Banking New York 2Q 2013 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SECOND QUARTER 2013 • VOLUME 28

Not Your Usual

BANK MERGER Provident-Sterling matchup reflects new market realities

+INSIDE: STATE’S OLDEST BANK EASES INTO NEW CENTURY | AN EXAMINATION OF FEES | GOODBYE, BRICK AND MORTAR? Produced in partnership with the Independent Bankers Association of New York State

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BANKING NEW YORK Volume 28 | Second Quarter 2013

Not Your Usual

BANK MERGER

Provident-Sterling matchup reflects new market realities

PAGE 16

04 FROM THE EDITOR

Crawling Out of Darkness – What Comes Next?

16 GETTING TO YES

IBANYS 04 C ALENDAR OF EVENTS

06 FROM THE PRESIDENT & CEO

20 THE NEW EQUATION FOR BANKS

Strength in Lending

08 T ELEPHONE BANKING – THE FORGOTTEN TECHNOLOGY?

Provident and Sterling Merger has Some Nontraditional Surprises

More Customer Knowledge Equals Greater Wallet Share

22 ANALYSIS OF A CRISIS The Scales Fell from Our Eyes

10 C OMMUNITY BANKING IS UNDER SIEGE

24 BANK PROFILE Chemung Financial Takes Next Step

14 C ONGRESS SHOULD PASS THE ‘PLAN FOR PROSPERITY’

26 PRUNING THE BRANCHES

Branch Rationalization Evaluation

28 SMALL CHANGE 22

©2013 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210 www.thewarrengroup.com

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

SALES DIRECTOR OF MEDIA SOLUTIONS

George Chateauneuf GROUP SALES MANAGER

Richard Ofsthun ADVERTISING ACCOUNT MANAGERS

Kelsey Bell & Claire Merritt ADVERTISING COORDINATOR Joanne Lee

30 Q&A

Kanas Takes On the State of the Industry, and the Future of BankUnited

EDITORIAL DITORIAL DIRECTOR

David Harris CUSTOM PUBLICATIONS EDITOR

Christina P. O’Neill EDITORIAL OPERATIONS MANAGER

Cassidy Norton Murphy CREATIVE/MARKETING DIRECTOR OF MARKETING & CREATIVE SERVICES

John Bottini DESIGN PRODUCTION MANAGER

Scott Ellison MARKETING COMMUNICATIONS MANAGER

Michelle Laczkoski GRAPHIC DESIGNERS

Amanda Martocchio & Tom Agostino

Second Quarter 2013 | 3

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

Crawling Out of Darkness – What Comes Next?

he banking scene in New York State is shifting, as mergers and acquisitions continue apace. The acquisition of Sterling National Bank by Provident Bank – two like-minded commercial banks – creates an entity large enough to stand on its own in an acquisition-hungry climate. In today’s low interest rate environment, feegenerating services are proliferating like iPhone apps. The key to success is providing services that customers don’t mind paying for. We want to thank our editorial partner, the Independent Bankers of New York State, for teaming with us to take a survey of their members large and small, to see what they had to say about fees. It seems that we’re in a season of inventory-taking, with banks assessing their operations to determine

how to run more efficiently. This issue contains an abundance of advice on the topic of operations, but also how to determine what to keep and what to let go. As Frank Capaldo notes in his column (see page 6), community banks generate more than half of all smallbusiness loans in the state despite having less than 25 percent of all bank assets. They have 38 percent of all loan assets today, largely due to increases in commercial and residential lending. So, the economy is on the mend, and community banks continue to play a large part in the recovery. ■ Christina P. O’Neill Editor, Banking New York The Warren Group

IBANYS 2013 CALENDAR OF EVENTS June 25 Director’s Conference Doubletree Hotel, Syracuse

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July 17, 10 a.m. Board of Directors Conference Call

October 16 In-Person Board of Directors Meeting Location TBD, Syracuse

August 25-2 IBANYS 40th Annual Convention Hyatt Hotel, Buffalo October 7 Security Conference Castleton Comfort Inn, Schodack

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PRESIDENT & CEO’S MESSAGE | By Frank J. Capaldo

IBANYS Board of Directors Officers Chairman David Nasca Evans Bank, N.A., Hamburg Vice Chairman Gregory Hartz Tompkins Trust Company, Ithaca Secretary John Buhrmaster First National Bank of Scotia, Scotia Treasurer Christopher Dowd Ballston Spa National Bank, Ballston Spa Directors Eileen Bagnoli Pioneer Bank, Troy, NY Ronald Bentley Chemung Canal Trust Company, Elmira Randy Crapser Bank of Richmondville, Cobleskill Ronald Denniston First National Bank of Dryden, Dryden Martin Dietrich NBT Bank, N.A., Norwich Robert Fisher Tioga State Bank, Spencer E. Peter Forrestel Bank of Akron, Akron Stephen Gobel First National Bank of Groton, Groton Gary Kavney Adirondack Bank, Utica Richard Koelbl Alden State Bank, Alden Doug Manditch Empire National Bank, Islandia Salvatore Marranca Cattaraugus County Bank, Cattaraugus Paul Mello Solvay Bank, Solvay G. William Ryan Cayuga Lake National Bank, Union Springs Robert Schick The Lyons National Bank, Lyons Glenn Sutherland Catskill Hudson Bank, Rock Hill Mark Tryinski Community Bank N.A., DeWitt IBANYS STAFF Frank J. Capaldo President & Chief Executive Officer Stephen W. Rice VP Government Relations & Communications William Y. Crowell, III Legislative Counsel Linda Gregware Administration & Member Services

York 6 | Banking BankingNew New York

Strength in Lending The Independent Bankers Association of New York State (IBANYS) welcomes a new study released by Gov. Andrew Cuomo and State Financial Services Superintendent Benjamin Lawsky, which found that community banks provide most of the loans for small businesses and small farms in New York.

e thank the governor and superintendent for recognizing the vital importance of New York community banks to our state and local economies. We believe the study reinforces the fact that that New York’s local, independent community banks know our customers, understand our markets, and are strongly committed to reinvesting in their future. With locally based ownership and a commitment to our communities, we are very close to the economic pulse of New York’s cities, towns and villages. The study notes that with less than a quarter of all bank assets in New York, community banks generate more than half of all small business loans, and nearly all the small farm loans in the state. Indeed, the state’s smallest banks, those with assets under $1 billion, account for almost 28 percent of all small business loans, and 43 percent of small farm loans in New York. As the study also points out, New York’s community banks continued to lend to small businesses and homeowners throughout the financial crisis. That fact cannot be emphasized enough. Despite the crisis, our community banks grew solidly in the last decade. Today, we have 38 percent of all loan assets. According to the report, which evaluates community banks headquartered in New York state, community banks during the 1990s experienced a dramatic decline in their asset share relative to large banks, as the large banks grew through mergers and many community banks were bought up. Community banks’ loan assets fell from 30 percent to 13 percent from 1992 to 2001, the report noted.

But despite the financial crisis, New York’s community banks grew solidly during the 2000s and as of 2011 have an even bigger share than in 1992. Today community banks have 38 percent of all loan assets. The increase is attributed largely to an increase in commercial and residential real estate lending. The increase in real estate loan assets is attributed, in part, to community banks holding onto and servicing real estate loans rather than merely originating them and then selling them to mortgage loan servicers. In releasing the study, Lawsky reiterated that community banks focus on the unique needs of their communities, build strong customer relationships which help attract local retail deposits, and take deposits from their communities and typically recycle them back into their communities in the form of loans. We at the Independent Bankers Association of New York State think this study hits the nail on the head. New York’s local community banks have been, are today and will continue to be committed to building stronger economies for our localities and state, and brighter futures for our customers. ■

Frank J. Capaldo President and CEO IBANYS

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Telephone Banking – The Forgotten Technology? By Trent Fleming

By far one of the most popular customer-facing technologies banks have introduced is Interactive Voice Response (IVR). Customers flocked to this technology, calling over and over to hear a balance or see if a payment had cleared, many calling multiple times per day, even if account balances and other information was not in real-time. The advent of Internet banking may have slowed the usage, but it did not go away. Convenience might be an issue: a customer checking an account balance may find the telephone faster than logging into a website. These systems are simple and easy to use.

nternet banking is well into its second decade, however, and many of you are already investing in the next generation: mobile banking. The question is, what to do with our IVR systems? Especially if you are running IVR in-house, it is likely that your system is aging, and support may be lacking. If you’ve priced a new sys8 | Banking New York

tem, you may be taken aback by the cost. If you can keep that old clunker running a bit longer, here’s my stepby-step process for getting a handle on this technology before it causes you a real problem. Do an operational and contractual assessment of your current system. Get the vendor involved (if they are

still around) and make sure you have ready access, in the short term, to replacement parts and support in the event of a failure. Get your core vendor involved (if they are not the IVR vendor) and ask them to help you plot a backup strategy, if your IVR vendor is not around. Or call an expert. Your goal here is to put together a strategy to keep the technology working for another year or two, while you move these users to other solutions. Take a hard look at the number of calls you are receiving, and who these folks are. Generally, you will find a significant group of “repeat offenders.” Hopefully, your system produces reports, but if not, go to the phone logs to see what you can learn. If you have outsourced your IVR, think about aligning the efforts listed below with that contract’s expiration date, so that you can retire the technology at that time. A benefit of outsourcing is that you are relieved from worry over the state of your system. A downside, however, is the costs associated with the technology and the calls. Taking into account (based on available reporting) the frequency and type of activity you see, design an aggressive marketing campaign to move those folks to Internet banking. If you currently have mobile banking, even better. Promote that directly to your IVR users, with particular attention to the SMS text capability, as it offers the path of least resistance to their using the product. Trent Fleming is principle of Trent Fleming Consulting. A 30-year industry veteran, he is widely recognized as an expert in many areas of banking technology, operations, and strategy. He can be reached at (901) 896-4007 or via email at trent@trentfleming.com.

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Community Banking is Under Siege: Are You Ready for Battle? By Jarius DeWalt and Edmund Gish

The current economic uncertainties coupled with the dramatic regulatory changes proposed for the banking industry create an environment fraught with significant strategic risks for community banks, even those currently demonstrating relatively strong profitability.

n 2012, the federal banking regulators issued a series of reports discussing the regulatory and business environments and other pressures facing community banks as the financial services playing field continued its shift towards larger financial firms and the “shadow” banking universe. The overall number of federally insured banks and thrifts declined by 59 percent from 1984 to 2011, from 17,901 to 7,357. The banking industry’s share of the U.S. credit market declined from 49 percent in 1984 to 25 percent in 2011. More importantly, the FDIC study found community banks’ share of banking assets declined from 38 percent to 14 percent over that period, but community banks were still responsible for 46 percent of “industry small loans to farms and businesses.” Given the continued critical role of community banks in their local community’s economic stability and development, one of the key regulatory concerns is the inadequacy of strategic risk assessment among community banks, particularly given the formidable destabilizing shockwaves stressing the industry. The FDIC study noted that the stronger the risk management practices of community banks, and the more effective the regulatory supervisory policies, the less consolidation will be a result of bank failure. Regardless of their final form, Basel III and Dodd-Frank regulatory reforms (or the tangible capital alternative offered by some leading regulators) will force fundamental structural changes in the ways community banks do major aspects of their business. It is essential that they devise effective and flexible probability-driven strategic risk mitigation plans. We believe the first step is to undertake a comprehensive ratio-based strategic risk indexing (RSRI) process to determine which 10 | Banking New York

driving forces are primary given your firm’s unique business model and its strategic challenges and opportunities. The widening performance gap between larger (non-community) institutions and community banks has been a long running industry concern, but we note even among community banks there is a growing dichotomy in performance, which these four factors – return on average assets (ROAA), return on average equity (ROAE), net interest margin (NIM) and non-performing loans as a ratio of total loans (NPL/TL) – will showcase for both the national universe and the New York universe of community banks. ROAA

The table below breaks out the average ROAA for the highest 10 percent, highest 20 percent, overall universe average, lowest 20 percent average and lowest 10 percent average for 2012 for both the national universe and New York’s community banks. The New York average ROAA at 0.62 percent was 31 basis points and 33.33 percent below the national average ROAA of .93 percent. Although the national average ROAA for each of the highest 10 percent and highest 20 percent groupings were significantly above the same ratios for New York state community banks, the New York community banks lowest 10 percent and lowest 20 percent average ratios, although reflecting losses, were ROAA Classification

New York

National

State

Difference

Highest 10%

1.87

4.39

(252)

(57.40)

Highest 20%

1.54

2.97

(143)

(48.15)

Average

0.62

0.93

(31)

(33.33)

Lowest 20%

(0.55)

(0.79)

30.38

Lowest 10%

(1.20)

(1.72)

30.23

continued on page 12 

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lower than the respective national averages for the same percentiles. ROAE

The ROAE average spread for the national community bank data ranged from a high of 26.0 percent average for the highest 10 percent to a negative 22.82 percent average for the lowest 10 percent, or 4,882 basis points compared to a 2,869 basis points spread for the New York community banks. The state average ranged from 17.89 percent average for the highest 10 percent to a negative 10.80 percent average ROAE for the lowest 10 percent during 2012. ROAE Classification

New York

National

State

Difference

Highest 10%

17.89

26.00

(811)

(31.19)

Highest 20%

14.78

20.24

(546)

(26.98)

Average

5.79

6.30

(51)

(8.10)

Lowest 20%

(4.97)

(10.85)

588

54.19

Lowest 10%

(10.80)

(22.82)

1202

52.67

The banking industry typically uses two key ratios to measure relative profitability of net interest income: net interest rate spread and net interest margin. For this illustration the chart below shows the net interest margin (NIM) range for both the national universe and New York community banks. NIM is defined as net interest income as a percentage of total average earning assets and therefore takes into account the positive effects of investing non-interest bearing deposits in earning assets. For 2012, New York’s community banks’ averages in the highest and lowest 10 percent percentiles and for the universe average were lower than the national averages. The spread from the 5.11 percent average NIM for the highest 10 percent in New York to the 2.01 percent average NIM for the state’s lowest 10 percent was 310 basis points compared to a 336 basis point spread for the national universe Net Interest Margin New York

National

State

12 | Banking New York

Nonperforming Loans To Total Loans Ratio

Finally, we illustrate asset quality dispersion for the national and New York community banks using the nonperforming loans to total loans ratio. In this case, the highest 10 percent represent the worst performing institutions for this ratio, while the lowest 10 percent are the best performers. The average spread for the national universe was 1,329 basis points from the 13.29 percent average for the highest 10 percent to a zero average for the lowest 10 percent compared to a 10.22 percent average for the highest 10 percent and 0.09 percent average for the lowest 10 percent of New York community banks, or a spread of 1013 basis points. On average, New York community banks had a 40 basis points lower NPL/TL ratio than the national average at the end of 2012.

Nonperforming Loans / Total Loans

Net Interest Margin

Classification

which ranged from 5.51 percent average for the highest 10 percent to 2.15 percent average for the lowest 10 percent.

Difference

Highest 10%

5.11

5.51

(40)

(7.26)

Highest 20%

4.75

4.98

(23)

(4.62)

Average

3.68

3.74

(6)

(1.60)

Lowest 20%

2.42

2.57

(15)

(5.84)

Lowest 10%

2.01

2.15

(14)

(6.51)

Classification

New York

National

State

Difference

Highest 10%

10.22

13.29

(307)

(23.10)

Highest 20%

8.11

9.83

(172)

(17.50)

Average

2.93

3.33

(40)

(12.01)

Lowest 20%

0.28

0.12

133.33

Lowest 10%

0.09

0.00

Summary

Today’s banking environment is allowing larger and/or non-traditional competitors to better position themselves in the financial services marketplace. The significant regulatory overhaul of the capital and operational rules for banking will force community banks to re-think their strategies and dedicate greater focus on assessing both their competitive strengths and weaknesses in a more rapidly changing marketplace. To successfully survive, banks must gather and analyze extensive amounts of external and internal data and then incorporate it into probabilities-driven strategic planning. We leave you with one question: Are you ready for battle? ■

Jarius DeWalt is chief strategist and Edmund Gish is senior strategist at Paradigm Strategies & Solutions.

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Congress Should Pass the ‘Plan for Prosperity’ By Stephen W. Rice

The Independent Bankers Association of New York State (IBANYS) was in Washington, D.C., in late April to participate in the Washington Policy Summit hosted by the Independent Community Bankers of America (ICBA). Among our top priorities: urging members of the New York Congressional Delegation to support ICBA’s “Plan for Prosperity” regulatory relief package, which IBANYS’ Government Relations Committee has strongly endorsed.

he plan is intended to relieve community banks from the most burdensome and costly regulatory requirements. It is not a Stephen W. Rice single bill, but a set of priorities that may be introduced and enacted individually or collectively. As a living document, the Plan for Prosperity can adapt to rapid changes in the congressional and regulatory environments. It includes proposals to exempt community banks from

mortgage-lending reforms, reduce annual privacy notice redundancies, ease municipal advisor registration requirements, reform the Consumer Financial Protection Bureau, improve bank exam accountability, and offer relief from auditing expenses. Simply put, the plan is designed to reduce excessive regulation, while supporting greater regulatory accountability to help community banks stay focused on their mission: promoting economic growth in their communities. Each provision of the plan was crafted to preserve and strengthen consumer protections and safety and

AMONG ITS PROVISIONS, THE PLAN FOR PROSPERITY WOULD: • • • • • • • • • • • •

Exempt community banks from certain mortgage reforms to support the housing recovery. Reduce annual privacy notice redundancies to cut paperwork. Ease municipal advisor registration burdens to help serve local governments. Strengthen the industry’s voice with an assistant Treasury secretary for community banks. Reform the Consumer Financial Protection Bureau to ensure more balanced regulation. Improve accountability in bank exams with a workable appeals process. Offer relief from accounting and auditing expenses for publicly traded institutions. Support mutual banks with new charter and dividend rules. Require rigorous and quantitative justification of new regulations. Support additional capital for small bank holding companies. Cut the red tape in small-business lending. Facilitate capital formation by reforming Subchapter S corporation regulations and extending the net-operating-loss carry-back.

14 | Banking New York

soundness. Rebalancing the regulatory burden will ensure that scarce capital and labor resources are used productively, not sunk into unnecessary compliance costs. This will allow community banks to better focus on lending and investing, and that will directly improve the quality of life in our communities. Community banks and thrifts play a vital role in ensuring the economic recovery reaches communities of all sizes across the country. The Plan for Prosperity provides targeted relief from the regulations that are stunting the economic recovery. Relieving community banks from excessive, redundant and costly regulatory burdens will allow community banks to thrive by doing what they do best: serving and growing their communities. The continually increasing burden of regulation discourages new community bank charters and leads to further industry consolidation, which harms competition, consumers, and exposes taxpayers to the risk of additional costly bailouts. The ICBA Plan for Prosperity helps provide appropriate tiering of regulation and relief for smaller, low-risk institutions so they can better serve their communities and promote economic growth and a diverse financial system. Passing the Plan for Prosperity would help strengthen our communities, our economic recovery. Congress should act without delay. ■ Stephen W. Rice is vice president and director of government relations and communications for the Independent Bankers Association of New York State.

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Equal-but-Different

MERGER of Provident and Sterling

Nontraditional Merger Surprises Reflect Bankingâ&#x20AC;&#x2122;s New Landscape

16 | Banking New York

By Scott Van Voorhis

hen you shell out hundreds of millions of dollars to buy out a rival, it’s typically your bank’s name that goes on the signs. But as Provident New York forges ahead with its $344 million deal to buy Sterling Bancorp, it is turning that tradition on its head. When the final regulatory approvals come through later this year, the newly combined bank will adopt the Sterling name, becoming Sterling National Bank. The Provident name will be the one retired. The unusual name change is emblematic of the team approach the two commercially minded New York banks are taking to their union, which Provident CEO Jack Kopnisky jovially compares to dating and getting married. The two banks say they are eager to capitalize on each other’s strengths to better compete in an ever more competitive and regulatory challenging market. And the ultimate goal is to further grow and expand in what Kopnisky contends is the best areas for banking in the country, the New York metro market. While it has the greatest level of competition, it also has the greatest population and the greatest wealth.

a similarly-sized Provident Bank of no relation, operating in New Jersey, creating some predictable confusion in this key market, Kopniskey said. Provident also conducted marketing surveys that looked at both banks names and brands, he said. Sterling came out with higher brand recognition in the crucial Greater New York area, he noted. Kopnisky and Sterling’s Cappelli will also share top roles at the new bank, with Kopnisky to serve as CEO and Cappelli as chairman. The merger is expected to yield $34 million in cost savings for the combined bank. Provident and Sterling last year earned $41 million on $257 million in revenue. “This is the right transaction for Sterling Bancorp’s shareholders, customers and communities,” Cappelli

Dating and Marriage, Banker Style The deal came about after a year of talks between Kopnisky and Louis Cappelli, Sterling’s chairman and CEO. Kopnisky compared it to a long courtship, with both sides assessing each other to determine whether they would be a good banking-market match. Both banks were similar in the right places, with a focus on lending to small and midsized businesses. Both have focused on expanding, “sticky, long-term” deposits. Yet each bank has carved out a somewhat different niche in this market, creating valuable synergies as well. “It’s like dating,” Kopnisky said. “You start to date sand see whether there is really something there and whether you believe in the same things. In time you pop the question and hope the person on the other side says yes.” The two banks now hope to get their marriage off with a grand compromise of sorts, one that has Provident giving up its name in favor of Sterling’s. There are solid business reasons for the decision to take on the Sterling name, even though Provident will hold a controlling, 53 percent stake in the merged bank. For starters, going with the Sterling name will clear up a considerable amount of market confusion that has bedeviled Provident over the years, Kopnisky noted. That’s because there is

said in a press statement. “For shareholders, it provides a premium to the current value of our stock and creates a banking institution with even greater competitive strength, growth potential and profitability.” The merger has not been without controversy, with the banks facing a lawsuit from a shareholder arguing the deal is not rich enough. Others disagree. “I can say with confidence the transaction is good for shareholders,” said Michael Carrazza, chairman and CEO of Solaia Capital Advisors LLC and chairman of the board of Patriot National Bancorp, Inc. “The operating synergies are expected to approach 18 percent. The combined enterprise will no doubt have an expanded product suite.” For his part, Kopnisky declined to comment on the lawsuit.

“

It’s like dating. You start to date sand see whether there is really something there and whether you believe in the same things. In time you pop the question and hope the person on the other side says yes.” — Provident New York CEO Jack Kopnisky

Jack Kopnisky

Focus on Organic Growth While Provident’s Kopnisky spent a year courting Sterling, don’t look for the newly combined bank to quickly hit the acquisition trail. He said the focus now is growing in place, not buying other banks. That will mean buckling down, possibly for years, continued on page 18  Second Quarter 2013 | 17

Walt Mix

to focus on growing the combined $6.5 billion bank organically. So why the merger in the first place? According to Kopnisky, one aim was bulking up, pushing the newly combined bank past the crucial $5 billion-asset mark, a size that will provide a strong foundation from which to grow. Individually, the two banks, with Provident at $3.8 billion, and Sterling at $2.7 billion, were more vulnerable as potential acquisition bait. Moreover, joining forces will also help the two banks absorb the increased regulatory costs coming down the pike, a result of the Dodd-Frank financial service sector regulations, he said. Having achieved the right amount of bulk, Kopnisky now wants to grow the combined bank’s lucrative commercial lending business. The two banks bring complementary product lines to the deal, he noted. Provident comes to the table with a strong construction financing business and commercial

“Bulking up was one goal, pushing the newly combined bank past the crucial $5 billion-asset mark, a size that will provide a strong foundation from which to grow.” real estate loan business. Sterling, by contrast, has carved out a more commercial business lending niche, as opposed to construction and real estate. It’s a package that also includes private banking services targeted at executives of the companies to which it lends. The combined bank, Sterling National, will be able to offer a range of loans and services that other financial institutions in its size range will find hard to beat, Kopnisky contends. That includes commercial real estate lending, payroll lending, factoring and equity financing. “One of the best things about this merger is that it brings to bear a very broad set of lending expertise,”

18 | Banking New York

Kopnisky said. “There is virtually no other $7 billion bank out there that has experience” in that range of products, he said. The new bank will also benefit from offering a range of loan products in another crucial way as well, diversifying the way it makes money. That means not just relying solely on revenue generated by interest rates on loans, but also fees as well. “The two banks look like a good fit of different asset categories,” said Walt Mix, head of the financial services practice at Berkeley Research Group. New Ways of Doing Business But the merger is more than just about broadening the mix of loans. The new Sterling National also plans on shaking up how it does business, starting with its real estate. In a first step, new bank will consolidate unneeded real estate, having announced plans to shutter five to seven overlapping branches, according to Kopnisky. The combined bank hopes to shed about 50,000 square feet of space, bringing the total portfolio down to about 350,000. That said, the two banks plan to hold onto both their current headquarters – Provident’s offices are in Montebello, while Sterling’s spread is in Manhattan. That gives the bank more flexibility when recruiting new employees and talent, he said. The new bank will also move away from the traditional, branch-centered growth strategy, to one that features lending teams with a focus on a particular geographic market, industry niche or ethnic community, Kopnisky said. Made up of three to five employees each, the new lending and sales teams will target a wide range of niches, from the Italian or Hasidic business communities to New York’s giant health care sector. “That is where we see the future,” he said. ■

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THE NEW EQUATION FOR BANKS

More Customer Knowledge Equals Greater Wallet Share How to Use In-Memory Computing to Improve Your Bank’s Performance By Eric Stine

ow much do you know about your customers? Can you capture every interaction they have with your bank and act on the information? Imagine a customer who is logged on to your website. She has significant savings. Over the past six months, she’s moved to a higher yield account, ramped up her savings and made fewer purchases on her bank-issued credit card. She’s looking at home mortgage rates on your website right now. She currently rents her apartment. Perhaps she’s even asked colleagues on LinkedIn about buying a first home, or complained to her Facebook friends about a rent increase. Would you offer her a mortgage? More importantly, which product? Does her behavior indicate she’d be more comfortable with the predictability of a fixed rate? Or does the data indicate that she is likely to be in the home for only a few years before moving to a larger home or another neighborhood? Perhaps a larger down payment and an adjustable rate mortgage or interest-only product with a lower rate would enable her to have both equity and the lower payments that permit saving towards a larger investment down the road. Finally, what does your data tell you about channel behavior? Does she meet the profile of a researcher that you should push a targeted direct mail to? She appears to be tech-savvy, though – perhaps a timely live interaction via web chat would increase the chance you’ll take the application today? And would other products or services,

like a high-yield savings account that reduces her interest rate by one-eighth or one-quarter, secure her business and increase your share of wallet? Like every other business, banks today are focused on knowing as much as possible about their customers. In other industries such as retail where large volumes of data are collected and analyzed, in-memory technology is already being adopted to manage offers, enhance customer loyalty, and improve consumer sentiment. Similarly, the banking industry is adopting this technology to provide the kind of personal service that builds trust and loyalty, and boosts wallet share. In-memory computing is helping banks surpass traditional models of customer service. It is fundamentally changing the way banks collect, store and use their vast capacity of data. The technology uses a central database and enables banks to rapidly process massive amounts of customer-centric and transactional banking data across channels, creating holistic, real-time profiles of customers and groups of customers. The data can be used to develop targeted marketing campaigns; prevent defections by identifying customers at risk of moving to a competitor; detect identity fraud and prevent money laundering; and quickly identify new trends, segments or behavioral patterns. In-memory computing can provide insight into how branches, ATMs, products and personnel are performing, overlaying that information with

Eric Stine is senior vice president and general manager of financial services for SAP. 20 | Banking New York

customer and segment data. The result is better decision-making about hiring and training, staffing and hours, and branch and ATM openings and closures. Most importantly, the ability to make decisions about which products and services to create, maintain or discontinue – along with the ability to identify affinities, halo effects and target markets for those products and services – better enable banks to make the right offer to the right customer through the right channel. In-memory computing improves on many banks’ existing technology. It’s extremely fast, as much as 3,600 times faster than standard analytical computing. It replaces outdated, patchwork IT systems that segregate data and store it on different servers, making fast retrieval and analysis difficult or impossible. It is also more efficient and can help control costs. While the benefits are substantial, building an in-memory computing system can appear daunting. But banks can start small and still achieve significant benefits. They can use a phased approach, such as starting with one or two channels or business functions, and then expand the effort over time. Whatever route a bank chooses, it should have a road map for each inmemory use case that aligns with its overall business strategy. It should also create a prioritized list of business objectives. The four-step assessment that follows answers important questions and can serve as a guide.

Step 1: Where can in-memory computing deliver additional benefits and create value?

as well as identifying the potential risks, strengths and weaknesses of the new landscape.

The first phase includes analyzing current business strategy, existing business processes, impacted lines of business, and software assets – aligning business and IT strategies towards a common set of goals. It also explores the business requirements and opportunities in the use cases where in-memory computing could be best applied.

Step 3: Which is the best transformation path to integrate inmemory computing? The third phase of the assessment centers on defining implementation and migration scenarios for the new landscape. It also establishes a project framework and master plan that include organization structure and required governance.

Step 2: What would a target IT architecture using in-memory computing look like?

Step 4: What are the benefits and risks of implementing an in-memory computing system and when will the investment pay off?

The second step involves developing a target application portfolio and the target architecture for both in-memory computing solutions and supplemental solutions. This step also focuses on creating high-level prerequisites for the technical infrastructure and its blueprint,

The last assessment phase weighs one-time investment and recurring costs against potential tangible and intangible benefits using a return-oninvestment calculation and high-level risk analysis.

Enhancing long-term customer value and reducing the cost and complexity of operations top the agenda of many bank executives today. In-memory computing has emerged as an essential advantage. Imagine what could have happened with the prospective homeowner described above if the bank didn’t have the technology needed to capture and analyze her behavior from multiple angles. It would have been impossible to be the first bank to get in front of her at a pivotal time with the right product. In-memory computing takes customer insights to a new level. If banks aren’t feeling a sense of urgency, they run the risk of falling behind. In a competitive marketplace, inmemory computing can offer the rapid, personal service that cements customer relationships, and help banks find new opportunities for growth. ■

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ANALYSIS OF A CRISIS

The Scales Fell from Our Eyes Alan Blinder Addresses the Banking Community By Steve Viuker

lan Blinder, author of “After the Music Stopped: — ,” serves at Princeton University as the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department, and vice chairman of The Observatory Group. He founded Princeton’s Griswold Center for Economic Policy Studies in 1990. In a speech given at Princeton University on March Alan Blinder 7, he cited a combination of unrestrained free markets and lax regulatory enforcement as leading to the financial crisis. Regulators “had plenty of authority; they didn’t use it,” which he termed “malign neglect.” “Once the crisis became acute, policy makers took bold, comprehensive and effective actions. They were highly interventionist and they worked,” he said, but the bad economy and policy activism led to a backlash against the Federal Reserve, the Bush and Obama Administration, and Congress – namely, the entire public sector. Blinder cited 315 million people who lost an estimated $18 trillion 22 | Banking New York

in wealth from housing and stocks, more than a year’s GDP. But while taxpayers thought they were sharing an enormous bill for the bank bailouts, the government made a profit in the end, he said. “When are you are getting public money, the public has the right to expect something in return. [Former Secretary of the Treasury Henry] Paulson asked nothing,” Blinder said. The deal also lacked an upside for taxpayers, and had minimal restrictions on dividends and executive compensation. While Timothy Geithner tightened executive compensation when he became Treasury secretary, no one went to jail. The Fed, as a lender of last resort, lent the banks “massive amounts,” in an unprecedented magnitude, going from a pre-crisis total of $200 million to more than a trillion dollars. And the Fed decided which financial institutions should live or die; something central banks usually don’t get involved with.” Blinder also said President Barack Obama took on too many things at once – health care reform, education and two wars, in addition to the financial crisis, and therefore lacked a clear focus on the economy. “There will be other instances

where the government will have to do extraordinary things; many of which are counter-intuitive,” said Blinder, but he noted that America leads the world in financial reform.” While Dodd-Frank will likely not prevent financial bubbles in the future, it will make their consequences less severe when they do happen – for example, an orderly liquidation authority to apply to large financial institutions. Another issue was the lack of a single systemic financial regulator in the United States. Banks, investment banks and mortgage banks all had their own regulators. “When bad mortgages were being written by non-banks, banking regulators should have seen the picture, but they didn’t,” he said. The work load that Dodd-Frank assigned to these agencies was impossible to complete within the designated time frames, and Congress was unwilling to appropriate more funding for staff. The lobbying by the financial industry was and continues to be extensive, powerful and highly effective,” he said. In summation, Blinder said the Fed now owns mortgage backed securities, not something it necessarily wants in its portfolio. However, the Fed portfolio is less risky now than in the early days of the crisis. The Fed is faced with changing the composition of its portfolio and shrinking its balance sheet. If it moves too slowly, it will cause excessive liquidity and lending, leading to inflation. Err in the other direction, and deflation results, as it did in 1937, he said. The 1999 repeal of the Glass– Steagall Act was not a culprit in the crisis either, Blinder said, “The trouble came from banks doing banking badly and from investment banks doing investment banking badly.” ■

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BANK PROFILE

State’s Oldest Bank Takes Next Step By Linda Goodspeed

Ronald M. Bently President and CEO Chemung Financial Corporation

24 | Banking New York

ollowing record earnings in 2012, Chemung Financial Corporation, parent company of the state’s oldest locally owned and managed community bank, is poised for the next chapter in its long history. In November 2012, Chemung began trading on the Nasdaq exchange, a move bank officials and analysts say will help the bank in its acquisition strategy. Headquartered in Elmira, Chemung Financial is the parent company of Chemung Canal Trust Company, a full-service community bank with $1.3 billion in assets and 28 retail branches. It also owns and operates CFS Group, Inc., a financial services company. The bank was established in 1833, and took its name from the newly opened Chemung Canal waterway which first opened up trade in the region. Ancestors of some of the founders still hold accounts at the bank. Earlier this year, the 180-year-old bank reported record net income for 2012 of $11 million, an increase of

$500,000, or 4.6 percent over 2011. The bank experienced double digit growth in both loans and deposits. Ronald M. Bentley, president and CEO, said there were several reasons behind the bank’s move to the Nasdaq, including paving the way for future acquisitions. Previously, the bank’s stock was traded over the counter. “Moving to the Nasdaq improves the liquidity of our shares and increases our exposure in the investment community,” Bentley said. “To the extent being on the Nasdaq has boosted our stock price, it gives us more currency to do more acquisitions, which are a big part of our growth strategy.” Moving to the Nasdaq also makes Chemung eligible to join the Russell 3,000 index of largest stocks, which is expected to happen in June 2013 when the index rebalances. “I have a buy on Chemung’s stock right now,” said Alex Twerdahl, associate director at Sandler O’Neill & Partners, who follows the bank. “Part of the thesis behind that recommendation is that Chemung will be added to the Russell 3,000. A fair number of funds look to mirror the Russell indexes, which provides buying pressure for people to buy and own the stock.” Chemung’s record year was all organic growth. Its last acquisition was in April 2011 when it purchased Capital Bank. “After the Capital acquisition, we took a breather last year to digest and integrate the bank,” Bentley said. “We’re now poised to be in the merger business again.” The Capital acquisition gave Chemung a strong presence in the Capitol Region, which Bentley calls “one of the best markets in the country” with a diversified economy

that includes government, health care, higher education and nanotech. Bentley said the region accounted for about $165 million in new commercial loans for the bank last year. “Expansion into that market generated a lot of new commercial loans for us,” Bentley said. “We have a real leadership position in that market.” He said the bank wants to continue to build its presence there and may look for another acquisition in that market. Overall, Chemung’s commercial loans last year increased $47.3 million or 11.6 percent and consumer loans increased $42.5 million or 21.6 percent. Non-performing assets to total assets ratio declined to 0.89 percent at December 31, 2012, compared to 1.79 percent at December 31, 2011. On the residential mortgage side,

Bently said the booming refinance business the last several months had slowed dramatically, hurting earnings at some larger banks. “It’s slowed down with us, too,” he said. “But it’s not a major line of business for us, so there’s less impact.” He said the bank will continue to sell residential mortgages on the secondary mortgage market, and as a result, underwriting guidelines will have to conform to those standards. “We don’t want to put 30-year mortgages on our balance sheet,” he said. “There’s too much risk.” On the deposit side, total core deposits last year grew $86.5 million or 12 percent. Bentley said the historic low interest rate environment has put tremendous pressure on earnings. “We have margin compressions I haven’t seen in my lifetime,” he said.

“There’s very little room to lower deposit costs to offset those margins.” Bentley said the challenges facing Chemung are not unique, but are industry wide. Among those challenges are: low interest rates, high unemployment, slow economic growth, regulatory uncertainty and political gridlock. “The business outlook is very challenging,” Bentley noted. “The business community is sitting on a lot of cash, but is reluctant to invest because of all the uncertainty. It’s not a particularly attractive climate for anyone.” But if history is any guide, and Chemung has 180 years of history on its side, the bank should be able to navigate these troubled waters. “It has a good solid balance sheet, a good management team and room to grow,” Twerdahl said. ■

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PRUNING THE BRANCHES

Branch Rationalization Evaluation Restructuring May be a Hassle, but Could Yield Impressive Results By Dan Shannon

ank executives resist branch restructuring, even in the face of today’s mounting profit pressures due to regulatory changes and soft lending revenues. It’s important to learn how to evaluate branch performance and consider other key factors for branch consolidation efforts. The key to any branch rationalization analysis is to understand current performance and the potential to improve results given existing market realities. The following graphic illustrates the key drivers of branch network performance and highlights the critical considerations in evaluating options with regards to improving overall effectiveness.

STEP 1: IS THE BRANCH IN QUESTION SATISFYING PROFIT CONTRIBUTION OBJECTIVES? Achieving marginal profitability is not the same as enhancing shareholder value (or generating a reasonable dividend/ interest payment to mutual depositor owners).The efficacy of the financial modeling per each branch should include consideration of the following key elements: • Ensure credit for services provided to accountholders not domiciled in the

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target office. While many banks reassign deposits to the locations where the customer is most often serviced, many do not. At least on pro forma basis, credit for this inter-branch servicing needs to be made in order to understand the actual financial contribution of a location. • Ensure that the interest income earned from branch-based loans is adjusted for loan loss provision expense rather than simply reflecting gross yields. • Determine a normalized transfer pricing credit rate for excess deposit balances generated in the branch. • Consider unallocated expenses, particularly overhead costs for administration that are variable. • Require a secondary analysis of the cost to close the facility if the running rate contribution of the office is inadequate to satisfy the bank’s financial goals.

STEP 2: WHAT IF A BRANCH IS FALLING SHORT OF REQUIRED PROFIT CONTRIBUTION LEVELS? The next step in the process involves evaluating the potential of the market served by the branch to support a profitable operation. The objective of the analysis is to understand what a fair share of any given market holds in the way of potential, contrast the share of business already being held by the branch and place a value on the gap between current and future business. A myriad of providers of demographic and customer valuation models serve the financial industry. Firms such as Nielsen Claritas conduct regular statistically valid surveys of market characteristics and provide a range of information. This information becomes very useful in understanding everything from a bank’s share of business, to insights about the

overall potential to use a full array of financial products and services down to the census tract level.

the array of products in demand by the segments evaluated in Step 2.There are a number of quality market research organizations focused on updating and maintaining current competitive data for banks, thrifts and credit unions.

STEP 3: COMPETITIVE PRODUCT EVALUATION Deposit and credit products are in their greatest period of change in the past 25 years thanks to regulatory and statutory changes and the overall credit environment. And in this environment, everexpanding alternative channels layer on top of changes to functional banking products. The unsettled nature of these offerings creates both confusion and inertia. Sufficient insight is available from competitive market surveys to move forward in adjusting products and services. This evaluation can be conducted to the extent that market trends show an institution to be lagging with regard to

centive programs as part of a larger salary administration program that fail to consider market potential, or, plans that reward gross account opening rather than net business growth • Inadequate management reporting resulting in a lack of visibility to aid sales management • Inadequate performance evaluations, coaching and remedial action to address short-comings

STEP 4: RE-EVALUATE PERSONNEL PRACTICES In banks across the country, the following has been found to be all too common impediments to improving branch effectiveness: • Inadequate criteria for identifying the characteristics of effective sales staff and recruiting qualified staff • Lack of appropriate training to create an effective sales environment • Failure to align sales staff with appropriate skills and knowledge against quantifiable market potential • Misalignment of sales goals and in-

Each of these can be addressed specific actions and when implemented correctly, the changes have improved overall sales effectiveness in markets with upside potential. Branch and channel productivity evaluations require hard data to make sound decisions. Following a logical process will produce the optimal decisions required in tough economic times. ■

Dan Shannon is senior vice president with FIS Consulting Services.

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SMALL CHANGE

FIRST NIAGARA First Niagara Financial Group has appointed Gary M. Crosby to serve as interim president and CEO. He formerly served as the bank’s executive vice president and chief administrative and operations officer. His appointment follows the mutually agreed upon departure of John R. Koelmel as First Niagara's president, CEO and Board member. A special committee of the Board's independent directors has been formed to initiate a search for a permanent president and CEO. Crosby joined First Niagara in 2009, and has served as its executive vice president and chief

SIGNATURE BANK Signature Bank has made a series of announcements on staff hires and board of director appointments. It appointed three private-client banking teams, bringing the total of five new teams added year to date. Joan McNulty was named group director and senior vice president. Most recently, she spent 13 years at Citibank as senior vice president and relationship manager at the commercial banking headquarters in midtown Manhattan, catering to commercial clients. Joining McNulty are Melissa Badger, who was named associate group director and vice president, and Manuel Chalen, appointed senior client associate. McNulty worked closely with Badger and Chalen for 10 and five years, respectively, at Citibank. Badger, previously sales manager of treasury products and vice president at Citibank, most recently served as vice president and branch manager at the Citibank United Nations branch, serving 28 | Banking New York

administrative and operating officer. In this role, Crosby has overseen the successful build-out of the infrastructure to support the company's growth, with particular focus on enterprise risk management, technology, and operations. Peviously, he was a founding shareholder of ClientLogic Corporation serving as chief financial and chief operating officer. He was a partner with Seed Capital Partners, a venture capital firm, and has held senior financial leadership positions in banking and manufacturing. Crosby also dedicated five years to full-time community service, answering the call to turnaround the finances and operations of the Buffalo schools, the second largest school district in New York State. Crosby is a magna cum laude graduate of Canisius College. ■

personal and commercial clients. McNulty and her colleagues join the bank’s office at 950 Third Avenue and 57th Street in Manhattan. Chris Panellino was named group director and senior vice president. She brings her team of three to the Signature Bank Great Neck, Long Island office. She, along with Helen Dounias and Jason Torres, who have each been named associate group director and vice president, join from HSBC in Glen Oaks, N.Y. Complementing the offering of Panellino’s team is Michael Santucci, named group director – investments under Signature Securities Group, the Bank’s investment advisory arm. Monika Buono, group director and vice president, along with her three-person team, temporarily join the Borough Park, Brooklyn private client banking office until the Bank establishes a new site in Bay Ridge, Brooklyn. Her team includes senior client associate Joanne Panagiotakis and client associate Angela Zoto. Most recently, Panagiotakis was assistant branch manager at another Brooklyn location, focused on commercial and personal accounts. Zoto was a personal banker at the team’s prior institution

for the past four years, where she serviced business and personal banking clients. Signature Bank also announced the appointment of two executives, both of which will strengthen its senior management team. Eric R. Howell, executive vice president and CFO, has been named to the post of executive vice president, corporate and business development, a newly created position. He will devote more time to assisting in client acquisition and service, and will help recruit and expand the bank’s private client banking teams and development of new offices. He will increase his involvement in assisting both Signature Financial, the bank’s specialty finance unit, and Signature Securities’ Small Business Administration Pool Assembling business. Lastly, he will retain oversight of investor relations. He joined the bank in 2000 and has served as CFO since November 2004. Prior, he was vice president of finance and controller. Earlier in his career, he was an associate managing director at Republic National Bank of New York, which he joined in 1992. During his tenure there, he held other numerous positions including CFO of both Republic’s retail broker-dealer and retail insurance agency. Concurrent with Howell’s appointment, the bank named Vito Susca, who joined the bank in March 2004, to the post of senior vice president and chief financial officer, to manage the bank’s finance and accounting functions. Prior, he was senior vice president and controller. Before joining the bank, he held various positions at Republic National Bank of New York, which he joined in 1991, and then HSBC Bank USA/ HSBC Securities Inc., following the acquisition of Republic by HSBC. ■

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Q&A

Kanas Takes on the State of the Industry, and the Future of BankUnited By Steve Viuker

J John Kanas

ohn Kanas was named chairman, president and CEO of BankUnited in May 2009, when he and a group of investors bought the assets and most of the liabilities of the former BankUnited FSB, investing $900 million in the enterprise to make it one of the most wellcapitalized financial institutions in the country. Prior to joining BankUnited, he was chairman, president and CEO of North Fork Bancorporation, the 16th-largest bank holding company in the United States. He held this position from 1977, when he was appointed at the age of 29, until North Fork’s acquisition by Capital One in December 2006. He led the company in its initial public offering in 1982 to its membership on the NYSE and inclusion in the S&P 500 Index. During his tenure, the company completed 15 bank acquisitions. Since its 2009 debut, BankUnited has been recognized for its dramatic growth in Florida. In 2011 it topped the FDIC list of that state’s most profitable banks earning two consecutive five-star ratings from Bauer Financial in its first evaluation opportunities since the bank was established. BankUnited recently opened its first branch in Manhattan at 299 Park Ave., one of three branches planned for New York City. The other New York branches in the works are at 136 E. 57th St. and 960 Avenue of the Americas. BankUnited also opened a branch in Melville, N.Y, in March. Visitors to the bank’s website are greeted with the slogan: “We Don’t Have Time For B.S.” Kanas spoke with Banking New York about his thoughts on the state of the banking industry. BNY: You’ve been quoted as saying, “A lot of people are probably betting against me, thinking that I’ll fail. I love that.” Why are people betting against you? Kanas: Our competitors are understandably concerned and don’t believe that we can recreate our successful model.

30 | Banking New York

BNY: Do you still focus on winning business accounts “by getting their deposits, and the loans would follow?” Kanas: Yes, we are a relationship bank and are attracted to doing business on both the deposit and loan side. BNY: Do you think smaller banks will be able handle the burdens placed on them by Dodd-Frank and the like? Kanas: The combination of all the new regulations puts great pressure on all banking institutions, but disproportionately on the small banks. BNY: What do you think about mobile banking and technology to reach customers? Kanas: Mobile banking is a very important component of consumer banking today and will continue to be in the future. BNY: Any thoughts on Mary Jo White heading the SEC? Kanas: She is a good choice. BNY: Are options such as the Amex-Walmart Bluebird card a threat to banks? Kanas: They are particularly threatening to very large universal banks, which derive significant revenue from consumer card business. BNY: What about credit unions and check-cashing facilities? Kanas: Credit unions will continue to have a competitive edge on banks since they have an income tax advantage. While fewer people are using paper checks, check cashing facilities will remain important for those who do. BNY: Banks have been blasted for raising fees? Any other options? Kanas: The cost of regulatory cost is growing every day and net interest margins are at historic lows. In order to justify the cost of capital, banks will continue to develop fee income. BNY: If you weren’t a banker, what would you be? Kanas: Lead singer for the Rolling Stones.

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Bottom Line “It has saved our bank numerous times.”

In the early ’80s, Mr. Heitkamp and ValueBank Texas were looking for a network partner that understood the needs of a community bank. PULSE was the perfect fit. Over the years, ValueBank has utilized many of our innovative products and services to help them grow. When it comes to fraud detection, they rely on DebitProtect®. It provides early warnings on fraudulent card activity, which has helped them significantly reduce their fraud losses. That’s good for ValueBank’s bottom line. “If you’re not using DebitProtect, you better take a good look at it.” To take a good look at DebitProtect and hear what else Mr. Heitkamp had to say, go to: pulsenetwork.com/debitprotect-bny