Banking New England Nov/Dec 2014

NOV/DEC 2014

INSIDE: HELPING YOUR DIRECTORS UNDERSTAND THE LATEST TECHNOLOGY

NEW ENGLAND

THE RESOURCE FOR NEW ENGLAND’S FINANCIAL LEADERS

PLUS: THE SIGNS ARE THERE: HOW TO TELL IF YOUR BANK WILL BE SOLD THIS YEAR NECESSARY VIGILANCE: STAKES RISE ON CHECK FRAUD A MAINE INSTITUTION MOVES INTO NEW HAMPSHIRE

A P UBLICATI O N O F TH E WAR R E N G R O U P

Smaller Banks & Basel III Window of Opportunity for Those in the Right Space

LETTER FROM THE EDITOR

A Blessing in Disguise Christina P. O’Neill Editor, Banking New England

Thomas J. O’Connor, CPA Vice President & Director of Financial Institution Services

O

ur cover story on the impact of Basel III on smaller banks is sure to elicit a mixed reaction in the banking community as to whether the final ruling is a boon or a bane. Since the enactment of post-crisis regulation, forecasters have predicted a swath of mid- and small-bank mergers of institutions seeking to increase asset size in order to stay afloat.

But Basel III creates an opportunity for banks that fall below the big-bank benchmark of $50 billion in assets. The capital and risk-covering requirements for big banks will likely make certain business segments less attractive for them to pursue, and their smaller brethren may be able to take up the slack. That is, if they can maintain the systems and structures necessary to maintain business segments such as correspondent banking clients, small businesses and retail customers who might be attracted by higher interest rates and lower fees, and interested in products such as nopenalty CDs – discouraged for big banks under Basel III capital requirements.

David J. Keyo Jr., CPA

Vice President & Director, Financial Institution Advisory & Assurance Services

But that’s if the smaller banks have the ability to put IT systems in place to handle the new business. On the minus side, they often don’t have those systems in place. On the plus side, they don’t have those systems in place. Yes, you read right, and the reason is that those on their maiden IT voyage aren’t grappling with legacy services that have to be converted to the new system.

One more thing: Check out our Industry News on page 28. At the top is an item on the most recent Bank of America small-business report. It’s a national study that breaks down small business customer expectations by demography and region; the whole study is available on BofA’s website. Millennials, the youngest, say they expect to hire and add locations; Gen Xers will explore new markets. Boomers trail in both those categories – they’re possibly thinking more about transitioning their business to their kids or selling to an outside party. All of these situations create new opportunities for banks that know their customers. BNE

Giuseppe “Joe” Femia, CPA Director, Financial Institution Advisory & Assurance Services

Jayme F. Moore, CPA Accounting & Auditing Manager

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A PUBL ICAT ION OF T HE WA RRE N G ROUP

CONTENTS

NEW ENGLAND

THE RESOURCE FOR NEW ENGLAND’S FINANCIAL LEADERS

6

CHECKS AND BALANCES

Stakes Rise on Check Fraud

10 TECHNOLOGY

12

14

22

16

COVER STORY

Hidden Traps of Payment Processing

DIRECTORS’ CORNER

The Tech-Savvy Board: Helping Directors Understand Technology

READING BETWEEN THE LINES

Will My Bank be Sold?

BANK PROFILE

Holding to Its Roots, Kennebunk Savings Bank Expands into New Hampshire

24

COMMUNITY GOOD WORKS

Basel III Presents

Opportunities for Smaller Banks But Only if they Can Define their Best Prospects

26

PERSONNEL FILE

TWG STAFF CEO & PUBLISHER Timothy M. Warren Jr. PRESIDENT David B. Lovins

28

INDUSTRY NEWS

EDITORIAL EDITORIAL DIRECTOR Cassidy Murphy CUSTOM PUBLICATIONS EDITOR Christina P. O’Neill ASSOCIATE EDITOR Anna Sims

30

IN CASE YOU MISSED IT

www.thewarrengroup.com ©2014 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210

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BANKING NEW ENGLAND

5

CHECKS AND BALANCES

Stakes Rise on Check Fraud Vigilance Required on Rights and Remedies

BY MARK W. POWERS Mark W. Powers is a partner in the Worcester office of Bowditch & Dewey. He represents banks, financial institutions, business organizations, creditors’ committees and trustees on a wide range of commercial matters, including out-of-court workouts and in bankruptcy courts across the country. He may be reached at mpowers@bowditch.com

$100,000 Average cost per incident of check fraud

$1 MILLION More than 20 percent of fraud cases result in losses of more than $1 million

6

BANKING NEW ENGLAND

S

mall businesses continue to suffer large losses due to check fraud. In recent years, check fraud schemes have become increasing sophisticated and the legal environment (at least in some jurisdictions) more uncertain, making it essential that banks examine their procedures to safeguard against check fraud and avoid potential liability. This article highlights the prevalence of check fraud, identifies common types of check fraud, provides examples of tactics used to avoid detection, and offers suggestions on how banks should navigate the changing legal environment.

Check fraud remains MARK W. POWERS a significant problem. The average cost per incident is more than $100,000, and more than 20 percent of fraud cases result in losses of more than $1 million. Check fraud often goes undetected due to inadequate internal controls and because the perpetrators of check fraud do not fit the stereotypical criminal profile.

The vast majority of perpetrators are first-time

offenders. Many are long-term employees or trusted advisors.

In recent years, the perpetrators of check fraud have employed new tactics to avoid detection, thereby resulting in larger financial losses. At the same time, court decisions in some jurisdictions have imposed a legal duty of “inquiry notice� on both collecting banks and drawee banks in connection with their acceptance, negotiation and payment of items in the normal check collection process, even when (in the case of a collecting bank) it had no prior business relationship with the victim. These developments pose challenges to the banking industry.

While it is not yet clear whether these court decisions are mere outliers or part of an unfortunate trend, there is cause for concern.

On an operational and even moral level, it seems unfair to impose a legal duty on a bank that had no prior business relationship with the victim of a fraud. This outcome is also inconsistent with the legal principle that liability should generally rest with the party that is in the best position to avoid Continued on page 8

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7

CHECKS AND BALANCES

Stakes Rise on Check Fraud Continued from page 6

the loss. In almost all fraud cases, the party in the best position to avoid the loss is the victim of the fraud.

Traditional methods of check fraud include “altering” the payee name or check amount, forging the signature of the drawer (or its agent), and counterfeiting. Applicable law, specifically the Uniform Commercial Code (the UCC), imposes a duty on a bank’s customer to review its bank statements and copies of checks, and to notify its bank of any suspected check forgeries or alterations. The UCC requires a bank to credit its customer’s account if the customer notifies its bank of any forgeries or check alterations within 30 days of receiving its bank statement.

Due to the relative ease by which check alteration or forgery of the drawer’s signature may be detected by the bank’s customer, perpetrators of fraud have developed different tactics to avoid easy detection. Two examples of check fraud from recent cases follow,

Check fraud often goes undetected due to inadequate internal controls and because the perpetrators of check fraud do not fit the stereotypical criminal profile.

one committed by a supposedly “trusted employee” and the second by a dishonest financial advisor.

The Trusted Employee

Consider a small business that delegates substantially all of its financial affairs to its long-time employee, an office manager and bookkeeper, who is considered competent and loyal. Over time, the employee decides that he is underpaid and underappreciated, or is under personal financial distress. He devises a scheme to defraud his employer without forging or altering any company checks. In this example, he obtains a personal credit card from the same credit card company that issued his employer’s corporate credit card. He then makes out checks drawn on the company’s bank account for signature by his boss (who is obviously not paying attention), who signs the checks presented to him by the bookkeeper for the stated purpose of paying charges incurred on the company’s credit card account; however, the bookkeeper instead uses that same check to pay his personal credit card bill owed to the same credit card issuer. The bookkeeper perpetrates this scheme without forging the drawer’s signature or altering the check, thereby preventing the employer from detecting the fraud by reviewing copies of statements and checks.

8

BANKING NEW ENGLAND

This example presents a host of legal issues. For example, when the credit card issuer receives a check drawn on a corporate account to pay a personal obligation of its customer, should it be on notice of a fraud? Does the answer depend on the size of the bank? Or on the number of checks the bank processes each day? Are there legitimate reasons a company might pay the personal expenses of its employee? What are the rights of the credit card issuer vis-à-vis the victim’s own bank? Does it matter what jurisdiction governs the parties’ contractual relationship?

The Crooked Contractor

Consider a second example taken from another case. A company hires an accountant to maintain its books and prepare its tax filings. The client trusts its accountant implicitly. The accountant instructs his client to pay its tax obligations by drawing checks on the company’s bank account payable not to the taxing authorities directly, but rather to the accountant’s bank. The accountant represents that he will deposit the checks into his bank account and draw against those same funds to pay his client’s tax obligations.

The accountant’s bank has no business relationship with the accountant’s client. The accountant then presents the checks drawn on his client’s bank account (made payable to the accountant’s bank) for deposit into the accountant’s personal account at his bank, but instead of paying his client’s tax liability, uses the funds for his personal benefit. Like the first example above, the accountant perpetrates this scheme without forging the drawer’s signature or altering the check.

This second scenario raises many of the same issues as the first.

For example, does the accountant’s bank have a duty to contact the accountant’s client to inquire of the intended purpose of the checks even though it had no business relationship with that company? What are the rights and remedies of the banks in the check collection process, each of which accepted, negotiated, and forwarded each check for payment? Does the victim of the fraud have a claim against its own bank for making payment on the checks? Does the victim’s bank in turn have legal claims against the prior collecting banks? Some court will impose a duty on the collecting bank to make inquiry on the drawer of the checks on this example, even though no business relationship existed.

Banks need to remain vigilant against check fraud as the perpetrators of fraud have become more sophisticated and the legal landscape has become increasingly uncertain. Banks should consider undertaking the following steps: reviewing its internal processes for accepting and negotiating checks for deposit, particularly checks presented to a teller that can be physically inspected; identifying any checks made payable to the bank’s order when the bank has no prior business relationship with the drawer of the check (this should trigger further review by senior management); and consulting with experienced bank counsel to navigate the evolving legal landscape and avoid potentially significant legal liability. BNE

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TECHNOLOGY

Hidden Traps of Payment Processing What Your Staff Doesn’t Know Can Hurt You

BY SEAN CARTER Sean Carter, AAP, is senior vice president at NEACH.

F

inancial institutions are expected to be responsible and accountable for the operation of their payment processing systems, regardless of whether that function is handled by a third-party vendor. Most thirdparty vendors limit their accountability to failures within their own systems. Errors that originate within a bank or retailer’s system – not their job.

Even verifiable third-party vendor errors can result in a big headache. Bank customers don’t know the difference. They’ll leave a bank over a

botched bill pay, no matter the origin.

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

The efficiency of Automatic Clearing House processes has escalated the probability of fraudulent transactions, if no one experienced is watching. And the consequences are expensive: With the advent of the CFPB, financial institutions are being more closely scrutinized in regards to the handling of consumer disputes and account monitoring activity such as stop payments and over draft program. Over the last couple of years, financial institutions have been punished monetarily; fines levied have reached $10 million.

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

Here are a few tips on the points of vulnerability in every financial institution, and 10 BANKING NEW ENGLAND

simple steps to reduce human error, to help you avoid the roughest seas.

Eyes On the Street, and On the Sheet

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

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

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

We’ve all heard about mortgage customers who didn’t understand the conditions of their agreements when they took them out, before the mortgage crisis hit. That problem isn’t limited to mortgage products – it’s also a problem with wire transfers, ACH origination, exception processing for card and ACH disputes which can leave the financial institution exposed in the areas of Regulation E error resolution, security procedures that weren’t followed or stressed enough in cross training, lack of implementation of ACH risk management program components; inexperienced staff failing to catch the signs of increasing returns or issues surrounding a particular customer – and compromise of cross channel risk principles.

IT specialists within banks can track how long a customer opening an online account took to read the agreement. If it took the prospect only a few seconds to read a 52-page agreement, that’s a problem the IT team should monitor – though many legitimate customers might be exhibiting the same behavior.

Customers also need to be warned: Do not discuss your account online! Most bank websites have posted this type of warning for years. But there are new customers all the time, and we all remember what P.T. Barnum said about who gets born every minute. Fraudsters target the most vulnerable amongst us and this in some cases is the elderly. There has been a big push at the CFPB to help strengthen protections for the elderly. Banks need to understand the signs of fraud and put in procedures to help prevent losses.

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

to protect themselves. Does your staff know?

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

Vendor Safeguards

When opening a peer-to-peer online payment account, get a voided check from the customer, and put a limit on the amount and frequency of payments. Identify the tools the vendor is offering including limits are fraudulent transaction detection and implement them. If your third-party vendor does not offer risk management tools, you should implement in-house controls.

Have the customer check a box for a onetime stop, two times, or indefinitely.

When online customers call the bank to say the site is down, they may be the target of a “man in the middle” attack. It’s of critical importance to validate the phone numbers of those customers calling in.

Auditors cite financial institutions for returning items as stop payments that should have been returned as authorization revoked.

Stop payments are prepost events; returns for revocations are adjustments, or correction of posted items. To get into compliance with the new rules, one must establish the intent of the account holder. Have the customer check a box for a onetime stop, two times, or indefinitely. Training of frontline staff; and operations staff having controls in place to check forms with return codes.

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

BANKING NEW ENGLAND

11

DIRECTORS’ CORNER

The Tech-Savvy Board: Helping Directors Understand Technology

BY JACK VONDER HEIDE Jack Vonder Heide is president of Technology Briefing Centers Inc.

12 BANKING NEW ENGLAND

D

irector responsibility for IT risk and strategy has become more consequential as customers migrate to electronic delivery channels. New laws, guidance and regulations require a higher level of board focus on the IT area. At the same time, many directors still classify themselves as technology novices.

Technology is a continuum. People tend to develop a high degree of familiarity and expertise with technologies that were pervasive in their formative years. If a bank board is comprised of directors of varying

ages, each member will generally bring a set of skills and a frame of mind that is characteristic of his or her generation.

A 75-year-old director, for example, may have no idea how to use an iPhone.

However, the same director would easily be able to drive a stick shift car. Ask this director how Wi-Fi works and you will get a blank stare. But if you ask how a Hi-Fi worked, you will get a detailed explanation of proper warmup procedures, changing defective tubes, etc.

Most bank directors I have worked with have the natural ability to understand technology, but many feel overwhelmed by the rapid pace of change and the increasing level of personal responsibility they must assume for an area with which they don’t feel fully comfortable.

There are several steps that boards can take to improve the technical competence of directors and help them make better informed decisions.

First, recruit an outside director who has a deep understanding of technology.

An ideal candidate would be a C-level executive who is currently working in the field – one who oversees the IT area of a well-respected large or middle-market company. A publicly traded organization, is best because the executive will have some familiarity with regulatory issues.

Second, form a board-level technology committee. This group would be chaired by the tech-savvy director and would include two or three other directors, plus key C-level officers from the technology, risk management, operations and business development areas of the bank.

Third, ask each board member to identify the specific technology areas that they would like to understand better. Then provide one-on-one or small group training.

Some board members are visual learners who like examples, while others learn better by reading. It is important to discern how each person learns best and provide them with the type of instruction that will help them absorb and retain the information.

A good strategy for older directors is to explain technical topics in non-technical terms. I once worked with a board that was considering a proposal for increased bandwidth. Two of the directors could not grasp the concept until I said, “Imagine that that you are driving your car on Interstate 94 and all of a sudden traffic is reduced from four lanes to one lane.” There was an aha moment, and the bank got more bandwidth.

Fourth, have a technology-focused presentation at every board meeting and at every board retreat. Some of these presentations should focus on current issues like cybercrime, system upgrades, etc. while others address longer range strategic issues.

Fifth, decide what type of bank you are when it comes to technology. Do you

want to be on the bleeding edge, where you will enjoy an early lead over your competitors by being the first bank in town to introduce something new?

Do you want to be a quick follower that observes what other banks are doing, and then copies those new technologies that seem to be working for them?

Do you want to be a straggler and wait until the last possible minute to give your customers what every other bank offers?

Finally, prioritize technology initiatives that enhance the customer experience and improve the bank’s bottom line. Every bank has limited resources, and getting a double return on investment is a goal worth pushing hard for.

A tech-savvy board is a successful board. BNE

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BANKING NEW ENGLAND

13

READING BETWEEN THE LINES

Will My Bank be Sold?

What To Watch for if Your CEO is Ready to Retire

BY MARY BUFFETT Mary Buffet is an author, international speaker, entrepreneur and political and environmental activist. Her website is marybuffet.com.

MARY BUFFET

I

want my surgeons and my pilots to have a touch of grey. The same applies to bank CEOs. However, every banker will age and eventually retire. The question that many customers and investors often ask is this: Does a bank CEO’s age suggest that his or her financial institution may be quietly readied for sale?

Since the economy rebounded from the 2008 financial meltdown, larger banks are looking to expand again. As bank regulations were relaxed during the mid-1980s, a number of mid-sized and larger banks went on a spending spree. Within a decade, our banking institutions went through a period of great consolidation. Many great financial brands found themselves in the dustbin of history.

Today, it’s the same old story. Smaller and regional banks position themselves as counterpoints to the mega banks. They will give customers the time, care and feeding that larger banks cannot offer. In many cases, the CEO is only a phone call away. When these smaller banks are purchased, customers are often the last to know. Bank staff might know that there are acquisition rumors in the air but 14 BANKING NEW ENGLAND

they often discover an ownership change once senior management inks the new agreement.

Healthy bank mergers are back. Many of the mergers that took place during the meltdown were designed to find healthy homes for failed institutions. They were more like shotgun marriages than traditional mergers, because the policy goal was to keep the American banking system afloat. Between 2008 and today, the general populace has forgotten how close the American economy came to total collapse. But also since then, things have improved dramatically.

Why Acquire?

Why do smaller community and larger regional banks remain delicious acquisition targets? It’s all about attracting business customers, the most profitable piece of any banking portfolio. Larger bank brands might conclude that it’s cheaper to purchase a bank (and its customers) than growing business clients organically. That’s also why when healthy community banks are sold, it’s often for far more than book value.

Just because a community bank CEO

may be eyeing retirement, it does not necessarily mean that anybody is putting the “For Sale” sign in the window.

However, there might be several clues that investors, staff and customers might wish to ponder if they think that a particular institution might be up for sale in the near term.

Here are some red flags that should resonate with staff, investors and customers alike.

Look at the gene pool. If the financial institution is family-owned or familycontrolled, take a good look at the gene pool. Is there a family member who is being groomed to be the next generation of bank leadership? If the senior leadership team is in their 60s and seeking a soft and smooth exit, they should have designated an heir apparent to carry on the family business. When the third generation of any family institution comes onto the scene, they are often tossed and turned by the inevitable family dynamics that cuts across several generations. If the next generation has been assigned to the bank’s foundation (which gives away money as opposed to making it), it is a signal that the family’s genetic predisposition for banking has petered out.

If the next generation of leadership is not family, look closer still. Thanks to LinkedIn, you can look at the successor’s background and determine whether that person is a short-term or long-term player.

Based on what we have seen with recent community and regional bank acquisitions, that person will be richly rewarded.

Look at the senior management team. If they are a closely held or family controlled institution, look at the ages of the entire senior management team. Time takes its toll on everybody and we all are put out to pasture at some point. Wise companies engaged for the long term will have a constant rotation within their C-level suites. If the senior management team of a financial institution continues to age without any new blood added into the mix, it is a sure sign that its long-term prospects might be very limited.

How is the bank organized? If the bank has an environment where the percentage of shares is highly concentrated within a few shareholders, it’s likely

to be organized as an S corporation.

If so, it is a sure red flag for a future sale. Unlike a traditional corporation, S corporations pass the taxable profits and losses directly back to the shareholders (as opposed to the corporation’s bottom line). By law, the timeline of an S corp has a beginning, middle and an end. When it matures, often after a 10-year period, the shareholders have some very big decisions to make. They could renew the S corporation structure, alter it or simply sell. After surviving on the dangerous rapids of the last couple of years, the idea of a happy and wealthy retirement might be completely irresistible.

Finally, look at the bank’s product offering. Smaller community and regional banks often have an incomplete portfolio of customer and commercial products when compared to large banks. Smart Realtors will “stage” a house to prepare it

for sale by adding a number of features that will attract a top flight buyer. It is no different within the world of banking. If senior management is making a concerted effort to quickly add a number of new programs and products, it could mean that they are trying to complete against the big boys. However, it could also mean that the bank is being “staged” for a future sale.

Smaller community banks and other regional institutions became quite profitable as a result of the 2008 banking collapse. Average balances within these institutions are often 50 percent higher than what you find in the larger mega banks. Because banking programs offer so many hooks that make it harder to steal away business clients, it becomes far easier to buy the entire bank. In a nutshell, that is what is driving the endless waves of bank acquisitions, not solely the age of retirement potential of a CEO. BNE

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BANKING NEW ENGLAND

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COVER STORY

Basel III Presents

Opportunities for Smaller Banks

But Only if they Can Define their Best Prospects

16 BANKING NEW ENGLAND

By Steven Jones-D’Agostino In July 2013, the Federal Reserve Board approved a final rule to implement the Basel III regulatory capital reforms in the U.S. That rule stemmed from the Basel Committee on Banking Supervision and certain changes required by the federal Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the final rule, large, national banks had to begin phasing in their Basel III requirements in January 2014. Smaller institutions, including all savings and loans, will have to begin phasing in their requirements in January 2015. Both types of banks will have until 2017 to implement their respective requirements. Only the 39 U.S. Continued on next page

BANKING NEW ENGLAND

17

COVER STORY

Opportunities for Smaller Banks Continued from page 17

banks with more than $50 billion in assets were directly impacted by the final rule.

The final U.S. Basel III rule was intended to require American banks to fortify their capital positions to ensure continued lending to creditworthy households and businesses, despite unforeseen losses and during severe economic NATHAN STOVALL downturns. The final rule minimized the burden on smaller, less-complex financial institutions. It also established an integrated regulatory capital framework that addressed shortcomings in capital requirements – particularly for larger, internationally active, “too important to fail” banking organizations – that became apparent during the recent financial crisis.

The final rule also increased minimum requirements for both the quantity and quality of capital held by U.S. banking organizations.

Consistent with the international Basel framework, the final rule included a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that applies to all supervised financial institutions.

In addition, the final rule raised the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and included a minimum leverage ratio of 4 percent for all U.S. banking organizations. And for the largest, most internationally active banking organizations, the final rule included a new minimum supplementary leverage ratio that took into account off-balance sheet exposures.

On the quality-of-capital side, the final rule emphasized common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments.

The final rule also improved the methodology for calculating riskweighted assets to enhance risk sensitivity.

A Competitive Edge for Smaller Banks

In a September 2014 American Banker article, “How Basel III Will Shake Up Banks’ Deposit Strategies” by Randy Rosen, director of commercial earnings allowance and deposit research, and Zoya Lieberman, director of commercial research at Informa Research Services, financial institutions are getting a better handle on Basel III as they work their way though compliance efforts. Those that want to get ahead of the game are reinventing products and methods to bypass the regulation to maintain profitability while continuing to meet liquidity coverage ratio (LCR) requirements, they said.

Considering the limitations now faced by large commercial institutions, Rosen and Lieberman stated their belief that Basel III has opened up the opportunity for a competitive edge for all banks with assets of less than $50 billion.

Banks not subject to LCR requirements could now begin devising campaigns to pursue clients that larger institutions find it no longer advantageous to maintain, such as correspondent banking clients, Rosen and Lieberman continued. Smaller institutions may also be capable of offering product types less-profitable for larger institutions under Basel III. They may be able to offer higher interest rates and 18 BANKING NEW ENGLAND

Are banking regulators now regulating with eyes wide open instead of wide shut, as was too often the case leading up to the crash of 2008 and the need for Basel III? lower fees to certain types of clients because they are not discouraged from doing so by LCR requirements.

“In the coming months,” Rosen and Lieberman concluded, “it may well pay to be small.”

Double-Edged Sword

However, the U.S. final rule for Basel III may also be a doubleedged sword for some smaller banks. Larger regional and community banks may have the infrastructure in place to support the larger clients that the big banks choose to no longer service under Basel III. But smaller banks may lack that infrastructure to do likewise.

Smaller banks could experience a negative impact if they must fund upgrades on their internal systems to accommodate the needs of larger clients, Lieberman told Banking New England.

For smaller banks without many commercial clients, though, Lieberman sees a silver lining. “Chances are, they have not invested many funds in infrastructure in the first place, so they don’t have the maintenance,” she said. If they were to determine to seek larger clients with more sophisticated needs, they won’t have to upgrade existing systems, but instead, can purchase top-line software to compete directly with large institutions.

Under Basel III, smaller banks will also gain an advantage with product opportunities, Rosen said, because Basel III requires much tighter controls on larger banks than on smaller banks on when deposited funds get withdrawn. As a result, he said, larger banks may be reluctant to offer no-penalty CDs, which allow depositors to withdraw those funds at any time, to their customers, who may then decide to do business with smaller banks that have looser controls imposed on them.

A “great opportunity” for community banks and larger credit unions, according Lieberman, is one that does not directly flow from Basel III. It involves attracting clients that are small businesses but also have more complex and more sophisticated needs than the momand-pop type of enterprise.

“I know they are looking for these types of clients and would like to gain a revenue share from these types of clients,” Lieberman said.

“In terms of what they should do, I think the prudent thing would be to decide what types of clients they would want to attract, look at the infrastructure expenses that are required for that, and also make sure that their front-line teams are trained properly in explaining and selling the product that would appeal to that audience.”

What Lieberman and Rosen see “way too often,” she said, “is Continued on page 20

Most Banks On Strong Footing To Comply With Basel IIII In a recent SNL Financial article, “As Basel III deadline looms, small banks still coming up short,” Nathan Stovall and Salman Aleem Khan found that while banks have several years to reach full Basel III compliance, some advisers have cautioned that they will likely need to demonstrate that they are moving toward full compliance before the final effective date.

By mid-2014, Stovall and Khan reported, most banks were on strong footing to comply with Basel III capital accords, but a fairly sizable number of smaller institutions were still falling short just six months before the deadline to begin phasing in the rules.

Smaller institutions had made progress to comply with the Basel III rules over the previous 12 months, they noted, but nearly 200 small banks still needed to build their capital levels to meet the standards, according to an analysis by SNL Financial. “Their larger counterparts have been better prepared to comply with the Basel III standards for quite a while,” they wrote, “in part because they have less time to comply with the provision.”

SNL has regularly measured banks’ efforts to comply with the Basel III rules. That has included measuring the capital impact of the final Basel III rules by developing a template that examined two severity scenarios. The “conservative” and “moderate” scenarios took into account provisions outlined in the proposed rules, such as new risk-weightings of assets and new deductions of certain items from common equity Tier 1.

SNL’s most recent analysis found most small banks had sufficient capital to comply with the Basel III standards, as well, but a fairly large block of institutions still fell short of the requirements. Smaller institutions narrowed the shortfall to the final Basel III rules by the end of 2013, though progress slowed considerably in the second half of that year. Smaller banks made modest progress again in the first half of 2014.

Smaller banks have long lagged larger institutions, Stovall and Khan reported, accounting for a greater portion of the industry’s shortfall under the proposed rules despite their smaller size. In the second and third quarters of 2013, those institutions were responsible for the entire shortfall measured by SNL and accounted for the vast majority of the shortfall in both fourth-quarter ’13 and first-quarter ’14. Smaller banks accounted for entire shortfall again in second-quarter ’14.

SNL tried to measure how relatively healthy banks stacked up against the Basel III requirements and, accordingly, excluded banks with adjusted Texas ratios, which excludes government-guaranteed loans, in excess of 100 percent – a widely considered threshold at which banks tend to fail. SNL also excluded institutions that had negative equity but still managed to report adjusted Texas ratios less than 100 percent.

When excluding those institutions, foreign-owned entities and

bank holding companies with less than $500 million in assets, SNL found no capital shortfall at banks with assets between $15 billion and $250 billion under the ’conservative ’ scenario at the end of the second-quarter ’14. SNL found a very small capital shortfall of $117.7 million among banks in that asset range at the end of firstquarter ’14 and found an even smaller capital shortfall in fourthquarter ’13. SNL found no shortfall among those institutions at the end of the third or second quarters of ’13, after coming up short for several quarters.

Assuming the full phase-in of the final Basel III rules, SNL found that institutions with less than $15 billion in assets would post a capital shortfall below the minimum requirement based on secondquarter ’14 data of $985.7 million, or 0.85 percent of their riskweighted assets, under the “conservative” scenario. That compared to $1.23 billion, or 1.31 percent, at the end of first-quarter ’14, and $1.35 billion, or 1.12 percent, at the end of fourth-quarter ’13.

Second-quarter ’14 marked the first time that banks’” capital shortfall to the Basel III minimums fell below the $1-billion level since SNL first began measuring the impact of the capital accords in 2012. The size of possible capital shortfalls had steadily shrunk over the previous year, though SNL found that the number of institutions falling short of the Basel III requirements fluctuated and even increased in several periods. For instance, SNL found that 210 U.S.based banks with less than $15 billion in assets would fall short of the minimum requirements under the “conservative” scenario at the end of fourth-quarter ’13, compared to 200 at end of third-quarter ’13.

That trend reversed in first-quarter ’14, when SNL found that 190 banks would fall short under the “conservative” scenario. The trend reversed again, though, in second-quarter ’14, when SNL found 193 banks would fall short under the “conservative” scenario.

SNL found that 117 would fall short under the “moderate” scenario, compared to 119 banks in first-quarter ’14 and 139 banks in fourth-quarter ’13. Still, SNL’s analysis found that banks falling short of the minimums should be able to build their capital to the required levels in a relatively short time, and even more quickly than in first-quarter ’14.

When assuming at least a 5-percent return on common equity, SNL found that banks with less than $250 billion in assets, excluding bank holding companies with less than $500 million in assets, could earn back their shortfall to the minimum capital requirements on a median basis in just 0.75 years under the “conservative” scenario and 0.91 years under the “moderate” scenario. Comparatively, SNL measured the median earn-back period for banks at the end of first-quarter ’14 at 0.95 years under the “conservative” scenario and 1.11 years under the “moderate” scenario. BNE BANKING NEW ENGLAND

19

COVER STORY

Opportunities for Smaller Banks Continued from page 18

smaller institutions coming out with “wonderful products, but nobody knows how to sell them. And therefore, they’re not attracting the clients that they would like to have.”

If anything, Lieberman observed, smaller banks need to focus more on the opportunities stemming from Basel III. “Even though [Basel III] doesn’t have a direct regulatory impact on these institutions, it can have a significant impact on their market share and potential revenue increase. These institutions are not paying nearly as much attention to this regulation as they should. [They should do so] because it is to their advantage.”

Eyes Wide Open

All of this begs the question: Are banking regulators now regulating with eyes wide open instead of wide shut, as was too often the case leading up to the crash of 2008 and the need for Basel III? Lieberman and Rosen think the regulators are now holding the banks responsible for their actions.

“After Sarbanes-Oxley and other [legal and regulatory reforms], I think there is no way around [banks now being responsible for their actions]. Unlike before, when you could say, ‘I didn’t know,’”

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“In the coming months, it may well pay to be small.”

– Ron Rosen and Zoya Lieberman, Informa Research Services

Lieberman said. “Now, it’s implied that you do know.”

Regarding the regulators, Lieberman said, “I think we’re getting to the point where we’re starting to get slightly over-regulated. But in terms of eyes wide open, I think right now it’s much more of an aggressive approach than it was before.”

Rosen agreed with Lieberman. When sectors such as banking and automotive bottom out, as they did over the past several years, he pointed out, “you’re going to come up with people who kind of go over and beyond, to protect us, so it doesn’t happen again. One could maybe say that they’re being over-regulating, like Zoya said. … But again, they’re trying to make sure [the consumers] don’t lose their money like they did years ago, when they did have banks that failed and customers lost lots of money from that situation.”

Room for Interpretation

That said, are enough of the right sorts of regulations on the books? And are the regulators enforcing them in the right ways? Or are there some gaps that still need to be filled?

“I’m sure there are [gaps], even based on the regulations that came out in the last five years,” Lieberman said. “A lot of them are very complex, and I don’t think that they’re being necessarily used or implemented in the way that they were intended. I think there is a lot of room for interpretation. I think your question is very general, but I’m sure there is room for improvement. But at the same time, I’m not confident that the regulations that we have in place are right on point with what needs to happen.”

Still, both the regulations and the enforcement of them are significantly better, Lieberman agrees, in terms of improving greatly the chances of mitigating another crash such as the one in ’08. “I think that’s a fair statement,” she said. “I think things are more stable in terms of regulation, to avoid the [bank] failures that we had in the last six to 10 years.” BNE Steven Jones-D’Agostino is a strategic partner of Susan Wagner PR + Best Rate of Climb. Follow him on Twitter @SWPR+BROC.

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21

BANK PROFILE

Holding to Its Roots, Kennebunk Savings Bank Expands into New Hampshire

BY LINDA GOODSPEED

Bradford C. Page, president and CEO, Kennebunk Savings Bank

I

n 1994, Kennebunk Savings Bank raised the bar for banks and other for-profit institutions when it pledged to give 10 percent of its earnings every year to the community.

In the 20 years since then, Kennebunk’s Community Promise program has donated nearly $9.5 million to local nonprofit and charitable organizations, including $770,000 this year. In addition to those dollars, its employees donate 10,000 volunteer hours. No wonder the Kennebunk Kennebunkport Arundel Chamber of Commerce named Kennebunk Savings Bank its Business of the Year winner for 2014.

Founded in 1871, Kennebunk Savings Bank is an independent, mutual bank with $940,000 in total assets, 280 employees and 16 branches, including three (and soon to be five) branches in Seacoast New Hampshire.

Kennebunk (population 11,000) and its more famous sister Kennebunkport (summer home of the Bushes, with a year-round population of 3,500) sit side-by-side on Maine’s southern coast. The local economy is heavily reliant on summer tourism, a segment Kennebunk Savings has promoted through a strong hospitality lending focus.

“Some other banks don’t encourage their commercial lenders to call on hospitality because it reflects a high degree of risk,” said Bradford C. Paige, KSB president and CEO. “We’ve been very able to serve the hospitality sector – motels, hotels, 22 BANKING NEW ENGLAND

retail shops, restaurants – because we know our communities and customers so well.”

Paige, who began his banking career in 1989 as a teller at Maine National Bank, joined Kennebunk Savings in 1998 as a commercial loan officer. After directing several different departments at the bank, he was named KSB’s 13th president in January 2009, in the midst of the worst banking crisis since the Great Depression.

“It was a very difficult economic time,” Paige said. “But the way I looked at it, there was nowhere to go but up.”

And up Kennebunk has gone. Since becoming president, Paige has expanded the bank’s footprint into New Hampshire’s Seacoast, opening branches in Portsmouth (2011), Dover (2012) and Hampton (2013). In January 2015, KSB will open a branch in New Market, and later next year or in early 2016, will set up shop in Durham.

Paige said the Seacoast has a strong tourist market that “profiles similarly to the south coast of Maine in York County.”

“New Hampshire provides us a little bit more year-round business, a little more manufacturing and real estate activity, both residential and commercial. It’s not quite so reliant on the tourist side. That helps,” he said.

He declined to say just how large is Kennebunk’s hospitality loan portfolio, only that “nothing else comes close.”

‘Stick to What We’re Good At’

Kennebunk’s total loan portfolio of $740 million is split about 56 to 44 percent between commercial and retail, mainly mortgages and home equity loans.

“We had some minor issues during the downturn,” Paige said. “Today, the loan portfolio is as strong as it’s been in a number of years.”

He attributes much of the bank’s success to its deep roots and involvement in the communities it serves.

“I think when you are that immersed in communities, you are going to be successful,” Paige said. “When a commercial customer comes in to talk about a project, we’re already aware of it. We’re very much a part of our communities. Ultimately, I think it brings business to the bank.”

A 10 percent financial giveback is rare among banks. Paige said Kennebunk Savings is the only bank in Maine with such a commitment, and one of only a handful in the country.

“It’s hard to commit 10 percent, particularly for a mutual. Our only source of capital is earnings. Unless it’s ingrained in you, it’s hard to take 10 percent off your income statement when you’re putting together a budget, and maintain profitability.”

“Kennebunk Savings is a wonderful community partner,” said Barb Wentworth, president and CEO of the United Way of York County. “The bank has a very proud tradition of giving back through its financial resources, and also through its employees.

They are an inspiration for all of us.”

The bank’s 280 employees, starting at the top with Paige, donate more than 10,000 volunteer hours every year to local organizations.

Looking ahead, Paige said Kennebunk Savings will continue to “stick to its knitting.”

“I don’t see us changing our direction or adding a lot of additional business lines or products,” he said.

As the bank continues to grow organically (Paige expects to cross the $1 billion mark in late 2015), he wants to deepen even further the bank’s community involvement.

“Over time, our growth provides us opportunities to do some more creative things around community,” Paige said. “Are there some development programs we can do out there in the finance realm? Can we work with schools and universities to put together some programs? We want to stick to what we’re good at, and meet the needs of the community.” BNE BANKING NEW ENGLAND

23

COMMUNITYGOOD GOODWORKS WORKS COMMUNITY

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 Christina P. O’Neill at coneill@thewarrengroup.com.

Bristol County Savings Bank

Featured Banks • Bristol County Savings Bank • Centrix Bank • Country Bank • Eastern Bank • Meredith Village Savings Bank • MutualOne Bank • Rollstone Bank & Trust

Rhode Island-based Bristol County Savings Bank (BCSB) sponsored “Boo at the Zoo” at Buttonwood Park Zoo (New Bedford, Mass.) and presented the zoo with a check for $5,000 to fund the event, as well as the zoo’s educational and family programs. Pictured, Kristen Gray, director of society operations, Buttonwood Park Zoological Society, and Keith Lovett, director, Buttonwood Park Zoo, receive the check from David Medeiros, vice president and regional banking officer, BCSB, and Pete Selley, vice president of commercial lending, BCSB, and board vice president, Buttonwood Park Zoological Society.

Centrix Bank

Bedford, N.H.-based Centrix Bank, since acquired by Boston-based Eastern Bank, gave a total of $10,000 to four Milford, N.H., nonprofits: the Boys and Girls Club of Souhegan Valley, Bridges: Domestic & Sexual Violence Support, Opportunity Networks and SHARE Outreach. Pictured, Joseph B. Reilly, president and CEO, Centrix Bank; Rocky Morelli, executive director, Opportunity Networks; Dawn Reams, executive director, Bridges; Christine Janson, executive director, SHARE; Seth Zeigler, chairman of the board, Boys and Girls Club of Souhegan Valley; and Paul D. Spiess, chairman of the board, Centrix Bank.

24 BANKING NEW ENGLAND

Country Bank

Eastern Bank

Country Bank supported the Baystate VNA & Hospice, which has been a member of the community for more than 100 years, with a donation of $20,000 to help it continue to provide care to those in need. Country Bank also donated “country cash,” totaling $30,000, to support programs at the Carson Center. Pictured, Jane Simonds, Susan West and JAC Patrissi of the Carson Center.

Meredith Village Savings Bank From left: Eastern Bank Chairman and CEO Richard E. Holbrook, Jeffrey C. Riley, Lawrence Public Schools superintendent and Robert F. Rivers, Eastern Bank president and COO, gather for the 26th annual Celebration of Social Justice, where Riley was honored. The award was accompanied by a $25,000 donation from the Eastern Bank Charitable Foundation to the Lawrence High School Scholarship Fund.

MutualOne Bank Meredith Village Savings Bank purchased $5,000 in tax credits through the Community Development Investment Program in support of the WOW Trail in Laconia, N.H. The bank also served as a festival sponsor for the trail’s recent “WOW Fest” fundraiser.

Rollstone Bank & Trust

Rollstone Bank & Trust recently donated $1,200 to the Nicholas James Foundation, which provides iPads to teachers and speech therapists working with children with autism and special needs.

Pictured, Stacy Maillet, president, Nicholas James Foundation, and Linda Racine, executive vice president, RBT.

MutualOne Bank’s Charitable Foundation has announced a $5,000 Foundation grant to the Amazing Things Arts Center (ATAC) in Framingham. The grant will help fund a branding/website project that is part of the organization’s longterm strategy for sustainability and growth, according to Joe Fredette, chair of the ATAC board of directors. The grant to Amazing Things Arts Center was among awards totaling $63,375 in the MutualOne Charitable Foundation’s most recent round of funding.

BANKING NEW ENGLAND

25

PERSONNEL FILE

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 Christina P. O’Neill at coneill@ thewarrengroup.com.

Featured Banks • Bay State Savings Bank • Berkshire Bank • Commerce Bank • Dedham Institution for Savings • Georgetown Bank • Kennebunk Savings Bank • Ledyard National Bank • Merchants Bank • Middlesex Savings Bank • MutualOne Bank • Northern Bank • Pilgrim Bank • Winchester Savings Bank

26 BANKING NEW ENGLAND

Appointments and Elections Ledyard National Bank Hanover, N.H.based Ledyard National Bank’s President and CEO Kathy Underwood has been elected to the ICBA Securities board of directors for a three-year term. ICBA Securities Kathy Underwood is the broker/dealer subsidiary of the Independent Community Bankers of America that provides fixed-income investment services to the nation’s community banks. Underwood was also recently appointed to the Consumer Financial Protection Bureau’s Community Bank Advisory Council in Washington, D.C.

Merchants Bank Thomas Meshako has been appointed CFO and treasurer at South Burlington, Vermont-based Merchants Bank. He previously served as director of finance at Brookline Bancorp. Inc. Prior to that, he was senior vice president of operations of Union Bankshares Inc.

MutualOne Bank Framingham, Mass.based MutualOne Bank elected Rahnuma Habib, Kimberly Sambuchi and George Gilroy to new positions. Habib has been named vice president Rahnuma Habib and will oversee human resources and training.

She joined the bank in 1998 as a teller, and has since earned several promotions to human resources coordinator, human resources manager Kimberly Sambuchi and assistant vice president.

Sambuchi also has been named vice president and will oversee operations, electronic banking and client services. She joined the bank in 2002 as a teller and has worked as a customer

service representative, retail banking analyst, and eBanking manager. She was elected an assistant vice president in 2012.

Gilroy, previously IT support specialist, is now George Gilroy technology officer and assistant vice president. He joined MutualOne Bank in 2012 with previous technology experience as a systems engineer with John Hancock Financial Services, and as Windows administrator with both MODIS IT and IBM. MutualOne Bank also announced the promotions of Clarice Santos, Julie Morin, Melissa Roberts and Cheryl Suarez.

Pilgrim Bank Pilgrim Bank has appointed Kenneth Provost as assistant vice president/ controller. In this role, he is responsible for managing and directing the daily operations of the bank’s Kenneth Provost finance department, as well as overseeing the financial reporting process.

Provost comes to Pilgrim Bank with over 25 years of experience, most recently at First Ipswich Bank in Ipswich, Mass., where he managed accounting and financial functions while ensuring regulatory compliance, including public company reporting.

The Village Bank Eric D. Boecher has joined the Auburndalebased Village Bank as CFO. Boecher has more than 20 years of professional experience, including with the Eric D. Boecher commonwealth of Massachusetts Division of Banks and with the U.S. Treasury/Comptroller of the Currency in Boston. He comes to Village Bank from Southbridge-based Savers Bank where he was CFO of operations.

Promotions Dedham Institution for Savings

Alex Cavallini has been promoted to commercial loan officer at Mass.-based Dedham Institution for Savings. He has been with the bank for two years.

Georgetown Bank

Georgetown Bank promoted Frederick H. Weismann to executive vice president and COO. Weismann’s background in banking spans more than 40 years. Most recently, he was Georgetown Bank’s senior vice president and senior commercial loan officer. Before joining the Massachusetts-based bank, he worked for Pentucket Bank in Salem, N.H.

Alex Cavallini

New Arrivals Bay State Savings Bank

Robert Ciraco

Lemonia Mironidis

Bay State Savings Bank has hired Robert Ciraco as vice president and retail lending manager and Lemonia Mironidis as assistant vice president and branch manager. Ciraco has more than 20 years of experience in the financial industry, most recently as the director of operations with Carrington Mortgage Services in Enfield, Conn. He will work from Bay State’s headquarters on Franklin Street headquarters in Worcester. Mironidis was previously assistant vice president and store manager II with TD Bank in Framingham, Mass. During her banking career, she has spearheaded financial literacy training programs in local schools. She won the MetroWest Chamber of Commerce’s Ambassador of the Year award in 2012 and currently serving as chair elect.

Berkshire Bank

Pittsfield, Mass.-based Berkshire Bank has added Jason P. Edgar to its wealth management team as vice president and senior portfolio manager. Edgar’s areas of specialization are market analysis, economic analysis, asset allocation and individual security selection.

Jason P. Edgar

Commerce Bank

Jason Truong

Jason Truong has joined Boston-based Commerce Bank as vice president of corporate banking. Working from the bank’s Brookline Avenue location in Boston, Truong is responsible for new business development for commercial and industrial clients in Greater Boston with loan size targeted up to $20 million.

He comes to Commerce from Eastern Bank.

Alan Brow

Carrie DiGeorge

Cassandra Mosher

Steven Smith

Middlesex Savings Bank

Natick, Mass.-based Middlesex Savings Bank has hired John Cataldo as senior vice president and director of internal auditing and Thomas Farley as senior vice president and senior credit officer.

Cataldo has more than 30 years of experience in internal audit and risk management in the banking and financial services industries. During Thomas Farley his career, he has created and directed operational, systems and compliance, internal audit, risk management and process improvement programs for financial services institutions including Citizens Financial and Fidelity Investments. Farley has more than 35 years of corporate and commercial banking experience, including credit risk management, business development, client and portfolio management and workout/restructuring experience. He has worked with Bank of America and RBS Citizens in Boston.

Northern Bank

Joseph H. Saling has joined Northern Bank as vice president of information technology.

Saling brings 17 years of IT experience from StonehamBank. BNE

Kennebunk Savings Bank

Kennebunk Savings Bank has hired Alan Brown as assistant vice president and branch manager and Carrie DiGeorge as vice president and residential lending manager of the Dover, N.H. office.

Brown has over 20 of management and customer service experience, and DiGeorge has more than 14 years of lending experience.

Kennebunk Savings also added Cassandra “Cassie” Mosher and Steven Smith as assistant vice president and branch manager of its Wells, Maine and Eliot, Maine offices, respectively.

Mosher most recently worked as a financial services manager at a bank in Kittery. Smith comes to Kennebunk from a Portsmouth, N.H. financial institution where he was branch manager.

Joseph H. Saling

BANKING NEW ENGLAND

27

INDUSTRY NEWS

how continued confidence in their

remain e wary of of small y will percent eve the ext 12 ss owners over the gnant from nal economy

ho say...

Overall, small business owners showed a decline in their concerns about various economic issues. When it comes to specific economic issues, small business owners are most concerned about the effectiveness of U.S. government leaders and health care costs.

The effectiveness of the U.S. government leaders

74% 76%

Healthcare costs

72% 77% 63% 70%

Commodities prices (i.e. oil, gas)

prove

45%

63%

The strength of the U.S. dollar

69%

41%

59% 63%

Consumer spending

ve

54%

Corporate tax rates

59%

50% 45%

55% 55%

Interest rates

ove

31%

Credit availability

44% 51% ‘14

Merchant Groups Seek National Standard on Data Breach Reporting

‘13

A total of 44 national and state organizations of retailers and other dealers signed and sent a letter to Congress in November calling for a federal standard of consumer notification when a business encounters a data breach involving financial data or other sensitive personal information. They want legislation to apply to all businesses, from financial institutions, merchants, payment card processors, technology companies and telecommunications providers, to insure prompt communication to the public when data breaches occur.

Currently, breach notification laws vary in 47 states and four federal jurisdictions.

The merchant letter cited a report from Verizon showing that retailers accounted for 10.8 percent of data breaches in 2013 while the financial services industry accounted for 34 percent. Some proposals before Congress would only require merchants collecting payment card numbers to notify customers of a breach, exempting other entities in the system, including card processors, financial service companies and telecommunications providers. As Banking New England went to press, a Congressional vote wasn’t expected during the current session; the merchants want any new law to cover all entities in the payment system which handle sensitive personal information.

28 BANKING NEW ENGLAND

Boston-area small business owners were optimistic about the economy, according to the Fall 2014 Bank of America Small Business Owner Report, released in November. Forty-four percent say they plan to hire, versus 28 percent in 2013 and 24 percent in 2012. Also, 56 percent expect revenues to increase in the next 12 months versus 47 percent in fall 2013.

The semi-annual report surveyed 1,000 small businesses with revenues between $100,000 and $4,999,999, and between two and 99 employees. An additional 300 respondents were sampled in nine test markets, one of them Boston. Respondents were defined by age: Millennials (18-34), Generation Xers (35-49) and Boomers (5068). Millennials were most optimistic about their local economies, expressing plans to hire or add new locations over the next five years.

Gen Xers were the most likely to be seeking new markets; Boomers trailed in both those categories.

Boston respondents were conservative in evaluating their technological skills compared to national peers, with 59 percent rating themselves at A or B on technology knowledge versus 67 percent nationwide. Forty-nine percent of Boston respondents said they thought they could run their business without the help of a smartphone or tablet.

Eighty percent of Boston respondents are worried about health care costs, the highest of any city surveyed, up 14 percent over 2013.

Other concerns are: the effectiveness of U.S. government leaders (69 percent), the strength of the U.S. dollar (64 percent) and the price of commodities (57 percent). Conversely, only 56 percent of Boston small business owners are concerned about unemployment rates, compared to 80 percent nationwide.

The study can be found on Bank of America’s website.

49% 52%

Global stock market 31%

BofA: Small Business Owners Optimistic

Seven Mass. Banks Lose Bid on Foreclosure Bonds

Seven Massachusetts banks lost out on their bid to defeat ordinances from the cities of Worcester and Lynn requiring lenders and other agents to impose cash bonds on home foreclosures, according to a report in the Worcester Telegram and Gazette. A federal judge denied the banks’ request for a preliminary injunction against the two cities, urging to keep the current system pending a review by the Massachusetts Supreme Judicial Court of a separate Springfield foreclosure ordinance, which has yet to be decided. The U.S. District Court in Worcester granted the banks an injunction against a Worcester ordinance requiring lenders to mediate with borrowers before foreclosing.

A 2009 Worcester ordinance requires a $5,000 bond per home, putting 10 percent into a fund to fix properties that lenders do not maintain. A mediation requirement added in 2013 has not yet been implemented, the Telegram & Gazette reported.

The objecting banks were Hometown Bank of Oxford, Country Bank for Savings of Ware, Eastern Bank of Boston, Avidia Bank of Hudson, North Brookfield Savings Bank, Rollstone Bank & Trust of Fitchburg, and Southbridge Savings Bank.

According to an affidavit filed in the case, Worcester had collected nearly $3.6 million in bond money under its ordinance as of July and put $359,000 of it into a repair fund. BNE

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BankWorld is your opportunity to learn about emerging opportunities and innovative solutions for the banking industry at the Northeast’s largest and most exciting banking show. The one-day conference includes essential educational sessions, interactive panels, cutting-edge exhibits, plenty of networking opportunities, attendee raffle prizes and much more!

BankWorld is for you if you’re an executive, senior management or bank staff involved in: operations, technology, lending, retail banking, marketing & sales, human resources, security, or compliance & risk management. Join us the evening before BankWorld, as we honor the rising stars in the Connecticut banking industry at the New Leaders awards dinner.

This is a great opportunity for bank management to get their hands on the latest products and technology and learn how to keep their business moving forward.

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IN CASE YOU MISSED IT

Eastern Bank Completes Centrix Buy

Featured Banks

Boston-based Eastern Bank Corp. completed its acquisition of Bedford, N.H.-based Centrix Bank & Trust Co. effective Oct. 24. Centrix had seven branches in southern New Hampshire. The acquisition makes mutually-owned Eastern Bank into a $9.5 billion bank with 102 branches in Massachusetts and New Hampshire, serving more than 460,000 consumers and businesses. The cash transaction was valued at about $134 million, or $41 in cash in exchange for each share of Centrix common stock, according to Eastern.

• Berkshire Hills Bancorp • Eastern Bank • First Niagara • NBT Bank • Rockville Bank

First Niagara to Close 17 Branches

First Niagara Financial Group announced in October that it will close 17 branches and two drive-through locations. Eight branches are located in Connecticut. The bank will have more than 390 branches in four states after the closure. The bank said it will notify customers of the affected branches 90 days in advance of closure that their accounts will be relocated to nearby branches.

Employees at the affected branches will take on new roles or apply for other jobs within the bank.

In a statement, the bank said mobile and online banking technologies are now used by more than 200,000 and 500,000 of its customers, respectively.

Bank, Rockville Bank Complete Merger

United Bank and Rockville Bank completed their $369 million merger, first announced in November 2013. The merger was approved by shareholders this past April. The combined bank, which has taken the United name, making it the fourth-largest bank in the Hartford-Springfield area; its headquarters

remain in Glastonbury, Conn. The merged bank employs 700 people at more than 50 branches in Massachusetts and Connecticut. It is led by CEO Bill Crawford, formerly of Rockville Bank.

Berkshire to Buy Hampden Bank

Pittsfield, Mass.-based Berkshire Hills Bancorp, parent of Berkshire Bank, announced in November that it will acquire Hampden Bancorp, based in Springfield, Mass. and parent company of Hampden Bank, for $109 million in stock in a deal expected to close in second quarter 2015. The merger will bring Berkshire’s assets to $7.1 billion, including $706 million in assets acquired from Hampden. In a statement, Berkshire President and CEO Michael P. Daly noted that the bank will move into the top five in deposit market share in New England. Hampden has 10 branches in Greater Springfield and $490 million in deposits; Berkshire operates 11 branches and $627 million in deposits. Terms of the deal call for each outstanding share of Hampden common stock to be exchanged for 0.81 shares of Berkshire Hills common stock, valuing Hampden common stock at $20.53 per share.

NBT Bank Opens Office in Portland

Norwich, N.Y.-based NBT Bank opened a regional headquarters in Portland in a planned expansion into Maine – the first national bank to enter the region since 2005. The Portland office will concentrate on commercial and industrial lending, and will not have retail presence in the state. The bank now has 15 branches in New England; it has a total of 155 locations in six states. BNE

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Banking New England magazine covers all the news, information and analysis vital to bankers across New England.

Bankers, industry experts, legislators, government agencies, and service providers contribute to each issue to ensure that executives and managers across the region have what they need to serve their customers, run their institutions and grow in a challenging economy.

Banking New England offers advertising and spwonsorship opportunities in three targeted marketing programs – digital, print and live events – reaching readers on multiple platforms.

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30 BANKING NEW ENGLAND

Questions? To learn more about Banking New England or to customize a marketing program unique to your business needs, call 800-356-8805 ext. 307 or email advertising@thewarrengroup.com.

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