 27 percent relegate this responsibility to the board chair or lead director.” Schindlinger told BNY that using a cloud-based board portal that is cross-platform compliant can be an advantage. This allows the director to use the board portal on any device, without abridging any security – and while still allowing the corporate secretary the ability to maintain services as needed.

A HACKER WINDOW A region away from New York, in a May 1 presentation by the Federal Reserve Bank of Boston, presenters cautioned that financial institutions must constantly monitor third-party

security issues going forward to ensure that the vendor relationship hasn’t changed over time. Addressing vulnerabilities in products where support has ended, and usage of outdated operating systems or web browsers, is a weak spot. That weak spot would turn out to be a primary issue in the global hacking attack in mid-May with the WannaCry malware. Outdated operating systems, primarily Microsoft products such as Microsoft XP, highly popular in its day, provided significant entry to hackers because these systems are not currently supported by Microsoft. As has been widely reported, Microsoft issued a patch in March for systems it currently supports but did not issue a corrective patch for legacy systems such as XP until weeks later. The delay on the part of users to implement the patches has been another component of the WannaCry cyber-hack. Even the most current vendor product doesn’t substitute for education of staff on the risks of social media and phishing tactics. In the global bank attack that occurred last year that clipped about $90 million from Bangladesh’s central bank and a bank in Ecuador, according to The Wall Street Journal, thieves used malware to steal bank codes and place fake transfer orders. The Bangladesh bank had not changed its passwords for the Society for Worldwide Interbank Financial Telecommunication, or Swift, described by The Wall Street Journal as the dominant network banks use for cross-border transactions, for a few months between 2015 and 2016. Swift has since tightened its customer security requirements, including software updates and threatening to report non-compliant banks to regulators, the WSJ reported. Two-factor authentication use has jumped among some Swift clients since the cyberattacks came to light. Syntax and formatting errors can give away the presence of cyberthieves, but only if the internal staffers viewing the requests pick up on them. “If we believe that cybersecurity is an IT challenge with only IT solutions, we’re neglecting the human element,” said Daniel Hoffman, a former U.S. intelligence officer, in a video presentation at the FRBB conference. In last year’s global bank attack, hackers used malware to remotely monitor routine activity at their target bank, and then post fake transfer orders, costing banks around the world hundreds of millions of dollars. That’s what happened to banks subscribing to Swift. The May 1 WSJ report noted that while Swift locked down the network’s core after the cyberattacks, customers were left responsible for their own security – and that’s where the hackers could come in. “In the end, cyber awareness begins and ends at the top,” Schindlinger said in the report, referring to the priority to educate board members on cyber-hazards. In a broader context, her caution that information security must take precedent over practicality applies to far more individuals than board members – and to organizations that run on legacy operating systems, and their staffers, who use personal computers, smartphones and other devices to stay connected in an increasingly mobile age. ■ Second Quarter 2017 | 13

BEST OF BRANDING | By Jack Doherty

Wear Your Brand on Your Sleeve – And Everywhere Else

s a bank CEO or marketing director, you understand the importance of convenience and accessibility to your customers. The industry has transformed from one where “banker’s hours” meant that branches closed at 3 p.m. and were not open weekends, to a 24/7 world. Most banks have branches open on Jack Doherty weekends, online banking around the clock, apps that allow people to deposit checks remotely – and so much more. Technology has significantly moved the dial for convenience. But being at the top of the curve technologically is not enough of a competitive advantage. Customers have come to expect this level of service. If banks don’t do a comprehensive job of letting potential customers know everything they do and offer, they may be among the industry’s better-kept secrets. When it comes to marketing, many banks have strong social media presences. Many have strong traditional advertising and public relations campaigns. These are all important. However, bank CEOs and marketing directors should not overlook the tried tried-and-true customer and community outreach programs, where they bring the message directly to their customers and the community. Visibility and brand awareness are critical in every marketing effort, and it begins with the bank’s logo. This is perhaps the most valuable piece of marketing that every bank owns. Banks invest considerable funds in logo and brand development, and this logo is the bank’s tick14 | Banking New York

et to greater visibility. A logo must have a higher purpose than simply being used for business cards, letterhead and branch windows. Banks can expand use of their logo through the use of both giveaways and community outreach programs. Incorporating the logo on materials – apparel, promotional products and leave-behinds – can serve to increase customer retention and customer attraction. One strategy we have seen is a bank will occasionally have its vehicles “wrapped” with the bank’s logo, effectively making these vehicles into moving billboards for the bank. It’s very powerful visually to see a vehicle with a large bank logo motoring along I-95 or cruising through downtown Boston’s streets.

A popular outreach strategy is hosting events in community schools. Banks sometimes offer financial literacy programs taught in elementary, middle and senior high schools. In so doing, it makes perfect sense to create a “leave-behind” textbook with the bank’s message (and logo!) prominently displayed. This will reinforce the bank’s message of community involvement; this goodwill gesture, many would argue, is far more persuasive than traditional advertising – although good marketing campaigns embrace a variety of methods. Consider the importance of the logo as a brand-builders when it comes to apparel. A logo does wonders when displayed on polo shirts, blazers, sweatshirts and other items of clothing. Every time a representa-

tive of the bank is in the community – whether at a golf tournament, speaking at a school career day, or attending a Chamber of Commerce event – he/she should wear apparel that prominently displays the bank’s logo. This “eyeball to eyeball” visibility helps propel the bank to the “top of mind” position and also conveys the message that the bank has a strong team and culture. In effect, the bank representative becomes an ambassador for his/her lending institution. Many banks are active in their communities, often sponsoring road races to help raise funds for cancer research, or other important causes. In these settings, personalized Tshirts help keep the name of the institution prominent, along with its alignment with this cause. We also see bank officials select apparel to promote local sporting teams – such as in support of the Red Sox as they

approach playoff season. And who could have resisted Patriots wear leading up to the recent Superbowl? Another popular use of the logo is with a promotional product. These include everything from pens to calculators to flashlights. These are great keepsakes for customers and possible customers. High-tech gadgets are popular among bank giveaways. One popular item is the sixin-one charger, which plugs into a computer or a vehicle’s power source and can charge multiple devices at one time. Also popular is the portable power pack, which will boost the battery life of a cell phone; if someone is at a conference all day, or out on the golf course, this is a remedy. Calendars with local photographs are also a popular item. And, ironically, so is the pen. Most of us recall that bank lobbies often chain their pens to the desk. Yet many bank officials find pens to be an effective

way to brand an institution. One additional item gaining in popularity is the shopping bag, created with recycled materials and branded with the bank’s logo. Whether it’s piggy banks for elementary schools, apparel in support of schools or historic building restoration, or products given out in the community, it makes strong sense for a bank to brand itself through these community outreach activities. For most banks, a “more rather than less” strategy for marketing is what works. Don’t overlook the logo on promotional products or apparel as part of the strategy. It “wears well.” ■ Jack Doherty is CEO of College Hype, an apparel and promotional product company in Dorchester, Massachusetts. Visit www. collegehype.com for more information.

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Second Quarter 2017 | 15

CREATING CUSTOMER EXPERIENCES | By Sean Payant

Don’t Get Left on the Sidelines: Aligning Marketing and Execution

he marketing process is a little like the dreaded team selection in gym class. Two captains are appointed and they take turns picking their team from the kids on the sideline. “Pick me! Pick me,” some plead; others stand quietly, just hoping to be noticed. No one wants to be picked last. As an industry, we spend vast amounts of money, not to mention time and internal resources, for the purpose of marketing our banks – to get them to choose us. We brand. We market. We craft creative campaigns and blanket with direct advertising. We create television and radio spots. We orchestrate social media initiatives. The role of the marketing professional is to get consumers – the team captains – to pick our bank first. We are the kids standing in line saying, “Pick me! Pick me!”

priately. Far too often, frontline employees are the last to know about your marketing initiatives, let alone equipped to respond effectively when asked about our products and services. When marketing gets you picked, it unfortunately doesn’t always mean you make the team. Making the team requires an organization-wide effort to capitalize on every opportunity. Marketing’s job is to create opportunities. The bank employee’s job is to capture the sale. If these two purposes aren’t aligned, your efforts don’t just fall short, they can cause lasting damage. With consumers holding more and more control over your brand message as they post and tweet, the customer experience is paramount. Simply put, unless there is alignment between marketing and execution, much of the marketing department’s effort is in vain.

HOW DO WE BUILD ALIGNMENT? Sean Payant

WHAT HAPPENS WHEN YOU GET PICKED?

Perhaps you’ve had this experience: you walk into the restaurant and read the specials board while you wait to be seated. Later, when your server approaches the table, you ask him or her about the daily specials. Their response: “I just got here,” or, “Let me check.” The specials board, aka marketing, did its job. It got you to ask questions and initiate a conversation, but the server didn’t have answers. This is a major fail. Our banks are no different. Experience has taught us that targeted, narrowly cast marketing gets people in a bank’s doors. But your team must be equipped to respond appro16 | Banking New York

For marketing initiatives to truly succeed an organization must commit to ongoing education. Every employee must be prepared to respond appropriately to opportunities. In any situation, employees must have one of two types of expertise: one, knowledge regarding the specific product or service being discussed, or two, the knowledge and skill to make a professional referral to the expert. Building true alignment between marketing and execution depends on three factors: product knowledge, customer service and accountability. With any marketing initiative, the bank’s employees must understand the offer and the fulfillment process. This goes

beyond just providing a marketing piece or a digital file of a television or radio clip. It should include product training: • What is the product? • How does it work? • Who is the target audience? • Why would a customer want this product, or specifically, how does it make the customer’s life better? • How do we clearly ask for the sale? It is important to understand that product knowledge training is not a “one-and-done” event. If you don’t have an ongoing training plan, your team members will quickly lose essential knowledge. In fact, with inadequate product knowledge, employees will miss buying clues, or even ignore them, not wanting to look uninformed. Ask bank executives why consumers should pick their bank and the response is always something like, “Our service is wonderful.” In reality, it’s not. As bankers, we put ordinary on a pedestal every day and try to convince ourselves and our customers that it’s actually extraordinary. For the most part, our customer service standards are unclear. It is crucial that consumers who pick your bank have an experience that complements your marketing efforts. Most organizations do very little to craft the customer experience. Employees are simply told, “Provide great customer service.” But they are never shown

what is actually expected of them beyond a few basic behaviors. Beyond basic behaviors, there is another level of customer service: “excellence.” Every employee should ask themselves, “What can I do so that when this customer leaves, they feel special?” This extra effort is what takes service beyond simply going through the motions and creates a truly extraordinary customer experience – the kind they’ll want to tell others about. Unless you have clear service expectations that are regularly trained, coached and modeled, it is unlikely your team is consistently providing the level of service necessary to complement your bank’s marketing efforts. Then again, even if you do have clear service expectations, how do you really know that they are being reliably executed? It starts with accountability. Accountability is really about measuring and reporting. The most successful organizations establish clear service standards and back them with specific customer acquisition goals. As the accompanying chart illustrates, training and mystery shopping can drive improvement to your marketing results. Client data shows financial institutions that mystery shop AND retrain employees at least annually experience a 19 percent lift in openings when compared to clients that neither shop nor train. When employees know we are measuring something, they will work to achieve it. When employees are properly equipped, know what they need to achieve, and are accountable, results follow.

WHERE DO WE GO FROM HERE? As captains pick their teams, we all want to be picked first. But regardless of the draft order, it is essential that your marketing and execution are aligned so you always make the team. Without a clear plan that includes product-knowledge training, customer service standards and training, and accountability, your organization may well be left on the sidelines. ■ Sean C. Payant,Ph.D., is chief consulting officer at Haberfeld Holdings, a data-driven consulting firm specializing in core relationships, customer and profitability growth for community-based financial institutions. He can be reached at (402) 323-3614 or Sean@haberfeld.com. Second Quarter 2017 | 17

FROM BANK LOBBY TO BANK LOUNGE | By Hilary Troia

Transforming Your Bank’s Lobby Could Answer the Millennial Question

icture yourself in a bank lobby. Almost any bank. What do you see? Chances are, your mind’s eye focuses on cherry furniture, an elaborate chandelier, hard, rigid chairs and lots of sage green and chrome accents. There is a “bar-like” space, but all it houses are deposit slips and chained pens. Any people that happen to be in the lobby have most likely been born prior to 1975. The employees may be friendly and knowledgeable, but the environment is boring and predictable. Granted, new advances in banking technology have significantly reduced the need to physically visit a bank location, but technology may not be the only reason why there are fewer people to be found Hilary Troia in a bank lobby these days. And if banks want to capture the future business of Millennials – especially as these individuals advance to the point where they’re ready to take out a mortgage or a home equity or business line of credit – banks need to do everything they can to entice Millennials to use their banks – both virtually and physically – here in the present. In fact, with their burgeoning purchasing power, Millennials are pushing virtually every industry to make decisions about what we’re doing to attract them. We need to create opportunities that are more welcoming for Millennials, and give them a good reason to choose one bank over another. We’ve all heard about the online bank Capital One and its efforts to “reimagine banking” by creating good-looking and contemporary cafés that – almost seemingly as an afterthought – also offer banking services. While this may not be a traditional pairing, these “banks” are creating an environment that Millennials are not only drawn to, but want to work in as well (another benefit that may catch banks’ attention). With so much competition, banks need to cater to their customers. These institutions need to think about what they can do to get their clients to come into the bank, to do more banking and to be introduced to additional products. The answer may lie in efforts to upgrade, change and update – to move beyond the impersonal while maintaining convenience, to highlight their tech-savvy capabilities while creating a space that people of all ages want to spend time in. This could be achieved by transitioning the more traditional but staid bank lobby into a more relaxed, collaborative banking lounge. Adding contemporary furniture that combine a loungelike, comfortable feel with a professional atmosphere is one way to accomplish this transition. Banking isn’t the only industry that’s evolved as a result of technology – new sofas 18 | Banking New York

have movable parts that can transition into semi-partitioned and sound-modified spaces that allow for private phone conversations, while also offering ports for users to plug into and charge their devices. Replacing hard, more formal chairs with soft seating in contemporary shapes like modular or serpentine chairs and strategically dotting the space with them also offer a soft, warm first impression. Bright and frequent colors and complementary patterns and textures also do the trick to transform a space from lackluster to lively, while still maintaining professional feel. Coffee bars are also popular additions to workspaces of all kinds these days, offering patrons an opportunity to talk with one another and linger. Adding one to a bank lounge could help to halt the rushed feeling people associate with visiting a bank, as well as gives customers another place to go rather than immediately heading for the teller line. Similarly, by converting current open space into collaborative workspaces, banks could attract remote workers, freelancers and other non-specific location workers away from the coffee shops and bakeries and into their own lounges. Banks should also consider making use of seldom-needed conference rooms by offering them to BNIs and other networking groups on a reservation basis. At a time when technology allows us to complete a financial transaction without going inside of a bank, why would we choose to go visit one? Especially as retail space is changing dramatically and service businesses are scooping up brick and mortar spaces, banks have an extraordinary opportunity to reinvent themselves. Banks that feature more up-to-date, contemporary and user-friendly environments could help to draw in customers – both current and new – and expose them to additional, bigger-ticket products and services. These initiatives will not only grow your client base, but will also strengthen the loyalty of your current customers – as well as offer you the opportunity to interact with them more frequently, by giving them a reason to come to the bank. ■ Hilary Troia is vice president and co-owner of Office Gallery International (www.officegallery.net), which offers qualitycrafted office furniture, space planning and design services for businesses of all sizes. She can be reached at hilary@ officegallery.net.

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NOT ANOTHER ELECTRONIC BILLBOARD | By Achim Griesel

Targeted Marketing is More Important Than Ever in Digital Spaces

arketers talk a big game about segmentation, big data and predictive modeling – and then they put up a billboard or run a radio or newspaper ad. What if best performers in the retail world operated the same way? Have you seen a lot of Apple billboards? How about Starbucks radio or even TV ads? Let’s go a little smaller than these two giants. Do you see broad-based targeting from the best local or regional retailers? It doesn’t matter if your marketing channels are traditional, digital, or both; don’t fall in love with your broad-based branding approach and forget to target the right audience. The same is true in banking. In acquiring and deepening core customer relationship, targeting is Achim Grisel key. Figure out who your best prospects are and market to them with an omni-channel approach, instead of putting up another billboard – online or in the real world. Even in the digital age data suggests that customers’ selection of their primary FI is based on convenience patterns. Financial institutions have a wide array of data that can be used to determine whether a potential customer is a good prospect or not. Locations. Most community-based FIs generate 95 percent or more of their new relationships in the branch. While customers will handle the vast majority of their transactions online, they still start that relationship, at least the core rela20 | Banking New York

tionship, at the branch. As the branch is still important, the geographic reach from that branch should be determined. But don’t use this to figure out who you should market to; use it to figure out who should be analyzed in your targeting model. Customers. What do they tell us? Customer-specific data should be part of any predictive model, as customers demonstrated with their action that we are their primary FI. Our customer data can also teach us a lot about market demographics. If the goal of your outreach is not acquiring new primary accounts, but rather deepening existing relationships, your own customer data should also be a major component of your model. For your existing customers, you don’t just know what products they have – you know where they spend their money! Big data. Today we have an almost unlimited amount of data available. The key to using it is to determine what data points are most important and predictive. Knowing a potential customer’s habits and their footprint, by tabbing into their available cell- and GPS-based data, is a powerful addition to your predictive targeting. After all, don’t we all carry that phone with us 24 hours a day? In the digital age targeting becomes even more important. An single “billboard” – or the attempt to benefit from potential customers searching for their next financial institution – is not enough, and honestly may not be productive at all. This is where banking is different from other retail

businesses. Potential customers are much less likely to go online and search for the next core banking relationship. When they are ready to move on, they usually already know which institution they want to move to. You have to get in the head of your next potential customer with your digital and traditional marketing prior to them knowing that they are looking for a new banking relationship. In the old days, a banner in front of your branch and some inside and outside signage may have been enough for that. Today, this needs to cover all channels, digital and traditional. But even more importantly, it needs to be highly targeted. Once your predictive model outlined above helps you identify the best targets for your institution, you need to get in front of that specific group in a one-to-one setting whenever possible. Omni-channel. Don’t operate your digital and traditional channels in silos. Traditional approaches like branch signage and mail are still extremely effective. Both of them target the folks that you have identified as your best potential customers. Transitioning this to the digital channels, follow the same approach and look how you can highly target your best prospects. Tactics like IP targeting or targeting customers through their social channels fit the mold perfectly. Contextual targeting based on life changing events provides another valid option. Frequency. This is definitely an area where we have channel variation. Digital channels allow outreach to cus-

tomers at a much higher frequency. They also allow the flexibility of reaching your target segments with better customized message and a different frequency rate based on the targeted prospect. On the flipside it will likely take several outreaches prior to a customer responding to a digital ad. Offer. Lastly, the importance of your offer has not changed. Customer-centric models and good products are the key, and an incentive-based tiebreaker can be very effective. Good service is an impossible differentiator as an offer – I have not seen any institution advertise average service. On the flip side, good service – or, even better, exceptional service – will make a big difference when it comes to referrals. Most of the core principals of marketing have not changed. They apply in the traditional and digital marketing areas. Targeting the right prospect, with the right offer and the right frequency is key. Don’t fall into the trap that digital marketing can’t be targeted or does not allow the one-to-one communication most effective in every channel. ■ Achim Griesel is president at Haberfeld Holdings, a datadriven consulting firm specializing in core relationships, customer and profitability growth for community-based financial institutions. He can be reached at agriesel@ haberfeld.com or (402) 323-3793.

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INDUSTRY NEWS

FINTECH PROVIDER EXPANDS SERVICES TO PUERTO RICO New Yorkbased fintech provider Biz2Credit recently announced its partnership with Oriental Bank to develop a digital lending platform for the bank’s commercial clients. Through this partnership, Oriental Bank will be the first bank in Puerto Rico to engage commercial clients through a digital platform that supports applications for business credit cards, as well as lines of credit, term loans, real estate loans, equipment purchase and SBA loans. The customer application for Oriental Bank will be provided in both Spanish and English. The cloud-hosted platform allows bankers and clients to interact digitally, including uploading financial documents and gaining access to thirdparty credit data, as well as digitally delivers credit memos, commitment letters, closing documents and more. The platform includes a customized recommendation engine based on the bank’s credit policy, to streamline the decision process. Loans are booked on the bank’s balance sheet.

PCSB BANK CONVERTS TO A CHARTERED STOCK SAVINGS BANK

savings bank. As part of the conversion, PCSB Bank will become the wholly-owned subsidiary of a new corporation, named PCSB Financial Corp., which will become the bank holding company of PCSB Bank. PCSB Financial Corp. will offer shares of common stock for sale to eligible depositors of PCSB Bank and other persons in a subscription offering. An independent appraisal will determine the amount of common stock which will be offered for sale will be determined by an independent appraisal. The plan of conversion establishes Sept. 30, 2015, as the eligibility record date for determining the eligible depositors of PCSB Bank entitled to first priority non-transferable subscription rights to subscribe for shares of common stock in the subscription offering. If there are any shares of common stock unsold after the completion of the subscription offering, the unsold shares may be offered for sale in a community offering, a syndicated community offering and/or a firm commitment offering. The plan of conversion also provides for the establishment of a charitable foundation that will be funded with shares of common stock of PCSB Financial Corp. and cash. The charitable foundation will be dedicated to supporting charitable causes and community development activities in the communities in which PCSB Bank operates.

CONSULTING FIRM RANKS QUONTIC BANK AS TOP COMMUNITY BANK

PCSB Bank announced that its board of trustees has unanimously approved a plan of conversion to convert from a New York-chartered mutual savings bank to a New York-chartered stock

Astoria, Queens-based Quontic Bank has been named the top community bank in New York State in the latest comprehensive report from DD&F Consulting Group, a research and consulting firm on community banks. The firm measured eight metrics of performance. In its peer group of 31 banks in the state with assets of between $100 million and $250 million, Quontic Bank registered the best composite score. When factoring into consideration the state’s 148 banks of all sizes, the report ranked Quontic Bank No. 19. ■

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

22 | Banking New York

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