Banking New England July/Aug 2017

JULY/AUGUST 2017

INSIDE: BAR HARBOR AND LAKE SUNAPEE MERGER HIGHLIGHTS INDIVIDUAL BANKS’ STRENGTHS

NEW ENGLAND

THE RESOURCE FOR NEW ENGLAND’S FINANCIAL LEADERS

SBLI of MA

Reverse-Engineers

PLUS: STRATEGIES FOR THE SUCCESSFUL CFO ESTABLISHED COMMUNITY BANKERS DISCOVER THEY MAY BE UNMARKETABLE MODELS TO ACCOUNT FOR CORE CUSTOMER PROFITABILITY A PUB LICAT IO N O F TH E WA R RE N G R O U P

ALAN DeTOMA

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A P U B L I C AT I O N O F T H E WAR R EN G R O U P

CONTENTS

NEW ENGLAND

THE RESOURCE FOR NEW ENGLAND’S FINANCIAL LEADERS

04

STRATEGIES FOR THE SUCCESSFUL CFO

Build and Improve Relationships While Guarding Your FI’s Integrity

06

An Unexpected Job Hunt

10

12

A NEW CHALLENGE

BANK PROFILE

Two Sides of the Community Banking Coin

SBLI of MA

REVERSE-ENGINEERS 16

Core Customer Profitability and Cost Models

ACCOUNTING FOR THE CORE

18

PERSONNEL FILE

20

COMMUNITY GOOD WORKS

Insurance Co. Converts Back to Mutual

22

IN CASE YOU MISSED IT TWG STAFF CEO & PUBLISHER Timothy M. Warren Jr. PRESIDENT David B. Lovins EDITORIAL EDITORIAL & MEDIA RELATIONS DIRECTOR Cassidy Murphy EDITOR Malea Ritz ASSOCIATE EDITOR Mike Flaim

www.thewarrengroup.com ©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

Interested in receiving additional copies of Banking New England?

Call 617-896-5357 or email custompubs@thewarrengroup.com

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

STRATEGIES FOR THE SUCCESSFUL CFO

Build and Improve Relationships While Guarding Your FI’s Integrity

BY MARIE PEELER

Marie Peeler is the principal of Peeler Associates, a Pembroke, Massachusettsbased leadership development organization. For more information, please visit www.peelerassociates.com.

Marie Peeler

C

ombine the external challenge of a neophyte administration, regulatory uncertainties and concern that the recently burgeoning stock market may be a fleeting illusion with the trials that are intrinsic to heading a fiscal organization, and now may be a trying time for many financial executives.

While some of the most troubling external issues faced by organizations today – including tax reform and health care – fall into the main purview of the chief financial executive, CFOs sometimes face their biggest challenges within their own organizations.

Like all executives, the CFO has a dual role.

One is as the head of finance and the other is as a member of the larger team responsible for the success of the overall organization. Individual team members cannot perform this latter role if they have retreated into simply looking after their functional responsibilities. Rather, they must attend equally to providing solutions that advance the agendas of others across the organization. The CFO that cultivates a reputation for being balanced and open4

BANKING NEW ENGLAND

minded and a “team player” will inevitably be more respected and wield greater influence.

The most successful CFOs learn to develop the skills to simultaneously build and maintain personal relationships and guard the financial integrity and risk of their organizations. They are both task- and people-oriented. They learn to speak boldly and courageously to deliver the critical messages that the organization needs to hear. They cultivate an understanding of the complete organizational system that helps guide their decision-making. They are credible and trusted and, therefore, influential.

They are visionary and skilled in communicating their vision. They are collaborators and mentors and genuinely care about people and relationships.

Cultivating these leadership skills and abilities requires the development of certain competencies.

Rooted in emotional intelligence and adult development, these competencies help leaders balance the sometimes competing demands of tasks and people: CONTINUED ON PAGE 8

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APROTECTING NEW CHALLENGE VULNERABLE CLIENTS

CONTINUED FROM PAGE 6

An Unexpected Job Hunt Tenured Bankers Discover They May Be Unmarketable

BY NEIL BERDIEV

Neil Berdiev is a commercial banker and founder of DNB Advisory LLC, an outsourced commercial credit services and advisory firm working with commercial lenders and privately held companies.

He may be reached at neil@ dnbadvisory.com.

Neil Berdiev

R

emember how as a junior professional you were impatient to gain experience, tenure, rank and greater income generating capacity? Now that you have arrived, ready to harvest the benefits of your hard work, new dangers lurk on horizon that you must be aware of. It turns out that the more advanced you become in your career, the harder it may be to get back into the employment game if it gets interrupted, by choice or not.

Although older individuals are less likely to lose their jobs, when it happens it takes them longer to become reemployed. When they do find work, they usually accept a much lower wage than previously, according to a study from the Urban Institute. In commercial banking, similar to many other industries, generational turnover and retirement of many Baby Boomers means a shortage of talent. Yet a number of tenured commercial bankers are discovering the following challenges when they lose their jobs due to continued consolidation, forced retirement, restructuring, quests for efficiency and the introduction of new technologies: • Fewer jobs are available for experienced bankers.

• Your skill set may be becoming outdated, 6

BANKING NEW ENGLAND

or is already not fitting into a rapidly changing financial services landscape.

• You are too expensive compared to junior colleagues.

• While age discrimination is illegal, covert discrimination and preference for a younger – a more “dynamic” – workforce does occur.

• Decision-makers tend to hire from within their network, even if these new hires are not in the best interest of their employers.

Having worked with and interviewed a number of tenured and experienced commercial bankers, I witnessed firsthand these challenges.

Some are not difficult to overcome, if you recognize the most common shortcomings that tenured talent develops. If you are a more junior banker, take notice and prepare – it is only a matter of time before you face similar challenges.

Understand the role you are applying for.

Is it what I call an “operator” role (individual, highly proficient performer), project manager and problem-solver, or some level of general management? Many tenured executives lose the ability to be an operator, or even manage a

team of operators. C-suite executives in larger companies may have been removed from the action for so long that they are no longer good at those jobs. Unless you recognize this challenge and are able to make a case for why you’d be successful in the role, you will not be taken seriously by hiring teams.

You are experienced, and no one can take that away from you. However, when potential employers hear phrases such as “I have done it many years ago,” “How hard can it be to figure it out?” or “I went through a credit program x decades ago,” it is a sure way for people to stop taking you seriously. Many employers need deployment right away or within a very short period of time. Focus on what you can do and how you will ramp up when a particular project requires a skill set that you may not have leaned on in years.

There are stereotypes that older individuals are inflexible, unable to adapt and stuck in their ways. We tend to become generally more conservative and less intellectually curious with time (per Psychology Today). Prospective employers will be actively assessing whether you will be able to adjust, integrate and be flexible enough to do things “their” way. In one instance, a very experienced senior manager was asked to sign a nondisclosure agreement for confidential discussions in connection with the role he was applying for. Instead, he attempted to force their hand, saying he would only sign the paper when they met again. The meeting never happened, for his behavior was interpreted as stubborn, uncooperative and inflexible. People expect to see your best behavior during interviews. If that is your best behavior, no one wants to experience your bad side.

Knowing that something is a problem is not the same as doing something about it! Hiring teams will not believe that you are aware of an issue if there is a clear sign that you do not apply this knowledge to resolving it. If you tend to micromanage and you know it is a problem for your team members, do not keep saying that you know you tend to micromanage and you know your team does not like it. What are going to do about it?

Are you careless, arrogant or incapable of changing? Does any team want team members who know about problems and keep ignoring them?

Consider preempting questions that likely weigh on interviewers, even if they do not bring them up. For example, when you are very experienced but are interested in taking a position that requires less experience, employers will likely think that they are a quick stepping stone for you. No one wants to be viewed as a stepping stone. Another example of a potential trouble spot is the interviewer’s presumption that you would be too expensive, thanks to your experience and the fact you have held high-level roles.

With up to four generations packed into one team today, hiring managers may understandably worry if you can

interact and work well with younger generations. If you tend to stereotype and dismiss younger generations instead of energetically rolling up your sleeves and working with them, it is a non-starter. Hiring teams will scrutinize how you interact with younger team members to determine if you are likely to be successful with managing, working with or even reporting to them. Your more junior team members may be interacting with their peers on teams you may be interviewing with. What kinds of marks and behind-the-scene comments will they give you?

It is critical to keep your skills versatile, so keep learning and developing. The more we advance in our careers, the busier we become and the easier it is to lose the ability for active learning.

“Get your network to be brutally honest with you. Unless you surround yourself with individuals who can thoughtfully critique you, you severely limit your chances for success.”

We also get more detached from those who do day-to-day work.

You must find a balance of developing new skills, even if it is as simple as proficiency with Excel or another new technology.

Think what people would conclude if you simply state that you are not good at something; the implication is that you may not care enough to learn or, just as bad, that you are not smart enough to figure it out.

Get your network to be brutally honest with you. We all have habits and traits that annoy others, and everyone has at least one weakness in their professional profile. Unless you surround yourself with individuals who can thoughtfully critique you, you severely limit your chances for success. On a number of occasions, I provided constructive feedback to senior colleagues, whom I never heard from again; they were offended by my honesty. I learned from my network that, months later, they were still looking for that next career move because they were too tenured to take in criticism.

Reinventing yourself is the name of the game in our fastchanging world. Today you may be on top of the mountain, but tomorrow you are forgotten and irrelevant. Get out of your comfort zone. Companies do not just need experience from tenured talent. They need problem-solvers who are comfortable with the unknown. BNE BANKING NEW ENGLAND

7

STRATEGIES FOR THE SUCCESSFUL CFO

CONTINUED FROM PAGE 4

Integrity and honesty: Not only telling the truth but “walking the walk.”

Courageous authenticity: The bravery to talk about the “elephant in the room” and speaking one’s truth in service to the team, even when doing so is unpopular.

Relationship-building through caring connections: Building relationships and seeing others as valuable regardless of what they can or cannot do for you.

Development of others: Eagerness to assist others in their natural desire to grow and develop.

Motivation and inspiration of others: Ability to energize others and earn their commitment.

Internal and external collaboration: Valuing connection.

Understanding and promoting teamwork and shared vision.

Self-awareness: Understanding one’s own strengths and weaknesses. Having self-esteem that comes from within rather than being dependent upon external validation.

Composure: The ability to stay calm under pressure, remain present in the moment, and handle stress constructively.

Self-development: Leaders high in this competency are open to feedback and new experiences. They seek learning opportunities and alternate work methods.

Results orientation: The ability to set goals and high performance standards, as well as to pursue projects to completion.

Systems-thinking: The ability to see the bigger picture and the

interrelatedness of events. Understanding that cause and effect is often disparate in terms of time and space.

Sustainability: The ability to balance energy and resources to sustain high performance over time.

The journey of acquiring these leadership competencies is not as straightforward as simply learning a set of skills. Indeed, it usually requires a fundamental shift in how the leader views the world – and their role in it. The leadership competencies are as much about the being of leadership (who you are and what you believe) as they are about the doing of leadership (the actions you take).

This is an intentional journey. The leader must choose it and decide to develop as both a leader and a person. Along the journey, there are a number of supports to which CFOs can avail themselves.

Feedback is an important developmental tool. Although many leaders struggle to accept feedback, learning to process feedback constructively is one of the most powerful things a leader can do for self-development.

CFOs can also work with a coach, who will use many tools including acute listening, power questioning and constructive feedback to partner with the leader to achieve specific objectives. Mentors and role models, who are themselves strong in the leadership competencies that the leader wants to develop, can also be invaluable.

Constant engagement in learning and reflection are key to personal mastery. Being exposed to new ideas and taking the time to reflect on one’s experiences are essential in the growth of today’s CFO. BNE

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BANKING NEW ENGLAND

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PROTECTING BANK PROFILEVULNERABLE CLIENTS

Two Sides of the Community Banking Coin Bar Harbor and Lake Sunapee Merger Highlights Individual Banks’ Strengths

BY LINDA GOODSPEED

B Curtis C. Simard

10 BANKING NEW ENGLAND

ar Harbor Bank & Trust’s acquisition of Lake Sunapee Bank earlier this year really started in 2013, when Curtis C. Simard was hired to unlock the Bar Harbor brand as its newest CEO. “I represented the first material change in the bank’s CEO profile in decades,” said Simard, then 42 and managing director of corporate banking at TD Bank.

At Bar Harbor, a $1.6 billion community bank landlocked in the northeast corner of the U.S., Simard spent the next two years “investing in people, technology and risk management to prepare for acquisitions.”

But before he could start looking around, Simard got a phone call from Lake Sunapee Bank in the fall of 2015. Like Bar Harbor two years earlier, Lake Sunapee, also a $1.6 billion community bank that was headquartered in Newport, New Hampshire, was facing succession challenges.

“We had a nice conversation about how I was attracted to Bar Harbor, and what it would take to recruit someone like me” Simard said. “They were

picking my brain at first. They hadn’t really had to recruit outside their four walls in decades.”

As the conversations deepened, the two banks, so similar in so many ways, saw an opportunity.

“A lot of what we had spent investing at Bar Harbor the last couple of years, they were going to have to do,” Simard said. “Why not merge with someone who had already done it? From a capital perspective, it was an opportunity to take the best of both banks and put them together and leverage the cost of being a larger institution across a larger revenue base.”

Bar Harbor Bankshares, the holding company for Bar Harbor Bank & Trust, completed its merger with Lake Sunapee Bank Group, the holding company for Lake Sunapee Bank, on Jan. 13, 2017. Bar Harbor is now the only community bank headquartered in Northern New England with a market footprint in all three northern New England states of Maine, New Hampshire and Vermont. The combined company has 49 branch locations, some $3.5 billion in assets, $2.4 billion in net loans, $2.2 billion in deposits and over $2.0

billion in assets under management. The allstock transaction was valued at about $143 million. Lake Sunapee branches retained the Lake Sunapee name, and will operate as a division of Bar Harbor.

“Lake Sunapee is a very provincial market. There have been a lot of relationships built over generations. We knew their name was important to them, as our name is to us, if we had just been acquired,” Simard explained. “But we are one bank, one culture.”

Simard said the merger made sense on three fronts: similar culture, strong employees and geography. At first blush, the two institutions look almost like mirror images: Lake Sunapee was founded in 1868, has $1.6 billion in assets, $1.2 billion in loans and 35 branches. Bar Harbor was founded in 1887, has $1.6 billion in assets, $1 billion in loans and 14 branches. But there were some key differences that made the merger even more compelling.

“Bar Harbor was a largely commercial bank,” Simard said. “We had a lot of commercial lending in a very condensed footprint. They had a more sprawling retail footprint, less focus on commercial with a strong residential mortgage business.

Everything they did very well was opposite what we did well. We moved their mortgage underwriting process into our footprint and increased our output 300 percent. We moved our commercial process into their operation, and are getting good transactions on the Lake Sunapee footprint.”

Simard said there were few redundancies, resulting in an estimated 20 percent cost savings, relatively low by industry standards.

Most of those redundancies were in the Lake Sunapee executive suite. Stephen Theroux, Lake Sunapee’s president and CEO, was named to Bar Harbor’s board, and Bill McIver, Lake Sunapee COO, took over the retail franchise and mortgage business of the combined company, as well as the New Hampshire trust business.

“We took better competencies, like Bill McIver, and put them together,” Simard said.

“We made sure we are one bank, one culture.

We’re not going to be Lake Sunapee on one side and Bar Harbor on the other. The two banks are fully integrated.”

Simard said the three northernmost New England states, although similar in many

“A lot of what we had spent investing at Bar Harbor the last couple of years, they were going to have to do. Why not merge with someone who had already done it?”

— Curtis C. Simard CEO, Bar Harbor Bank & Trust respects, have many regional markets and differences.

“We think there are a lot of companies and individuals in those markets that want high-touch banking services and a community bank that will invest in those markets and understand the nuances of those markets,” he said.

Asked if a much bigger bank was in danger of losing its community touch, Simard replied that “the key is not to get

hung up on assets. It’s the delivery model – decisions made on the ground, empowered people.”

“We’ve invested in processes so people can make decisions on the ground,” he said.

“We’ve kept staff levels high. Money is all the same color. It’s really about having people in the bank [for] many years. They know the customers by name, their children, grandchildren. They know their patterns. It’s not size that makes a community bank.” BNE

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11

BACK TO PLAN A

SBLI of MA

REVERSE-ENGINEERS

Insurance Co. Converts Back to Mutual

By Christina O’Neill

P

olicyholders for the Savings Bank Life Insurance Co.

on June 30, Suffolk Superior Court Judge Mitchell Kaplan denied

company’s plan to return to a mutually-owned company

May 19, 2017, and many of the votes had already been cast and

of Massachusetts voted overwhelmingly in favor of the

from the shareholder-owned status it has held since 1992, in

a special meeting held June 28. That move runs counter to the

the request, in part because voting on the matter had opened on counted before the June 28 meeting.

The plaintiff subsequently filed a second request on the day

typical migration from mutual company to stockholder-owned.

of the meeting, to which SBLI was responding, Morgan told

proxy – amounted to 10.4 percent of the total voting contingent.

to close in July, Morgan said at that time. The plaintiff ’s attorney,

The votes counted by all methods – in person, by phone and by

Ninety-two percent voted in favor of the move.

SBLI President Jim Morgan said in July that the company was

Banking New England in June. The remutualization was expected Jason Adkins, did not respond to requests for comment.

In her class action suit, McEvoy alleged that SBLI’s notice of

currently conducting due diligence on the investors who propose

the special meeting was “false, deceptive and misleading” because

center of the remutualization.

of $219 million of net operating loss carryforwards or the ultimate

to buy the surplus notes that will fund the stock buyback at the

A remutualized SBLI will give policyholders total ownership

of the company, as well as voting rights to select members of the

it didn’t take into account the potential loss of the tax advantage cost of the surplus notes to policyholders.

Additionally she alleged the special notice did not include

SBLI board, which selects SBLI management. SBLI actuary

a fairness opinion from Piper Jaffray, SBLI’s financial advisor,

obtained by Banking New England that such ownership rights

Kaplan’s denial of the plaintiff ’s request cited that the surplus

Steven I. Schreiber of Milliman Inc., said in a January 2017 letter “should ensure the continued reasonable financial treatment of the SBLI policyholders.”

The special meeting vote on June 28 came days after a suit

filed in Suffolk County Superior Court sought to block the

remutualization. A policyholder filed a class action suit, McEvoy vs. SBLI of Massachusetts in Suffolk Superior Court, claiming

that the terms of the remutualization would negatively impact the policyholders who would become SBLI’s sole owners. The

plaintiff ’s attorney had requested that the Suffolk Superior Court judge hearing the civil case enjoin the policyholders’ meeting, but

alleging a windfall to stockholders at the expense of policyholders. notes were expected to bear 6 percent interest a year, “in excess of that which management asserts it will have to offer to sell

the notes.” He added, however, that the meeting notice “could

have been more clear” in offering data on costs and debt service on the notes. However, Kaplan concluded that “the issuance of

the surplus notes outweighs the potential irreparable harm,” and that if the conversion results in unlawful transfer of value from

policyholders to shareholders, policyholders could theoretically assert other legal claims.

CONTINUED ON PAGE 14

BANKING NEW ENGLAND

13

BACK TO PLAN A

Joseph Belth, an Indiana-based insurance expert and founder

of The Insurance Forum, concurred with McEvoy’s concerns about the shortcomings of SBLI’s special meeting notice.

“The fact that there was another opinion [the Piper Jaffray

letter] should have been in the notice,” he told Banking New

England, and added that he thinks the judge should not have

conversion would eliminate a complex corporate structure, and would free up the board of directors to focus on policyholder

interest. It predicted upward pressure on dividend payments on

the part of banks – an assertion with which its actuary agreed – to the detriment of policyholders.

The social media site Fat Wallet lit up with comments on

dismissed the complaint.

this topic in the runup to the June 28 meeting, mostly from

fund the share buyback to complete the remutualization, SBLI

Commenters’ concerns included how the assumption of debt to

But for now, the mutualization is moving forward. In order to

plans to issue $57.3 million in surplus notes, proceeds of which

will buy the shares back from the various holders of SBLI’s stock.

The change in ownership status by itself will not stop the $40

million in dividends paid to policyholders, William Parjeans,

director of life-health ratings division at A.M. Best, told Banking New England. He added that the dividend payout could change based on a number of factors including SBLI’s operating performance.

Course Reversal The remutualization allows for more liquidity – the ability to

buy and sell stock – and gives shareholders a voice on the entity’s board of directors, not a perquisite of policyholders in a mutual, despite their ownership of the company’s assets.

Despite the ubiquity of the SBLI acronym on banking and

insurance websites, there is no legal link between those and the

Savings Bank Life Insurance Co. of Massachusetts (SBLI), A.M. Best’s Parjeans said.

SBLI of Massachusetts is a single legal entity headquartered

those who said they would vote against the remutualization.

buy out the shareholders would impact policyholders’ premiums and dividends and whether the interest payments on the debt would eclipse the dividends shareholders had received and, as a result, sap the company’s residual value. Additionally, there

was concern that policyholders in a mutual tend to vote their proxies with management, unlike institutional shareholders,

who take a more activist role to monitor management behavior.

Given the current shareholder dividends paid by SBLI and

the challenges associated with raising the dividend payout,

the banks’ returns on SBLI shares were expected to be coming under pressure, A.M. Best’s Parjeans said.

SBLI’s policyholder information included a statement

that several of its bank shareholders had approached it in

2015 expressing an interest in liquidating their common stock because Basel III capital rules increased the risk weighting for non-publicly traded equity securities owned by banks from

100 percent to 400 percent, requiring them to quadruple the amount of capital held against their investment.

A.M. Best last November downgraded SBLI’s financial

in Massachusetts and is licensed to sell life and annuity products

strength rating from A+ (superior), a long-held designation, to

its status as a stock company, its dominant shareholders were 30

said that SBLI told him that the downgrade was not related to

in the District of Columbia and all states except New York. In savings banks with operations in Massachusetts. Half of those banks – some of the nation’s largest among them – acquired

Massachusetts-based savings banks, the original owners of SBLI’s shares. As insurance sales by bank shareholders have plunged

from 100 percent prior to 1990, they account for less than 0.1 percent of insurance sales today, SBLI said in its policyholder information.

Bank shares are fairly illiquid investments, and are subject to

increased reserving requirements against holdings that are not listed on exchanges as mandated under Basel III rules.

The information SBLI mailed to shareholders helped explain

the company’s thinking. It cited the Massachusetts Division

of Insurance’s assertion that shareholders owned 100 percent

of SBLI and that policyholders had no equity in the company, its surplus or its residual value. SBLI also asserted that the 14 BANKING NEW ENGLAND

A (excellent), revised from stable to negative. The SBLI actuary the proposed mutualization.

The retirement of the bank shares would end their dividend

payment, which was $1.8 million annually, as reported in SBLI’s statutory financial filings.

While dividend payouts would end, the surplus notes will

have a required interest payment, which would be known at the time of issuance, A.M. Best said.

When analyzing the expected impact of paying interest on

surplus notes (which is tax deductible) against the current stock dividend payouts to shareholders (which is not tax deductible), Parjeans said the opinion was that the net impact would not

have a material adverse effect on the financial position of SBLI. Moreover, the interest payments are fixed over the life the

surplus notes whereas the share dividend payments are subject to potential increases over time, he said.

BNE

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PROTECTING VULNERABLE ACCOUNTING FOR THE CORECLIENTS

Core Customer Profitability and Cost Models It’s Not What You Don’t Know; It’s What You Think You Know That Ain’t So!

BY ACHIM GRIESEL

Achim Griesel is president of Lincoln, Nebraska-based Haberfeld Associates. He can be reached at achim@ haberfeld.com.

Achim Griesel

B

efore figuring its profitability, it’s critical to define a core banking relationship. It’s possible with a simple test: Ask people where they bank. Their response will be their primary financial institution (PFI) and usually where they have their primary operating checking account.

This may not be the most scientific way to define a core customer, but it surely tells the story from the customer’s perspective. For those of us who would rather see some proof in the data, just look at the customer base. The average community-based financial institution (FI) will show similar stats to the graph below – 65 percent of customers start their relationship with a checking account.

It is undeniable that revenue streams related to checking accounts have declined over the last five years. Largely due to a 40 percent decline in overdraft income, fee income has declined, and with interest income we have been in one of the lowest rate environments for a decade.

So, what cost model we should use to evaluate products, policy and marketing success? The industry norm has been a fully allocated cost model, while some organizations have been very successful applying a contribution model and looking at incremental impacts. When looking at product viability and profitability, the cost model is critical, especially in an environment of lower per account revenues.

Fully Allocated Cost Model

There are many variations of this model, but there are common characteristics: • Use a process based upon type of account to assign a share of overhead to the account.

• Allocate larger shares of overhead to transaction accounts based upon the fact that these customers are the ones that utilize the branch most often.

• Combine allocated overhead with the variable costs of accounts to determine the total cost of that account type to the institution.

This all sounds very reasonable and logical. After all, overhead has to be factored in somewhere, so why not at the account level? There are two flaws to this approach in determining account profitability, especially for community based FIs that tend to have far fewer customers per office than their national brethren.

16 BANKING NEW ENGLAND

The first is that many of these models use a standard amount for each account regardless of the number of accounts at an institution. In other words, if a branch has 500 checking accounts or 1,500, the model will use the same amount per account, which is typically somewhere between $125 and $20-plus. This is flawed because as the number of accounts grows – up to the point where additional overhead is required to support the accounts – the allocated amount should go down.

Some models, however, do adjust in this way. The model is still flawed, because the overhead required to keep a branch operating and staffed appropriately is about the same up until a bank gets between 2,500 and 3,000 personal and business checking accounts.

Most community-based FIs have around 1,200 personal and business accounts per office. This means they can, on average, more than double the number of core relationships and add no significant overhead. In this context, a fully allocated model is not very useful in determining account-level profitability.

Contribution Model

In a contribution model, account profitability is determined by looking only at incremental costs.

These are the additional costs to add one more account. Contribution is short for “contribution toward overhead and profit.” The basic wisdom of this model is that since branch overhead is largely fixed, it does not belong in an account-level profitability model.

The first step developing a contribution model should be identifying the truly incremental cost per new account.

For every new account: • Data processing – the cost to add and maintain each new account on the core system.

• Statements and notices – the costs of statements and notices, a shrinking line item as e-statement penetration grows.

• Miscellaneous new-account costs – welcome kits, “switch kits,” etc. – anything associated with opening a new account that is not part of overhead or marketing.

For some accounts: • Debit card issuance and network – the actual costs to issue a card and the ongoing costs to have the card(s) on the networks.

• Digital banking services like online banking, mobile banking and/or bill pay – the cost to add – and the ongoing cost to keep providing digital banking services.

• Loss of principal on charged off accounts – the principal dollars charged off net of recoveries.

All of these costs have one thing in common: they would not occur without a checking account having been opened. The second group of costs only happens if another product related to the checking account is sold, or if the account is charged off with uncollected principal.

To develop a model on account profitability the cost side is only half of the equation. Working with community based FIs in over 40 states has shown us the revenue or contribution figures below are a good national average for checking account revenues at communitybased FIs. But, keep in mind these figures will vary on regional or local levels.

The typical core relationship contribution above the incremental

cost of the checking account is $242 toward an FI’s overhead and profit.

Contrast the contribution and marginal costs above with most fully allocated models, which result in per-account costs in the range of the above contribution amount. The ramifications are far beyond the academic. Think about the effect of your front-line and retail staff being told that half of your customers are unprofitable.

Acceptance of the fully allocated cost model is a part of the reason that community-based FI are operating at half (or less) capacity.

Not even considered is the checking relationship is the hub from which the total household relationship develops. The second layer of the contribution model should look at the overall relationship contribution. National averages will add figures similar to the ones below per checking household.

The decision of what cost model to adopt for core customer profitability has far-reaching ramifications. It impacts the products your FI will offer, its marketing, how it sets policies and how its front-line managers and platform people view their customers. In short, it will impact the culture of your organization. BNE

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17

PROTECTINGFILE VULNERABLE CLIENTS PERSONNEL

Career achievers in banks across New England are constantly on the move, with their professional journeys reflecting a combination of mobility and longstanding service. In this space, we acknowledge them, and welcome readers to submit news of their own banks’ efforts and endeavors to Editor Malea Ritz at mritz@thewarrengroup.com.

Featured Banks • Bar Harbor Bank & Trust • Bay State Savings Bank • Commerce Bank

Appointments and Elections Bar Harbor Bank & Trust Leonard R. Cashman was elected to serve as a director of both Bar Harbor Bank & Trust and its parent company, Bar Harbor Bankshares.

Leonard R. Cashman Cashman is an owner and partner of C.O. Properties, a real estate holding company based in New Hampshire. Cashman has worked in the wholesale food industry throughout New England for approximately 25 years. Cashman was also one of the founders of Landmark Bank in Lebanon, New Hampshire.

Cashman has served on the Lake Sunapee Bank Group board of directors for 20 years.

• Eastern Bank • Katahdin Trust • Lake Sunapee Bank • Lee Bank • Northeast Bank • Norwood Bank • SIS Bank • The Provident Bank

Commerce Bank Brendan Ahern, assistant vice president and manager of Commerce Bank’s South End office in Boston, has been elected president of the Brendan Ahern South End Business Alliance (SEBA). Ahern joined Commerce Bank in 2015 as manager of its South End office, and joined the SEBA board of directors in 2016. He currently sits on the Citizens Advisory Committee for the Back Bay/South End Gateway Project, and is actively involved in the Asian American Civic Association, the Greater Boston Chamber of Commerce and the Greater Boston Food Bank.

Bay State Savings Bank John Altomare, partner, Fusaro, Altomare & Ermilio Attorneys, and Christine Lucey, CFO, Sun Transportation Inc., both John Altomare corporators at Bay State Savings Bank, have been named directors. Paul Dubrey, certified public accountant/certified fraud examiner and Anthony Servidio, CPA/supervisor at Greenberg, Rosenblatt, Kull & Bitsoli, P.C., have been named corporators.

Katahdin Trust Billi Griffeth has been promoted to assistant vice president of retail services at Katahdin Trust Co. Her new duties will include serving Billi Griffeth as program manager for Katahdin Financial Services, a service of Cetera Investment Services LLC, a registered brokerdealer (unaffiliated with Katahdin Trust Co.). She will also be responsible for participating in various retail administration projects for the bank including all areas of facilities.

Promotions Eastern Bank

Matthew Osborne was promoted to senior commercial banking officer of Boston-based Eastern Bank. With the promotion, Osborne has relocated his office from Brockton to Boston. Osborne now assumes responsibilities for commercial real estate in Boston, C&I Boston and community development lending.

Matthew Osborne

Lee Bank

Susie Brown

18 BANKING NEW ENGLAND

Paula Gangell-Miller

Paula Lewis

Lee Bank recently announced the promotion of three employees within the company. Susie Brown has been named to the position of senior vice president of human resources and administration; Paula Gangell-Miller has been named to the position of vice president of community banking and retail operations; and Paula Lewis has been named to the position of first vice president of retail lending.

Promotions Norwood Bank

Tracey Robbins has been promoted to senior vice president of residential lending at Massachusetts-based Norwood Bank. Robbins joined the bank in 1996 as a mortgage originator and throughout her career at the bank held positions as virtual branch manager and business development officer and, since 2006, vice president Tracey Robbins of residential lending. She oversees the mortgage origination, credit and servicing areas.

SIS Bank

Michelle Sheppard

Brenda Keene

Sanford, Maine-based SIS Bank announced the recent promotion of five employees.

Michelle Sheppard was promoted to senior vice president and chief risk officer. In addition to leading the credit department,

she will also be responsible for collection and compliance/ security.

Brenda Keene was promoted Karyn Morin Eric Beauregard Anthony Cataldi to senior vice president, where she will continue to oversee branch administration with the added duties of overseeing deposit operations and commercial deposits. Karyn Morin, vice president and senior retail banker, adds loan servicing to her list of responsibilities. Eric Beauregard was promoted from assistant vice president to vice president in the commercial banking division. In addition to his existing responsibilities, Executive Vice President Anthony Cataldi will oversee residential lending, commercial lending and marketing. Blaine Boudreau also assumes the role of SIS Bank president upon the retirement of Mark Mickeriz, who will continue to serve as the bank’s CEO until Dec. 31, 2017.

New Arrivals Bay State Savings Bank

Jeanie Connolly

Jeanie Connolly has been named a vice president of commercial lending at Bay State Savings Bank. Connolly has over 20 years of experience, most recently as a commercial relationship manager at Clinton Savings Bank and previously at Peoples United Bank. Her primary focus at Bay State will be on loan portfolio management and new business development.

Katahdin Trust

John Frohock has joined Hampden, Mainebased Katahdin Trust as vice president and managed assets officer. Based at the bank’s Hampden office, he will be responsible for managing and directing the collection activity for all retail and commercial loan accounts.

Frohock’s career includes positions with the FDIC John Frohock in liquidation and bank closings, as well as 10 years with Camden National Bank as vice president in the special assets division. Most recently, he has served as consultant, loan review services with M and M Consulting in Massachusetts.

and industrial financing solutions, commercial real estate loans and credit enhancement programs, including SBA and BFA.

Northeast Bank

Brad Heritage has joined Lewiston, Maine-based Northeast Bank’s SBA lending division as senior vice president and business development. He comes to Northeast Bank with over 10 years of experience in the financial services sector, with a focus on nationwide lending to small businesses and utilizing online lending platforms to improve the borrower experience.

The Provident Bank

Brent Mathews has joined Amesbury, Massachusetts-based The Provident Bank as senior vice president and commercial lending officer of the Boston region. He will focus on lending to commercial and industrial companies with an emphasis on providing debt financing for mergers and acquisitions and will be based in the Greater Brent Mathews Boston regional office. Mathews brings nearly 20 years of experience in operations and finance, most recently as vice president of originations at PNC Business Credit in Boston. BNE

Lake Sunapee Bank

Donna Ehrler has joined Concord, New Hampshire-based Lake Sunapee Bank as senior vice president and middle market manager. Ehrler develops and manages complex banking relationships with business owners and entrepreneurs throughout the state, assisting them with appropriate financing solutions and Donna Ehrler comprehensive business banking services. She brings over 35 years of experience in credit and commercial lending in the New Hampshire market. She also has experience with commercial

Personnel File Submission formNEWS AD SUBMIT YOUR BANKER WWW.THEWARRENGROUPEVENTS.COM/BANKNEWS/ BANKING NEW ENGLAND

19

PROTECTING GOOD VULNERABLE COMMUNITY WORKS CLIENTS

Financial institutions large and small have been making a difference in their communities for years. In this space, we acknowledge them, and welcome readers to submit news of their own banks’ efforts and endeavors to Editor Malea Ritz at mritz@thewarrengroup.com.

Featured Banks • Baystate Financial • Country Bank • Katahdin Trust Co.

Baystate Financial

Boston-based Baystate Financial raised $30,000 in the Fourth Annual Baystate Foundation All Stars versus the Boston Bruins Alumni charity hockey game.

Country Bank

Ware, Massachusetts-based Country Bank’s Employee Charitable Giving program recently donated more raised more than $30,000 to support the Jimmy Fund. The program also donated $10,000 to the Easter Seals “Walk with Me” program.

Katahdin Trust Co.

• KeyBank • Lake Sunapee Bank • Main Street Bank • Mechanics Cooperative Bank • Merrimack County Savings Bank • North Brookfield Savings Bank • Reading Cooperative Bank • SIS Bank • UniBank

Maine-based Katahdin Trust Co. presented federally sponsored volunteer program Aroostook with a $1,000 donation in support of Aroostook Retired and Senior Volunteer Program.

KeyBank

KeyBank recently supported the Ludlow Community Center/ Randall Boys & Girls Club of Massachusetts as its $2,200 banner sponsor. The grant will help support a variety of academic success programs currently offered to its youth members.

20 BANKING NEW ENGLAND

Lake Sunapee Bank

Newport, New Hampshire-based Lake Sunapee Bank, a division of Bar Harbor Bank & Trust, announced its commitment to support the Children’s Scholarship Fund of New Hampshire through the purchase of Education Tax Credits from the New Hampshire Department of Revenue Administration.

Main Street Bank

Marlborough, Massachusetts-based Main Street Bank, the premier sponsor of the Annual Janis Bresnahan 5K Run for Education that benefits the Ayer Shirely Education Foundation, recently recognized its continued commitment to providing innovative educational resources for students of all ages.

Merrimack County Savings Bank

Mechanics Cooperative Bank

Taunton, Massachusetts-based Mechanics Cooperative Bank distributed $1,400 to the town’s YMCA, which was raised through employee donations during an eight-week time frame, allowing them participate in dress down days.

North Brookfield Savings Bank

New Hampshire-based Merrimack County Savings Bank sponsored Concord Community Music School Anniversary Weekend.

Reading Cooperative Bank

Reading Cooperative Bank employees have volunteered their time once a month over the last couple of months to serve breakfast at the Lazarus House Soup Kitchen, located in Lawrence, Massachusetts. The kitchen serves breakfast and a hot, nutritious lunch seven days a week, from November to April.

SIS Bank

Sanford, Maine-based SIS Bank donated $500 to Young Life Greater Sanford through the bank’s employee donation program.

Nathan Hampp, spotted in the community by a representative of North Brookfield Savings Bank wearing the bank’s hat, won a $100 gift certificate. Hampp is one of the youngest Hat Contest winners, at just 3 and a half years-old.

UniBank

UniBank awarded a total of $46,000 in scholarships to 23 class of 2017 graduates from local high schools in the towns of Blackstone, Douglas, Grafton, Hopedale, Hopkinton, Milford, Shrewsbury, Sutton, Upton, Uxbridge, Whitinsville and Worcester, Massachusetts.

BANKING NEW ENGLAND

21

PROTECTING VULNERABLE IN CASE YOU MISSED IT CLIENTS

Featured Banks

Ledyard National Bank Kicks Off Branch Opening in Concord

• Berkshire Hills Bancorp

now has approximately $11.0 billion in assets and $8.9 billion in deposits, and expands its banking footprint across the state of Vermont and into Western Massachusetts.

Berkshire Hills to Move Corporate HQ to Boston, Acquire Commerce Bank

• Community Bank • Commerce Bank • Ledyard National Bank • Merchants Bank

Ledyard National Bank recently celebrated its expansion into the Concord, New Hampshire region with a ribbon-cutting ceremony and open house at its new location on Pillsbury Street in Concord. The ceremony was attended by Concord Mayor Jim Bouley, Concord Chamber of Commerce President Timothy Sink and New Hampshire’s Banking Commissioner Jerry Little.

Ledyard National Bank, headquartered in Hanover, New Hampshire, with seven retail banking locations, expanded into the Concord market with its wealth management division late last year. In the near future, Ledyard plans to add to its Concord team with private banking and commercial and consumer lending.

Community Bank Officially Absorbs Merchants

Merchants Bank and Community Bank formally merged May 12-14. South Burlington, Vermont-based Merchants Bancshares and Syracuse, New York-based Community Bank System Inc. entered into a definitive agreement last October, under which Community would acquire Merchants in a cash and stock transaction valued at $304 million. Regulators approved the deal at the end of April.

Merchants Bancshares was the largest statewide independent bank in Vermont, with total assets of nearly $1.9 billion, deposits of $1.5 billion and 32 banking offices. Additionally, Merchants was the third largest institution by deposit market share in Vermont. As a combined financial institution, Community Bank System

Berkshire Hills Bancorp, parent of Berkshire Bank, announced plans to relocate its corporate headquarters to Boston later this year to support the bank’s continued growth in the Northeast.

The bank declined to state where exactly the new headquarters will be located in the city; that announcement is expected in the third quarter of this year.

The company also announced it will acquire Commerce Bancshares Corp. and its subsidiary, Worcester-based Commerce Bank, a $2.2. billion institution with 16 branches in Worcester and Boston. The combined institution will be the largest regional bank in Massachusetts and first regional bank headquartered in Boston in decades, the bank said in a statement.

The combined franchise will operate its corporate headquarters, four branches and three lending offices in Greater Boston, and an additional 15 branches in and around Worcester, with $3 billion in loans and $2 billion in deposits. On completion of the deal, Berkshire Bank will have 113 branches serving customers across the Northeast.

Berkshire’s operational center will remain in downtown Pittsfield and the relocation will not have any impact on its employees, the bank said in a statement. Berkshire Hills Bancorp has $9.3 billion in assets and 97 full service branch offices in Massachusetts, New York, Connecticut, Vermont, New Jersey and Pennsylvania.BNE

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