Banking New York 3Q 2013 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • THIRD QUARTER 2013 • VOLUME 29

HITTING YOUR MARK VS. DOING THE RIGHT THING

BERKSHIRE BANK IS BOOMING ONLINE BANKS DECLARE WAR ON FEES FICALORA GOES HIS OWN WAY

+INSIDE: Developments in Fair Lending | Getting Ready for the Sale | Reducing Costs Through Technology Produced in partnership with the Independent Bankers Association of New York State

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BANKING NEW YORK Volume 29 | Third Quarter 2013

HITTING YOUR MARK VS. DOING THE RIGHT THING

PAGE 16

Photo Credit: John Griffin/SBU Office of Communications via Flickr

04 FROM THE EDITOR

We’re from the Government, and We’re Here to Help

18 MASTERING COMPLIANCE One Master Plan Can Save Time, Money

04 2013 STATE LEGISLATIVE SESSION: IMPACT ON NEW YORK COMMUNITY BANKS

28 CRUNCH TIME

06 F ROM THE PRESIDENT & CEO

Preparing for Basel III

30 TECH FOCUS

To Build a Better Future

Responsibility for Today’s Technologies Starts in the Board Room

08 LEVERAGING NEW TECHNOLOGIES TO REDUCE COSTS

32 WHO’S NEWS Berkshire Bank Expands

12 DEVELOPMENTS IN FAIR LENDING

34 Q&A WITH JOSEPH FICALORA Counter-Intuitive Lending

16 STEPS FOR PREPARING YOUR BANK FOR SALE

36 TENTH AVENUE FEES-OUT

CONTRIBUTING WRITERS THIS ISSUE 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

Financial Firms, Online Banks Working to Protect Customers from Bank Fees

38 SMALL CHANGE

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

©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

Scott Ellison MARKETING COMMUNICATIONS MANAGER

Michelle Laczkoski GRAPHIC DESIGNERS

Amanda Martocchio & Tom Agostino

Third Quarter 2013 | 3

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

We’re from the Government, and We’re Here to Help

oseph Ficalora, interviewed in this issue, has some clear-cut ideas on the effects of government intervention on community banks. He’s president and CEO of New York Community Bank, the 20th largest holding company in the country. He’s also known for decades of successful lending in the multifamily rental market in New York, which some in more luxurious financial segments might regard as tantamount to getting blood out of a rock. No bank regulator would allow a bank to do today what Fannie and Freddie have been doing since they went into conservatorship in 2008, Ficalora says. Back then, they had 50-odd percent of the market of one- to four-family housing, and since then, have expanded it to 90 percent, by doing loans that no one else would make, at the longest terms in history at the lowest rates in history. Any regulator who reviews a bank profile and thinks 30-year lending at today’s rates is not viable, should be looking at the federal government and stopping them from doing it, Ficalora says.

Regulatory requirements on assessing ability to repay has increased the risk burden for banks. Stricter lending standards are crowding out many first-time homebuyers, while investors buy up large numbers of foreclosed properties. This contributes to transforming the one to four family housing market into a rental market rather than an owner-occupied market. You’d think that a market that creates more renters would make Ficalora happy, but it doesn’t. The current situation reduces the opportunity of the average person to build equity to upgrade to a better home. The health of the real estate industry, Ficalora notes, depends on sustainable demand in all sectors. ■

Christina P. O’Neill Editor, Banking New York The Warren Group

LEGISLATIVE WRAP-UP | By Stephen W. Rice

2013 State Legislative Session: Impact on New York Community Banks The 2013 session of the New York State Legislature ended in late June in yet another late-night wrap-up. When the dust cleared, IBANYS had succeeded in obtaining passage of a number of our priority issues, and in opposing and fending off a number of other proposals that would have had a negative impact on community banks.

y way of brief summary, IBANYS succeeded this session in getting a number of our legislative agenda bills passed, including legislation that will double the amount of state funds community banks can 4 | Banking New York

hold under the community bank deposit program, from $10 million to $20 million. We also succeeded in gaining passage of the bill to conform New York’s state law to federal changes enacted last winter, eliminating the

requirement that banks post duplicate fee disclosure signage at ATM facilities, which already display disclosures on-screen. And, we also succeeded in persuading the Legislature to cut in half the proposed increase regarding the ATM safety reporting requirement, from the proposed quarterly reports down to twice a year. As in most years, considerable effort was expended in opposing and stopping a number of proposals that continued on page 17 

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

To Build a Better Future The Independent Bankers Association of New York State celebrates four decades of service this year at our 40th Annual Convention.

n the summer of 1974, IBANYS was formed to ensure that small, independent local community banks in New York state had their own voice and organization. It would be a tumultuous year – the second year of a bear market for stocks that heralded the recession of the 1970s. That summer, President Richard Nixon resigned as a result of the Watergate scandal; inflation was building, the result of the 1973 oil crisis that drove gas prices from 33 cents a gallon to 50 cents a gallon, which pushed prices and wages up across the board. Manufacturers’ price lists became outdated weeks after they were printed. Demand for housing dropped, despite federal efforts to support it, as consumers struggled to pay for the basics. And U.S. troops would be in Vietnam for another year. The New York banking community was roiled by the disruptive failure of Franklin National Bank, at the time the nation’s 20th largest bank. Franklin National was declared insolvent under allegations of mismanagement and fraud in what was to date the largest bank failure in U.S. history. If there was ever a time that small banks needed a voice, it was that year. Today, IBANYS supports its member banks through endeavors such as regional meetings, which have been attended by more than growing numbers since their reinstitution in 2012. Our Enterprise Risk Management Program presents real-life scenarios involving risk, stress testing, and losses. The CFO Peer Council focuses York 6 | Banking BankingNew New York

on best practices, financial software, insurance issues, and more. We have brought the association into the social media age through a weekly e-newsletter, the publication of op-eds, online user group forums for CFO and Compliance Peer Groups, and partnering with The Warren Group to produce the quarterly publication you are now reading. Through our government relations endeavors, we have represented community banks’ interests regarding banking and corporate taxes, as well as New York’s conformity with Dodd-Frank regulations; regulatory burden; debit rules, commercial lending, and more. We also supported the Communities First Act, to reduce regulatory burden on community banks, and have urged Department of Financial Services Superintendent Benjamin Lawsky to call for exempting community banks from the Basel III capital proposals. Going forward, and as the world gets smaller, there will probably never be a time free of some sort of economic challenge. But community banks and the neighborhoods they serve can stand strong if they have the proper tools to build a better future. And that’s what IBANYS is here for. ■

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 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 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

Frank J. Capaldo President and CEO IBANY

Linda Gregware Administration & Member Services

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NEW BEHAVIORS | By Trent Fleming

Leveraging New Technologies to Reduce Costs

As you invest in new technologies, much of the focus is on the sign-up phase – getting customers to sign up for mobile banking, e-statements, or Internet banking. Clearly, it is important to get folks signed up as the first step, but that’s not the desired result – the intent is to get customers to adopt behaviors that reduce your operating costs, and improve customer satisfaction.

ffective employee education and targeted marketing campaigns can help you to achieve your goals. Let’s look at four currently popular technologies as examples: Mobile Banking

While you certainly need to have mobile banking from a competitive standpoint, it is not until a substantial percentage of your customer base begin to actively use mobile banking that you will see cost benefits from the technology. Measuring unit costs is difficult. However, as customers become more comfortable with using their mobile phones to perform increasingly complex banking functions, visits to your 8 | Banking New York

branches and calls to your call center should decline. This will lower the cost of serving customers, and increase customer satisfaction, as they are able to quickly and easily handle many of their banking needs with no outside help. Our society is increasingly reliant on mobile devices, so it is important that you reserve your “place” on these devices. You will then be poised to offer additional mobile based services. E-Statements

E-statements offer you a significant cost savings, every month, over paper statements. Thus, getting customers to accept electronic statement delivery is a worthy goal. Think about the number

of times companies that you do business with (utilities, delivery companies, etc.) encourage you to accept electronic statement delivery. Your customers are getting this pressure from all sides, and most are willing to go along with it, for everything from cost to privacy reasons. As a bonus, estatement delivery paves the way for delivering other notices electronically, reducing costs and improving customer service (same day notification of returned items, for example.) In general, you should be able to reduce the costs of statement production by at least 50-75 cents per account, per month. Do the math. You want to save this money, and your customers want electronic statements. In addition to straightforward promotion of e-statements, you should include e-statements as the standard offering for new accounts, and use them as an incentive to customers who may be seeking a free account, by including accepting electronic statement delivery as one of the required terms for a free account. Internet Banking

Internet banking, properly deployed, should greatly reduce your costs of customer service by allowing customers to handle more of their banking activities on their own. In particular, the ability to transfer funds, and see images of paid items will mean that, like mobile banking above, your customers require much less call center contact to address their banking needs. This reduces your costs and improves customer satisfaction. Another key part of Internet banking is bill pay. Many banks have had poor experience, penetration wise, with bill pay, as their initial offerings were cumbersome, required advanced payment, and may have even cost extra to use. The reality is this – many of your continued on page 10 

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customers have been driven to on-line payments through the biller’s sites, and won’t change their habits unless you find a way to make it easier. (Aggregation of bills on a handheld device

lar with customers. Generally, when banks promote debit card utilization, it goes up in response. When promotions cease, it then levels off – it does not go back to prior levels. Thus, we

A key way to influence customer behavior is to combine mandatory use of selected products with the promise of free checking.

costs, and may even increase your interchange income. Continuous promotion of debit cards is always productive. Don’t overlook debit cards for your businesses, as well. Most ATM/ EFT providers offer you a better interchange fee on such cards, and transactions are usually larger, so there is good revenue to be had. Checking Account Offerings

might have a shot.) For now, concentrate on those of your customers who are still check writers, and promote the ease of bill pay to them. Each time you convert a check to an electronic form of payment your transaction costs go down significantly. Debit Cards

Debit cards are immensely popu-

can acquaint usage with adoption. Even the most expensive debit card transaction (customer enters their PIN) is significantly less expensive than processing a check. Signature based debit card transactions actually generate revenue, via interchange fees. Efforts to convert check writers to debit card users will, at a minimum, reduce your transaction processing

A key way to influence customer behavior is to combine mandatory use of selected products (like e-statements and debit cards, for example) with the promise of free checking. In this way, customers can choose to avoid monthly fees for account processing, and agree to use those products and services that will help you to reduce costs associated with processing those accounts. Promoting New Services

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As you plan to implement new technologies from an operational standpoint, it is essential that you also have a marketing plan. Employees are the key: If you have knowledgeable and enthusiastic employees, you can sell anything to your customers. The good news is, you are not in a “hard sell” mode. Most of the newer products are already of interest to your customers, and you need only make them aware of the product’s availability to get acceptance. E-statements do require a bit more work, but proper promotion will build good excitement and acceptance. Especially if you already have some of these products in place – and you certainly do – promoting them more effectively is a low cost, high return effort. ■ 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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UPDATES FROM THE DOJ | By Peter Weinstock and John Delionado

Developments in Fair Lending In response to the recent housing and foreclosure crisis, the Department of Justice (DOJ) has made fair lending issues a top priority. In 2010, the DOJ established a Fair Lending Unit in the Civil Rights Division’s Housing and Civil Enforcement Section in order to devote more resources to fair lending enforcement.

n the attorney general’s 2010 Annual Report to Congress Pursuant to the Equal Credit Opportunity Act dated April 5, 2011, the DOJ indicated that in 2010 it had 60 active investigations and received 49 referrals from regulatory agencies involving a possible pattern or practice of discrimination – more than the DOJ received in the last 20 years. To compare, from 2001 through 2008, the Peter Weinstock DOJ received only a combined total of 30 referrals involving race or national origin discrimination. Of those 49 referrals in 2010, 26 involved allegations of discrimination John Delionado based on race or national origin. The increased number of referrals to the DOJ is a direct result of deliberate and aggressive steps taken by these financial institution regulators within the fair lending context. The DOJ is targeting specific discriminatory lending practices, including, but not limited to: • Discrimination in the underwriting or pricing of loans. • Redlining through the failure to provide equal lending services to minority neighborhoods. • Reverse redlining through the targeting of minority communities for predatory loans. 12 | Banking New York

• Steering minority borrowers into less favorable loans. • Marital status, gender and age discrimination in lending. The discriminatory lending practices at issue can take the form of either intentional discrimination (e.g., discriminatory underwriting criteria, such as requiring that borrowers speak English) or discrimination manifested by the disparate treatment of borrowers (e.g., statistical variations showing that borrowers of a protected class received less favorable loan terms when compared to borrowers of a non-protected class). Many of the investigations that have been referred from financial institution regulators to the DOJ have been based upon a review of data available under the Home Mortgage Disclosure Act (HMDA). This HMDA data has allowed regulators to isolate issues relating to the pricing of mortgage loans, the fees of mortgage loans and the difference in loan products, as well as issues relating to the location of the borrowers, otherwise known as red-lining. However, the review by financial institution regulators is not limited to only HMDA reported loans, but also includes unsecured and secured (whether by vehicle or some other collateral) loans. Notwithstanding the number of issues that can potentially arise from a fair lending examination, we think that there are a few practical steps a financial institution should take to help prepare itself for the examination and

minimize the potential for referral to the DOJ and an enforcement action. We generally divide the fair lending examination into three phases. The first phase involves the regulatory examination process which includes the extraction of loan data, interviews with the financial institution’s personnel and the formal exit interview conducted by the financial institution regulator. The second phase includes the financial institution’s response to a suspected fair lending issue, otherwise known as responding to a “15-day” letter. The third phase of the fair lending process involves production and negotiation with the DOJ in the event a referral has been made by the financial institution regulator. In each phase the financial institution is given the opportunity to correct any deficiencies and demonstrate to the regulators that it is not engaging in discriminatory practices. We discuss some of the steps that a financial institution can take in each phase below: The First Phase: Examination Process, Extraction of Data and Interviews

During the first phase of the fair lending examination, it is critical for the financial institution to understand what the financial institution regulators are looking for. First and foremost, they are looking for accurate data. In order to assess whether or not the financial institution has accurate data available to it, the financial institution should go back and do a spot review of its electronic data against some of the actual loan files. We have often found that a financial institution’s electronic system automatically updates and replaces key elements of the loan data without the financial institution’s knowledge. For instance, when loans are renewed and continued on page 14 

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a new FICO score is recorded the financial institution’s electronic system often retains only the new FICO score, thereby overriding the historical score(s) that may have been previously recorded over the course of the lending relationship. The impact of such data changes can be significant and result in inaccurate analysis of the data by the financial institution regulators. The financial institution should also compile a complete list of all the materials and factors that are used by the financial institution in setting pricing. An incomplete list will not serve the financial institution’s best interests, potentially resulting in an inaccurate assessment by the regulator. Unless the financial institution informs the regulators that it uses a particular risk factor in making and setting its prices, the regulators will not know it and will not use that risk factor in analyzing the data. The financial institution regulators will also seek to conduct interviews of the financial institution’s personnel, in particular the loan officers. It is important that the financial institution’s loan officers are familiar with the policies and processes used at the financial institution to approve loans to ensure that they are not communicating inaccurate information to the regulators. It is critical that the loan officers convey all of the factors and materials actually considered and used by the loan officers in setting price. At the time of the exit interview, the financial institution regulators will express some of their views on the financial institution’s policies and the results of the personnel interviews. The regulators will also ask the financial institution’s management to validate the regulators’ findings and/or address any issues the financial institution may have with the conclusions reached by the regulators. This is the financial institution’s opportunity to clear up any misconceptions and ensure that the regulators 14 | Banking New York

are aware of all the factors that should be considered as part of the fair lending examination. It does not serve the financial institution’s best interest to oversimplify things to please the regulators. If the financial institution engages in a multi-staged process in setting pricing that allows for discretion within certain parameters, the financial institution should expressly say so. Ultimately, the financial institution regulators will compile the information from the written documentation and interviews to create a package of information for the agency’s fair lending task force. This information will be reduced into a series of variables in a regression analysis that the financial institution regulators will use to assess whether or not there is a disparate impact on protected classes of individuals. The regulators are obligated to include in this regression analysis all factors that the financial institution considers in setting pricing. That is why it is essential that the financial institution provides the regulators with a complete list of all the factors considered by the financial institution. The goal of the regression modeling analysis is to control for all legitimate pricing factors and test whether the financial institution is applying those legitimate pricing factors in a uniform way such that members of protected classes are treated the same as members of non-protected classes. In the event that the regression analysis comes out with a statistically significant differential between the protected and non-protected classes that is not explained by legitimate pricing factors, the regulators will likely share these results with the financial institution and ask the financial institution for an explanation in writing.

financial institution regulators conveying that the regulators have seen an unexplained differential in the price between the protected group and nonprotected group, the financial institution should immediately begin preparing a detailed response. Among the things a financial institution should consider is retaining a firm that has the ability to run its own regression analysis to test the appropriateness and accuracy of the financial institution regulator’s model. The financial institution should request from the regulator not only the back-up documentation used to reach the financial institution regulators’ results, but also the back-up “codes” and the “model” that the regulators purported to use. The models that the regulators use are fairly similar and involve an attempt to normalize a number of legitimate pricing factors within a single regression model per portfolio of loan. The financial institution should first review the data the financial institution regulators used to build their model to satisfy itself that the data used is what the financial institution actually provided and is complete and accurate. If the data is inaccurate, then the results of the regression analysis, and therefore, the conclusions by the financial institution regulators will also necessarily be inaccurate. The financial institution should then seek expert guidance as to whether the model the regulators have built accurately captures all the factors and information the financial institution conveyed to the regulators during the examination process culminating with the exit interview. As with inaccurate data, an inaccurate model can also lead to an inaccurate assessment of the financial institution’s lending practices.

The Second Phase: Responding to a ‘15-Day’ Letter

The Third Phase: Referral to the DOJ

In the event that a financial institution receives a “15-day” letter from the

In the event that the financial institution regulators find a potential pattern or practice of discrimination, the

regulators will refer the matter to the DOJ. Upon receiving a referral, the DOJ must determine whether to file a lawsuit in federal court or return the matter to the financial institution regulators for administrative enforcement. The DOJ will receive from the financial institution regulators all of the compiled information from the fair lending examination along with the results of the regression analysis. The DOJ will contact the financial institution and initiate its own investigation and analysis, resulting in the production of additional information by the financial institution. During this phase, as with the earlier phases, the financial institution must engage in a process of validating the accuracy of the additional data produced to the DOJ. The financial institutions must normalize the additional data to make sure that this data is consistent with the

information previously provided and consistent with the actual factors employed by the financial institution in making pricing decisions. And, as with the second phase, the financial institutions should engage expert consultants to analyze the data and determine the affects, if any, the additional data may have upon the models used by the DOJ. After a full analysis of the data is completed, the financial institution should assess whether a meeting with the DOJ would be beneficial to make an affirmative presentation. In sum, the DOJ’s current emphasis on targeting financial institution’s for potential fair lending issues is unprecedented. Fair lending investigations and enforcement actions are nuanced and involve a unique focus upon statistical regression analysis in assessing whether or not there is a disparate impact on protected classes of individu-

als. As such, great care must be taken by financial institutions to ensure that both the regulators and the DOJ are provided a complete and accurate picture of the lending process and pricing criteria employed by the financial institution. Further, engaging consultants familiar with the statistical models and the investigation practices employed by the regulators and the DOJ is highly recommended. ■ Peter G. Weinstock is the practice group leader of the financial institutions corporate and regulatory practice group at Hunton & Williams LLP. He writes and speaks frequently on topics of interest to community bankers. He may be reached at (214) 468-3395 or pweinstock@hunton.com. John J. Delionado is s a partner in the litigation and intellectual property group at Hunton & Williams LLP in Miami, Florida. He may be reached at (305) 536-2752 or jdelionado@hunton.com.

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The Right Decision

Third Quarter 2013 | 15

M&A PRIMETIME | By Peter Weinstock

Steps for Preparing Your Bank for Sale Bankers are increasingly discussing M&A in light of the brutal net interest margins, compliance costs and tepid growth in lending. But it’s not just the big banks that are doing so.

efore your bank’s board and management place the bank on the market, they must see that the bank is ready to be sold. Doing so maximizes returns (both price and other considerations). Here are the steps: Define the selling horizon. Management and the board must determine when they intend to sell the bank. Certain actions that are sensible if a bank will be sold quickly may Peter Weinstock become counterproductive over a longer selling period. Maximize earnings. A bank, as the selling bank, should take all reasonable steps to maximize earnings. Banks are bought and sold based on earnings more than on prospects for earnings. So any reasonable steps that increase earnings increase the purchase price. Attack sacred cows. Put in place gold, silver and tin parachutes/severance policies. What is in place gets paid. Banks that wait until an acquirer has been identified will have difficulty developing such employee protections without a trade-off on the bank’s sales price. Avoid capital investments, branching and new activities. There are specific reasons for avoiding these three activities: Capital investments. Your bank should take the approach of homeowners who are preparing to sell: They would avoid adding a swimming pool because they will not get their money out of the investment; but, they would paint the house because it increases the value of the house by more than the cost of the paint. In the same way, your bank should avoid capital investments unless such investments have 16 | Banking New York

an almost immediate payoff. Branching and new activities: You should avoid engaging in new activities or establishing new branches because these activities tend not to become a net contributor to your bank’s profitability for some time. A typical branch does not become profitable for 12 to 18 months after it has been established. Even then, it takes additional time for your bank to recoup the opportunity costs associated with devoting funds to establishing the branch instead of investing them in earning assets. Engaging in new activities usually has the same effect. Negotiate data processing agreements with a sale in mind. Investments in new technologies or lengthy data processing agreements almost always reduce the purchase price. The prospective purchaser and acquisition target seem never to use the same data processing system. So any systems or equipment the selling bank purchases reduces its earnings and provides little, if any, value to the prospective purchaser. Selling banks also must avoid longterm data processing services agreements. These agreements often include extremely high liquidated damages provisions in case there is a change in control of the selling bank. A selling bank’s board and management should try to keep services agreements relatively short-term. If they are unable to do so, they should insist on eliminating the liquidated damages provision in determining the price to be paid for the selling bank. Reduce unproductive and employment expenses. If the selling horizon is short, the selling bank should reduce its level of employee expenses. It often can accomplish this simply through attrition, although sometimes a more aggressive approach might be in order.

For example: If a bank employee’s performance is unacceptable, it makes sense to terminate that employee sooner rather than later to achieve higher short-term earnings and a higher purchase price for the selling bank’s shareholders. If the prospective purchaser dismisses the employee, then the purchaser’s shareholders benefit. Defer expenses. To the extent possible, the selling bank’s management and board should defer expenses, if not actually cut them. For example, if a bulk order of bank forms provides absolutely no benefit to a prospective purchaser. You generally also can decrease advertising and public relations and consulting services without any short-term negative ramifications. Of course, if the selling horizon is longer term, management and the board should be more judicious in deciding what to cut. Enhance the quality of the bank’s documentation. Homeowners might paint their house to improve the prospective purchaser’s impression of the house; similarly, the selling bank’s board should insist on superb documentation to make a good impression. Management should review loan files and should take a concerted approach to reducing documentation exceptions. There are few issues that concern a prospective purchaser more than poor documentation and files. Such concerns can cause a prospective purchaser to reduce the price it is willing to pay so that it has some reserve for contingencies. Identify problem loans. The selling bank’s management and board should be able to advise the prospective purchaser of all problem loans in the bank. Again, nothing causes a prospective purchaser more lingering concerns than to discover unrecognized problems in the bank’s loan portfolio. Sell other assets. The selling bank should liquidate all of its parcels of other real-estate owned (OREO) and other assets to the extent it can do so at reasonable prices. Prospective purchasers typically discount the value of OREO significantly.

LEGISLATIVE WRAP-UP | continued from page 4

If the selling bank can sell a parcel of OREO at 10 percent less than the price it believes the property is worth, its shareholders still will benefit. It would not be uncommon for a prospective purchaser to value that same parcel of OREO at 2550 percent of book value. So the selling bank’s shareholders achieve a net gain equal to 15 percent of the book value of the property. Manage the investment portfolio to avoid risk. Management and the board should require that investment portfolio managers focus mainly on short-term maturities and that they avoid particularly risky investments. This way, unexpected changes in market conditions (e.g., fluctuations in interest rates) will have less of a negative impact on the purchase price. Consider corporate governance issues. For instance, consider making mandatory, rather than just permissive, indemnification provisions under the articles or certificate of incorporation; moreover, if there are outstanding ownership issues such as whether prior stock issuances were consistent with corporate law (were shares duly authorized and issued). Address compliance issues. Regulators are raising the selling bank’s compliance issues during the buyer’s regulatory application process. Depending upon the nature and extent of such issues, buyer’s applications are being bogged down. In some cases deals are being derailed if the regulators do not believe such issues are able to be addressed by buyers. Whether and how to hire a broker. Once a bank has decided to sell, it will need to address how to orchestrate the sale and the actual selling process. As part of such efforts, the board will want to evaluate whether to hire a broker and, if so, how to maximize the benefits of such decision. ■

would have had a negative impact on community banks. More than a few involved credit unions, including legislation that would have allowed Stephen Rice them to accept municipal deposits; another proposal that would have allowed them to accept state deposits under a proposed new program modeled after the Community Banks Deposit Program; and one that would have allowed low-income credit unions into the Banking Development District Program, among many others. The Legislature did approve legislation sponsored by the two Banks Committee chairs, Sen. Joseph Griffo and Assemblywoman Annette Robinson, that will benefit a small number of credit unions (only those with state charters) by seeking to expand membership fields and some powers. However, IBANYS will continue to make our arguments as to why this would be bad public policy, and seek a gubernatorial veto of this bill. Another bill that passed the Legislature was sponsored by Sen. Jeffery Klein and Assemblywoman Helene Weinstein, and was introduced at the request of the Office of Court Administration and the attorney general. It requires a complaint on a foreclosure against residential property to be accompanied by certification by the plaintiff ’s attorney that there is a reasonable basis for the action. We also succeeded in helping to stop the proposed “whistleblower bill” that would have provided for payment of a bounty to bank employees who reported violations of the Banking Law. Other initiatives stopped included one that would have significantly increased the paperwork burden related to requiring renewal of certain

Peter G. Weinstock is the practice group leader of the financial institutions corporate and regulatory practice group at Hunton & Williams LLP. He may be reached at (214) 468-3395 or pweinstock@hunton.com.

branches within banking development districts. Finally, the 2013 session was also highlighted by the release of the Community Bank Report by the State Department of Financial Services. The study found community banks provide most of the loans for New York’s small businesses and farms and are thus essential to job growth and the strength of the state economy. Even though community banks have less than a quarter of all bank assets in New York and are competing against much larger national banks, they generate more than half of all small business loans and almost all the small farm loans in the state. It also noted that New York’s community banks grew during the financial crisis by continuing to lend to small businesses and homeowners. In releasing the study, Gov. Andrew Cuomo noted: “Community banks represent a strong economic engine that drives growth in New York and their performance is remarkable. Small business is the engine of job growth and most small business loans come not from the big national banks, but from community banks.” State DFS Superintendent Lawsky commented: “Community banks focus on the unique needs of their communities. They build strong customer relationships, which help attract local retail deposits. These banks take deposits from their communities and then typically recycle them back into their communities in the form of loans.” We applaud the findings of the study, and the sentiments expressed by the governor and superintendent. We believe they hit the nail right on the head! ■ Stephen Rice is vice president, director of government relations and communications, for the Independent Bankers Association of New York State. Third Quarter 2013 | 17

MASTERING COMPLIANCE | By Stephen R. King

One Master Plan Can Save Time, Money • A routine periodic re-evaluation of whether or not the regulation applies to your institution. • A process to include the C-suite management team in the analysis of the applicability of new regulations to allow them to be up to date on the regulatory burden and risk management issues as they make decisions on new products and services.

Communicate the Responsibilities

here’s no question that the financial services industry is besieged by regulations right now. The Dodd-Frank Act alone has already created a number of new regulations, and over the next few years, several more will roll out that will keep financial institutions busy. This is on top of other regulations and laws targeted at financial institutions that are scheduled to come online in the near future. Approaching this flurry of regulations by ramping up and creating individual plans to prepare for each new regulation unnecessarily exhausts resources, time and staff. There is a better, more efficient way to prepare your financial institution: Create one master plan to prepare for compliance that can be adapted and applied to any and all regulations, laws, and major changes to your financial institution. By bringing together all of the elements that follow, you can create a solid master plan that will serve as a steady and consistent guide to meet the challenges of coming into compliance with any new regulation.

18 | Banking New York

Identify Your Requirements It’s important that your financial institution fully understand its obligations under each new regulation. Your master plan should have a clear process for identifying your requirements at the broader level of the financial institution overall as well as with new products and services. The plan should include clear steps to capture the analysis and reasoning behind your findings. This part of the plan should include: • The process and people needed to decide whether or not a new regulation or specific requirements applies to your financial institution overall as well as new products and services. • A system to analyze and document the reasoning and decisions as to why a regulation or any particular requirement does not apply. ºº This documentation will be extremely useful if your institution is audited by regulators and you can show sound and solid reason for believing the regulation does not apply.

One of the most important elements of your master plan is how it communicates responsibilities to management, employees and vendors. These responsibilities include defining who is responsible for writing the policies and procedures; who is responsible for creating the process and controls; and who is responsible for software and systems. It’s incumbent on the financial institution to make sure that vendors are also making the necessary changes to ensure that they, and the services they provide on your financial institution’s behalf, are in compliance. Your master plan should assign responsibilities to oversee areas such as: • The software-as-service vendors to make sure they are updating the software and integrating the necessary changes for compliance. • The vendors producing paper and electronic communications with customers or members to make sure things like the necessary disclosures are being included in all communications. • The third-party company that is servicing the loan that originated in your financial institution. • The closing attorneys who work on mortgages issued by your financial institution.

continued on page 20 

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MASTERING COMPLIANCE | continued from page 18

Detailing the Action Steps To ensure that your financial institution adapts to new regulations as efficiently and effectively as possible, it’s

lines, and with the entire institution. There are a number of areas to consider when developing the communications section of your master plan.

Encouraging and facilitating communications across business lines is very important to eliminate silos and promote cooperation across the institution. important to assign leadership roles, create timetables and assess resources. By doing this, you are creating an action plan within your master plan for compliance. Some of the things to be considered in your action plan are: • Assigning a project manager to oversee the process of moving into compliance, assigning roles to staff, and coordinating the activities that will occur. • Creating timetables and deadlines that make the process of coming into compliance orderly and efficient. • Anticipating and accounting for the resources it will take to implement the changes needed for the regulation and how this allocation of resources will work across business lines. To make this action plan effective, you must assign responsibility for the tasks; determine that resources needed to move into compliance are available; and create a task force to implement the plan.

Communication is Key Clear lines of communication are critical to effectively implement the master plan and successfully adapt it to a new regulation, law, or any significant changes to the institution. This means communicating up and down the management hierarchy, across business

Communicating with the appropriate staff and managers about their responsibilities and roles is important, but it’s equally important to communicate upwards to senior management to keep them informed, involved and on track. They must know about the options related to the latest regulations so they can be part of the decision-making team on how to comply, or whether or not to pursue a business opportunity in relation to their risk appetite. They must be educated on the compliance process in order for you to secure their buy-in on the plan and steps. They should be made aware of the resources needed to execute the steps toward compliance to make them more willing to provide them to you and your team. Encouraging and facilitating communications across business lines is very important to eliminate silos and promote cooperation across the institution. For instance, the lending department should be communicating next steps to the IT department for systems needs, as well as with the audit department for testing needs. Retail (if the branch staff have lending responsibilities) should be communicating with HR about training. It’s essential to work with representatives across all business lines to periodically get their input to update the master plan and keep it current and relevant to each department.

Communication also comes in the form of training in the new protocols to ensure that the steps to remaining in compliance are executed properly and become a matter of habit. Your team will need to be trained in new regulatory requirements, new processes and controls, and new software or relevant software updates.

Testing for Efficiency Creating and implementing a program for testing your compliance protocols is one of the most important elements to build into your master plan. There are some important steps you should follow to ensure your testing is a productive as possible. Before the date that the new regulation takes effect, it’s highly recommended that you test the new protocols resulting from changes and decisions related to the new compliance procedures to make sure that they work before the deadline. After the regulation is in place, and your new protocols and changes are active, you must test again. There may be effects that the new protocols have on certain parts of the institution that may not have been anticipated that will come to light only after going live. After testing, you will need to make adjustments to fine tune your protocols so they work as effectively as possible. Some of the areas you will most likely need to make adjustments are audit programs, monitoring programs and risk assessment – new risks may be created that will change the risk rating of an area.

Mastering Your Future Once created and refined, your master plan will see your institution through the many regulations coming your way and allow for more time, resources and people power to be dedicated to business goals and growing the bottom line. ■

Stephen R. King, JD, AMLP, is the director of the regulatory compliance group at Wolf & Company, where he guides clients through federal and state banking statutes from both an operational and legal perspective. 20 | Banking New York

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Hitting Your Mark

Benjamin Lawsky’s Standard Chartered Decision Has Ruffled Feathers By Steve Viuker

VS. Doing The Right Thing

enjamin Lawsky has developed a reputation for taking on compliance problems that have festered for years. The low-key superintendent of the Department of Financial Services, an agency created in October 2011, took on Standard Chartered Plc last year regarding its handling of dollar-clearing services to Iran, a country under U.S. economic sanctions. Lawsky’s office charged that the bank’s New York office had made more than $250 billion in transactions with Iranian banks, in which information about the payee and was deleted from wire-transfer messages, in clear violation of both federal and state money-laundering law. Last year, a 2006 quote attributed to Standard Chartered Plc’s Group Finance Director Richard Meddings resurfaced on the Internet. It goes thusly: “You f---ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” The bank subsequently confirmed the expletive sentence but continued on page 24  Third Quarter 2013 | 23

I’ve worked in government and political turf battles are about agency power. And battles over who will get credit are counter-productive and impede action. — Jimmy Gurulé, Notre Dame law professor

24 | Banking New York

not the far more interesting one that followed. State and federal regulators had known of the situation since 2004, when Standard Chartered had struck an agreement with the former New York State Banking Department and the Federal Reserve, promising to correct deficiencies in its antimoney-laundering controls. Lawsky contended that the bank hadn’t lived up to the agreement. In August of last year, the DFS wrested a $340 million settlement from Standard Chartered over the Iran situation. Lawsky’s case against the bank stole the thunder from federal agencies investigating the matter, correctly citing violations of New York state law. Fast-forward to July 30 of this year. That day, at a Crain’s Business Breakfast Forum in New York, Lawsky said, “People want to classify, especially in political debates, is someone pro-Wall Street or antiWall Street? Tough-on-business or pro-business? I think taking real, appropriate, and sometimes tough action is not anti-business, it’s probusiness, because it protects our system, keeps up consumer confidence and ultimately helps prevent another meltdown. “But by the same token, a regulator who takes actions, who acts unreasonably and beats up on industry for the sake of getting attention, as opposed to real needed reforms, can be very detrimental for the system, undermine consumer confidence, undermine the wellbeing of our industries and ultimately wreak havoc on our system.”

VIOLATIONS OF STATE AND FEDERAL LAW Mark Gongloff, chief financial writer of Huffington Post Business, told Banking New York: “If I’m [Attorney General Eric] Schneiderman or [New York Governor Andrew] Cuomo, I’m going to want my fingerprints on this [Standard Chartered case] as much as possible. But I have no idea who is pushing Lawsky. And this could have been his initiative. Maybe he got a talking-to, because that hasn’t

happened again.” (Cuomo, like Spitzer, was attorney general before he was governor.) Notre Dame law Professor Jimmy Gurulé, a former undersecretary for enforcement, U.S. Department of the Treasury from 2001 to 2003 who was instrumental in developing and implementing the U.S. Treasury Department’s global strategy to combat terrorism financing, said that with respect to the Standard Chartered case, “I applaud his political courage. Standard Chartered had violated federal law and New York state law. And there was no question. It wasn’t even a close call. The violations were repeated and they were numerous and they were over an extended period of time. Lawsky was criticized for preempting the Treasury Department. My criticism is of the Treasury for dragging their feet. They should have intervened earlier. I think it was embarrassing for Treasury that it was a state official who took action and did the right thing. The question of whether Treasury and Justice were given sufficient notice by Lawsky is a minor point. I don’t believe state officials need to give the federal government notice or get their approval to move forward and take action when there has been a clear violation of state law. But I would think the push back he got would cause him to keep the Feds appraised of significant actions that overlap jurisdictions. I’ve worked in government and political turf battles are about agency power. And battles over who will get credit are counterproductive and impede action.” Writing in the Financial Times last August, Kishore Mahbubani ripped Lawsky. “Lawsky’s decision to go after Standard Chartered was flawed for three reasons. First, his decision to expose StanChart appears to have been driven by domestic political considerations, not by the merits of the case. In the strange political climate of the U.S., anyone who stands up to Iran is a hero. Lawsky has enhanced his reputation.” “Second, Lawsky’s decision undermined the move to create

Superintendent Lawsky’s objectives for the new Department of Financial Services include three main goals – keeping New York on the cutting edge as the financial capital of the world, protecting consumers better than ever before, and serving as a model of efficient government.

Photo Credit: John Griffin/SBU Office of Communications via Flickr

global co-operation among financial regulators. Finance is not a domestic industry. Billions of dollars cross borders with a mouse click. The only way to regulate this industry is through global norms and processes. That is why the Basel and other international regulations were created. Mervyn King, governor of the Bank of England, observed that while American and British regulators had co-operated on the Barclays case, in the StanChart case one regulator, but not the others, has gone public while the investigation is still going on.” “Third: Would another regulatory authority someday similarly retaliate against an American bank? It is obvious why this question did not occur to him: American power appears, to him at least, to be unassailable.”

problems with U.K. banks, but money laundering is not a British problem,” said Mann. “American banks are doing the same and worse and there are numerous U.S. banks involved in drugs cases in U.S. courts. So, what we have here is a clear political agenda that has merged with a domestic American agenda to shift financial markets from London to New York.” Boris Johnson, the mayor of London, warned that regulation in New York should not become “a self-interested attack on London’s status as the preeminent financial centre.” At the July 30 Crain’s breakfast, Lawsky said his office will soon release audits of the state and various city pension systems. A subsequent report in The Wall Street Journal targets the New York State Common Retirement Fund and the New York State Teachers’ Retirement System. “Our predecessor agency did somewhat limited reviews and published them rarely,” Lawsky said. “We’re going to change that and

MAKING NO FRIENDS In The Telegraph, John Mann MP called for a formal inquiry. “We don’t want to whitewash any potential

significantly step up the scrutiny.” And The New York Times reported that “government authorities are homing in on a lucrative loophole that allows online lenders to offer shortterm loans at interest rates that often exceed 500 percent annually, the latest front in a crackdown on the payday lending industry.” Lawsky has sent letters to 35 of the online lenders, instructing them to “cease and desist” offering loans that violate local usury laws, according to documents reviewed by The New York Times. He ordered the lenders to halt the “illegal” loans within two weeks of sending the letters. The Times also reported that Lawsky is preparing to crack down on the consulting firms that banks hire to navigate legal problems like money laundering and wrongful foreclosures, according to people briefed on the plans. His office is also continued on page 26  Third Quarter 2013 | 25

A good way to gauge how effective he’s been is by the amount of outrage he’s stirred among the folks he regulates. — Aaron Elstein, Crain’s New York Business

considering a new code of conduct for consultants. And Lawsky also has begun an investigation into pension advance firms. These are lenders that entice retirees to sign over their monthly pension checks in return for a lump sum. In May of this year, the Department of Financial Services sent subpoenas to 10 companies in the business. Aaron Elstein writes a blog called “In The Markets” for Crain’s New York Business and covers all aspects of Wall Street. “I think he’s picked really smart cases that demonstrate a good understanding of the financial system’s complexities,” he said. “A good way to gauge how effective he’s been is by the amount of outrage he’s stirred among the folks he regulates. You might recall that after he brought his case against Standard Chartered at this time a year ago, the bank’s response was to complain that he was some kind of rogue regulator. A week later, it settled for $340 million

and a few months later settled with the feds for about the same amount.” “Another case that Lawsky’s working on involving insurance companies setting up sham companies where they can lay off their risks looks extremely important,” Elstein said. “One of the ways the financial system has protected itself from those wish to change it is by not only making banks and insurers extremely large, but extremely complex as corporate structures and one of the residues of this design is lawmakers and regulators sort of throw up their hands and say, it’s all terribly complex, isn’t it? Lawsky is a rare regulator who has the patience to wade through the murk. Is Lawsky seeking higher office? Maybe! Then again, he’s never been elected to anything and I have no idea if campaigning for attorney general or something else is something he wants to do.” ■

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CRUNCH TIME | By Roxanne Emmerich

Preparing for Basel III What Smart Bankers are Doing Now

here is a growing level of alarm among bank executives about a new topic – how to make sure your capital grows and avoids risk in light of Basel III. They’re right to worry. It could be a show-stopper for those who don’t get prepared right now. Doing what you’ve done in the past and hoping for a better result is probably not going to work out well in this environment. Instead, let’s figure out what you need to do differently to make sure you don’t get caught with your pants down when the perfect storm of bad economy, increasing rates and Basel III all slam together. Here are five things to make serious progress on now, so you don’t have to lose sleep after acting too late:

STAND OUT FROM THE COMPETITION You have a mountain of evidence that you need to match rates. Lenders stampede to your door every week telling you that you’ll lose the deal unless you match the rate. But they are dead wrong if they think that rate matching will lead to anything but oblivion for your bank. Your unique selling propositions (USPs) just can’t be wimpy. Your bank has been around for 113 years. That’s great. But nobody is really going to pay up for that. Would you? And it’s nice that your lenders all return calls the same day – but that’s not worth 150 basis points more on the deal now, is it? My other favorite is, “We have good service.” That’s the price of admission, not something that’s worth premium pricing. Talkable experiences justify premium pricing, and “good service” doesn’t qualify. Not one of these tired old USPs

stands to increase what you should get paid. But these are the ones that most lenders flaunt – and then are incensed that they didn’t get paid premium pricing for them. I know you don’t believe it can be done. Tell that to the banks who have well over five in net interest margin and picked up 40 to 100 basis points in the year. They used to believe that, too.

CHANGE YOUR BELIEFS There is nothing more dangerous than a “need to be right” executive who digs his or her heels into a belief system that says it can’t be done. If you believe you can’t be paid premium pricing, you are right. If you believe you have to get that pricing, and therefore need to figure out how to be worth more, you will.

GET ONBOARD THE PREMIUM PRICING SALES SYSTEM Notice that I didn’t say, “Get sales training.” Most sales training not only doesn’t get premium pricing, but actually disengages a workforce. There are thousands of banks that have spent millions of dollars on sales training that didn’t work. That’s because sales training by itself NEVER works. Does that mean you shouldn’t do sales training? No. Just don’t do sales training that isn’t part of an integrated process of strategic planning, marketing integration, accountability, culture transformation, and leadership and management development.

RESIST THE TEMPTATION TO ACQUIRE Acquisition sounds sexy. Weak banks will be throwing the keys at stronger banks, and you might think

it sounds easier than organic growth. But think again. When you acquire, you get the bad loans, the people who made them, AND the mindsets and skillsets of the executives who caused that bank to get into the shape it’s in. You also get a culture of “usversus-them” game-playing that typically takes two years to clean up, during which your own bank’s culture goes through the shredder. Now that’s costly. Always consider organic growth first and get good at it. Then and only then should you consider picking up one of those banks at a bargain price. In order to acquire, you have to have your own house in order first – from systems of culture to hiring to marketing to sales processes, you want systems that work to create predictable and profitable growth before you risk blowing up everything you’ve built.

BUILD YOUR “PREDICTABLE SUCCESS FRANCHISE MODEL Too many banks have no systems for hiring top performing lenders, no critical drivers for every position in their banks, and no management development program to make sure people are hitting those critical drivers. Winning banks have created wallto-wall, franchisable systems. They don’t wonder if the things that lead to success are happening. They know they are. We can’t know all of the consequences of Basel III. But putting these five key concepts in place will go a long way toward protecting your bank and your profits from the worst of it. ■

Roxanne Emmerich is CEO of the Emmerich Group Inc. Contact her at Roxanne_Emmerich@EmmerichGroup.com. 28 | Banking New York

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TECH FOCUS | By Barry Libert

Responsibility for Today’s Technologies Starts in the Board Room Four Steps to Mitigating Risks and Generating Returns SOCIAL: 1.5 billion people are using social media to communicate and collaborate. MOBILE: 5 billion people use phones and smart devices to transact and interact. CLOUD: Hundreds of millions of people store personal and financial data there.

BIG DATA:

2.5 quintillion bytes of new data are created every day.

igital technologies, including social media, smartphones, the cloud and big data, have transformed our personal lives. They have enabled all of us to connect and communicate with our friends and family, manage our savings, invest and share advice no matter where we are and what device we are using. The bottom line: It’s time to turn those technologies into business benefits, particularly when it comes to corporate governance, organizational strategy and capital allocation. And the responsibility for driving that digital adoption starts (and ends) with the board. Let’s start with the facts. Every corporation, including commercial and investment banks, is today a digital corporation. Digital isn’t just about connecting employees Barry Libert and customers to improve collaboration regardless of location or device, nor is it about making investor transactions more efficient and effective. At its core, becoming a digital corporation is about delivering real value to all stakeholders – value that adds up to some $1.3 trillion annually, according to the McKinsey Global Institute. This massive opportunity exists because of four key digital technologies. The result: It’s time for board members and leaders of all organizations, and especially those that handle the finance of individuals, business and government, to reconsider and reinvent their business models as digital enterprises. Commercial boards and leaders that try to avoid a digital transformation

risk having their organizations fall prey to the speed and might of companies that make the most of today’s social and mobile networks and the big data they create. The graveyard is growing: Just ask the boards and leaders of Best Buy, Blockbuster, Kodak and the presidents of the countries revolutionized in the Arab Spring. So what are the four rules for becoming a digital corporation in the banking sector (which applies to all businesses)?

BECOME AWARE OF TODAY’S DIGITAL POWER AND POTENTIAL The facts speak for themselves. Corporations that actively deploy social and mobile technologies produce 9 percent more revenues, 26 percent more profits, and a 12 percent higher market valuation than their peers, according to research by the Massachusetts Institute of Technology and Cap Gemini. Despite these facts, fewer than 30 percent of CEOs use social media, according to CEO.com. In addition, The Conference Board and the Rock Center for Corporate Governance at Stanford University report that only 7 percent of corporate directors use big data from social or mobile interactions in the course of making decisions. Finally, research from both the University of California at Berkeley and MIT reveals that social media is a leading indicator of stock-price movement, as exemplified by the recent ruling by the U.S. Securities and Exchange Commission legitimizing the use of social media for investor communications and the recent false tweet by The Associated Press, which cost the financial markets $200 billion in less than six seconds.

Barry Libert CEO of OpenMatters is a technology investor, corporate director, and strategic advisor to boards and their leaders seeking to make the most of social, mobile, and big-data technologies. 30 | Banking New York

On Jan. 10, 2013, Kenneth I. Chenault, the CEO of American Express, announced that the company would change its travel-service business strategy and investment in technologies, cutting 5,400 people as it reallocated its capital to emphasize online initiatives. Chenault said that the travel industry had been “fundamentally reinvented” by technology. In support of this change, he noted that more than half of its corporate customers were booking flights online or via their mobile phones rather than calling an American Express representative. “Because customers are using tools directly online, we need less customer-facing people, such as travel counselors who take reservations and bookings,” said Kim Goodman, president of AmEx’s global business travel unit. Ask yourself: How aware are you and your board members and leaders of these fast-moving technologies and how are you using them?

UNDERSTAND WHAT CREATES VALUE NOW Boards and leaders have always known that their objective is to create value for their stakeholders. But those sources of value are changing. In the agricultural age, the amount of land owned and tilled was what mattered. In the industrial age, value was based on an organization’s physical assets and manufacturing capabilities. In the services age, it was based on how many people an organization employed and their billable hours. In the information age, it was quantity and quality of the software code written. In the digital age, value is a function of the size and vitality of an organization’s social and mobile networks and their ability to co-create new products and services. Boards and leaders hold a number of historical and framing biases that make it a challenge for them to see and invest in today’s intangible and often unmeasured sources of value. This is especially critical, given that less than 25 years ago, physical and financial assets constituted some 80 percent of corporate market value. Today, that amount is less than 20 percent, according to research by Ocean Tomo. As such, leaders need to rethink their capital allocation strategies. Recent research from McKinsey shows that most companies invest in the same assets year after year.

REVISE YOUR ATTITUDE ABOUT THE WISDOM OF CROWDS All leaders must fully understand and appreciate that an organization’s next big idea may come from anywhere or anyone – whether insider or not. To insure that an organization’s attitude about this new way of thinking is aligned with today’s realities, corporate directors need to ask their management teams how they are leveraging the collective wisdom of not just their own employees, but also the organization’s crowds, which include customers, prospects, investors, suppliers, and partners.

IMPLEMENT DIGITAL BUSINESS BEST PRACTICES Yesterday, companies focused on internal processes to improve efficiency. That inside-out focus worked in a world in which customers had few choices. But today, con

sumers can buy from anyone and everyone, both online and off. And employees can work for anyone anywhere – storing their knowledge and relationships in the cloud. As such, boards need to ask management how they are shifting their focus from inside-out to outside-in and implementing digital best practices, regardless of where they originated – be it in their industry or not. Based on the increasing size and power of social networks, Nike reoriented its marketing processes to outside in in order to capture the capabilities and insights of its fans and followers. To do this, Nike built Nike Digital Sport to develop products that allow the company to be with and where its customers are 24/7/365. This became the focal point of transforming Nike into a social company that has dramatically increased its revenues, while significantly cutting advertising costs. Fortune magazine reports that the strategy has generated a large increase in earnings before interest, taxes, depreciation, and amortization. Here are the three places that every corporation seeking to become a digital enterprise needs to adopt: Strategy: Corporate strategy in the banking sector is no longer about products and services. Digital is a strategic imperative for all industries and all job functions. Boards need to play an active role in ensuring that their leadership teams consider these issues and opportunities and present plans about how they are investing in social, mobile, cloud, and big-data technologies. Research from Cap Gemini shows that social enterprises shift market and operating risk to other less-digitally savvy companies. Leadership: The concept of management as we all know it is quickly losing its power in a world in which everyone has a voice – including customers, employees, partners, and investors. Social technologies allow people to say and publicly share whatever they want about an organization, its leaders, and culture. In the context of increasing demand for accountability, transparency and open approaches involving all stakeholders, corporate directors need to think anew about their board composition and competencies. Although many have done a good job embracing diversity, most still lack members with today’s technology and strategy skills – this according to research by Spencer Stuart. Governance: The future for boards is less about traditional governance and regulatory compliance, and more about network alignment, capital reallocation to new sources of value and technology, and new strategies. Looking in the rear-view mirror of financial reporting will only go so far. Today, boards and CFOs must understand and rely on social intelligence about the future desires and needs of their stakeholders. The bottom line: Boards and leaders of all banks (regardless of size and client base) need to join the ranks of Amazon, American Express, Google, and Nike and become winners in their industry by becoming digital corporations. ■ Third Quarter 2013 | 31

WHO’S NEWS | By Laura Alix

Berkshire Bank Expands Mass.-Based Bank Acquires 20 BofA Branches in New York

erkshire Bank is writing the latest chapter in the story of its everexpanding geographical footprint with its recent acquisition of 20 Bank of America branches in upstate New York. Executives at Berkshire Bank announced the deal late in July, just a day ahead of their second-quarter earnings release, which president, chairman and CEO Michael Daly characterized in a conference call as “extremely disappointing.” According to terms the bank made public, Berkshire Bank will assume approximately $640 million in deposits and $5 million in loans. Berkshire paid a deposit premium of 2.25 percent, or roughly $14.4 million, for the acquisition. And the deal will increase Berkshire Bank’s market share in the Central New York region from 5 to 8 percent. The acquisition, which is still subject to the requisite regulatory approvals, is expected to close in the

first quarter of next year. Those branches were packaged together and sold as Bank of America’s Central New York Region, said Tami Gunsch, Berkshire Bank’s senior vice president of retail banking. In other words, Berkshire Bank couldn’t have chosen just a few of those branches and Gunsch said furthermore that that wouldn’t have made much sense. She added, “In 2011, we acquired Rome Savings Bank, which gave us five branches in the Rome area. These additional branches will really help us fill in our footprint along I-90 connecting Western Massachusetts and New York.” At the end of 2006, Berkshire Bank’s assets totaled around $2.2 billion. Today, the bank has increased its asset size to $5.2 billion. Along the way, it’s picked up the Connecticut Bank & Trust, the Needham-based Greenpark Mortgage Company, East Syracuse, N.Y.headquartered Beacon Federal Bank,

1 3 2

BOFA STREAMLINES As for the other side of the table, Bank of America is fully exiting those counties where the 20 branches in question are located. In fact, the banking behemoth announced its intentions earlier this year to close 750 branches nationwide in the coming years as part of an overall plan to streamline its operations and cut costs.

BERKSHIRE BANK’S FOOTPRINT 5

and the eponymous Rome Bancorp and its subsidiary the Rome Savings Bank, also in New York. Berkshire Bank now has a 74-branch network across Massachusetts, Connecticut, Southern Vermont and New York, and this acquisition will bring its branch count up to 94. Around the time it released its second quarter earnings, the bank also announced a restructuring initiative that would include a comprehensive review of its branch network.

1. Factory Point Bancorp

4. Connecticut Bank & Trust

HEADQUARTERED: Manchester Center, VT PURCHASED: Spring 2007

HEADQUARTERED: Greater Hartford PURCHASED: Spring 2012

$79 million

$37 million

2. Rome Bancorp

5. Greenpark Mortgage Company

HEADQUARTERED: Rome, NY PURCHASED: Spring 2011

HEADQUARTERED: Needham, MA PURCHASED: Spring 2012

$79 million

$4 million

3. Beacon Federal Bank HEADQUARTERED: East Syracuse, NY PURCHASED: Spring 2012

$133 million Berkshire Bank now has a 74-branch network across Massachusetts, Connecticut, Southern Vermont and New York, and this acquisition will bring its branch count up to 94. 32 | Banking New York

Besides those branches changing hands to Berkshire Bank, Bank of America last month sold 51 branches across four western states to the Seattle-based Washington Federal Bank, closed four branches earlier this year in Massachusetts, and Community Bank, based in DeWitt, will close a deal later this year to buy four Pennsylvania branches from the banking behemoth. Whatever that will wind up meaning for the giant bank remains to be seen, but it’s certainly proved a boon for regional banks – like Berkshire, Community Bank and Washington Federal – who are looking to expand their footprints.

however. Berkshire Bank isn’t acquiring Bank of America – it’s just taking a number of branches off the megabank’s hands. But that in itself could be Mark V. Nunccio a benefit for the Pittsfield-headquartered bank in a number of ways and potentially easier than acquiring a whole bank with a smaller network, Mark V. Nuccio, a partner at Ropes & Gray, said. “When you acquire a whole bank, sometimes it’s harder because you’ll have senior executives and you may not need them. That’s kind of sad,” he remarked. “But when you acquire branches, you really need all the people who already work there.”

A DIFFERENT DEAL This particular deal is a bit different from Berkshire’s previous acquisitions,

Corporate culture, redundancies and various other human resources errata are less likely to be an issue in an acquisition like this one, too. And furthermore, Berkshire could ultimately improve its funding cost and net interest margin after the deal is completed, swapping out higher cost borrowing with lower cost deposits. Gunsch commented on that point, “We plan to use some of that money to pay off some short-term debt borrowings, we’ll put some into securities, and use some to fund planned loan growth.” In an era where electronic banking almost obviates the need for physical branches, Nuccio said, “smaller banks can get bigger, and larger banks that have accumulated thousands of branches can afford to get smaller. There can be a nice happy match.” ■

Laura Alix is a staff writer for The Warren Group, publisher of Banking New York. She may be reached at lalix@thewarrengroup.com.

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Third Quarter 2013 | 33

Q&A | By Christina P. O’Neill

Counter-Intuitive Lending Joseph Ficalora, President and CEO of New York Community Bank

ew York Community Bank has been in the multifamily lending business for 40 years, 20 of them as a publicly traded company. Its parent company, New York Community Bancorp Inc., is currently the 20th largest bank holding company in the country, and a leading producer of multifamily loans in New York City, specializing in apartment buildings with below-market rents. However, it has yielded investors a 3,415 percent return on investment over its history as a public company, factoring in nine stock splits. Joseph Ficalora Joseph Ficalora, president and CEO and a director of holding company subsidiaries New York Community Bank and New York Commercial Bank, espouses a business approach that is the embodiment of patient capital, combined with the flexibility provided by loans with an average life of 3.3 years. He has been with the bank since 1965, working his way up through various positions to become president and CEO in 1993. He holds a degree in business and finance from Pace University and serves as a director of the American Bankers Association, the New York Bankers Association, and chair of its Metropolitan Area Division, as well as other directorships. He recently shared thoughts about the future of banking in general and the specific market niche with which the bank has marked consistent success. Here are edited highlights from that conversation.

BNY: Where do you see the future of banking over the next 10 years? JF: Unfortunately, we are at a place today where there are many new 34 | Banking New York

forces that are impacting the very foundation and viability of community banking in the U.S. Queens County Savings Bank, which evolved into New York Community Bank, was a local community bank in the borough of Queens with probably the largest customer deposit base in our market, which was there by choice, despite the fact that the largest banks in the world were within five blocks. The reality is that 10 years down the road, as we are heading today, we will have fewer community bank choices. The bigger banks that will have a presence, will not necessarily be capable of taking the kinds of risk and taking the amount of time necessary to provide the funding for those smaller communities. The single most aggressive, largest contributors to the evolution of an excess credit cycle, were Fannie and Freddie, and structured-debt lenders that aren’t regulated at all. It was the environment created by a government that was willing to actively encourage lending that was not prudent.

BNY: New York Community Bank has become a specialist in rent-controlled and rent-stabilized real estate, a market segment that some observers might regard as difficult. What’s it like? JF: While we have been in our market niche for 40 years, it’s only since 2010 that we are doing one-to-four family properties, and we are selling those loans, not keeping them in our portfolio. We are principally a multifamily lender on regulated housing that is very unique to the city of New York, so there are large numbers of apartment units that have rights under rent control or rent stabilization. Those rights supersede the rights of

ownership. The owner of the building does not have the right to charge a market rent, but is literally restricted to what the rule of law represents in that particular case. So you can have one rent controlled apartment in ten, and five regulated otherwise [such as] rent stabilized apartments and maybe four at market apartments, in the same building.

BNY: So it’s a mixed income stream. JF: That’s right, and the thing that we do better than others, is that we pay attention to the actual environment. We ensure that the buyer has the appropriate attentiveness to detail and to improving the building. Although there might be a few that lend less money in a similar way to us, they’re lending a lot less. Over the decades, we’ve lent tens of billions of dollars on low income housing, wherein for 40 plus years we have had significantly better outcomes out of average life of the loan between three and four years.

BNY: Rent-controlled and rent-stabilized real estate are both manifestations of government intervention. Has the bank mastered this market despite these restrictions or because of them? JF: The bank has mastered this market because of the restrictions in multifamily. In the past 40 years, many credit cycles have occurred, and in some of those credit cycles, longterm, New York City-based banks like Bowery, American, Greater and Dollar all went out of business on multifamily real estate because they lent differently.

BNY: What mistake did they make? JF: In most cases, the mistake they made was that they paid people to do the loan, and paid by the size of the loan. They lent more money than

they should have lent. They didn’t pay attention to detail. The decision maker was not the board. In many cases, the decision maker was the lender who was being paid based on the dollar volume of the loans they made.

We do loans through disposition. We don’t do loans because it’s a lovely rate in today’s market. We do loans because we expect to be paid, fully, over time. So if we have loans that average three to four years, that means that we’re eligible for three points in year three. Other banks do 15 year lending fixed. That means that the loan they write today at the lowest rates in history, they in fact have to live with for 15 years. We, otherwise, would have the circumstances where every three to four years we get to re-set the interest rate, and we get paid 15 points in 15 years. So it’s not just the coupon rate today and the coupon rate that we get to set every three to four years, it’s also the points that we get every three to four years. So that business model is great for us. But it’s also great for cycle players. [Owners] that are building the value of their property over time, need to know, because they’re cycle players, that when the cycle turns negative, they will have equity in their property. They’ll be able to refinance their existing property in that three to four year period with us, so as to buy the property next door at a deep discount. So they actually practice, buy low, sell high. We’ve had property owners that had the ability to pay us five points because they consolidate 10 of their properties and sell them at ridiculous cash flows, receive $100 million, pay us five points on that hundred million dollars, and go out and reinvest that money so as to have $150 million worth of property. It works for them, and works for us. It’s a beautiful thing.

BNY: So that by the time there was trouble, that paid lender would have collected their fee and they’d be gone. JF: Correct. And then the reality is, that is the way that business is done 98 percent of the time. People that lend like us are very few. Certainly even though we do large volume lending, and we do it consistently, the reality is that we’re competing with people who do not do what we do. So we lose lots of loans. Other people will lend more money on the very same property. We have requirements in regard to the appraisal process. Other banks appraise once, make a decision without ever inspecting the property, and book loans that are way too large for the cash flows in the property. And that’s just common practice. We might appraise as many as three times. … We might actually inspect the property, with not only an executive lender, but also a member of the mortgage committee, a director. We may insist on meeting with the owner, at the property. We, in fact, in many cases have long-term relationships with the best owners in the market. All of that matters. And therefore, the results that we have are better when the market is stressed. We’ve had 52 consecutive quarters without any loss on any loan that we originated [from Q195 to Q407]. That’s an extraordinary reality, and we’ve actually been criticized for not taking enough risk. We believe that over time – we are a cycle player – we believe that the building of capital is not a function of how much money you make today, but how much money the obligation leaves you with when it’s over.

BNY: A 2012 article in Crain’s implies that New York Community Bank is the lender on a large amount of distressed properties. That doesn’t sound consistent with what you’ve just outlined.

JF: The reality is you cannot lend to low income housing and make money available to some of the more difficult properties in the marketplace without there being some ill-repaired, difficult properties. There’s no question that if we were to ignore all the properties they were talking about, those properties would become city liabilities. The worst landlord in the history of New York City, is the city. At New York Community Bank, we have dedicated people to being informed of what’s going on in the marketplace. But I do not step back one inch in regard to our willingness to lend money on a building that has deteriorated. There is expectation that that building will be improved. And we have absolute certainty that we have improved materially, materially, housing in the New York market.

BNY: So you’re willing to take the risk of lending on a deteriorated building with the anticipation that the owner will make material improvements. JF: We’re not doing it because we’re social engineers. We’re doing it because we have confidence that the right loan to the right owner will result in an improvement of the property. If that guy does his job well, he gets to refinance and get more money to keep doing his job well. So when I tell you that for four-plus decades that we’ve been improving housing in New York City, doing that with loans that average three to four years, that means you can only do it if you’re successful in improving the property. The difference between us and others is that we lend on the actual rent roll. Our rents don’t go down. In other words, rent control, rentstabilized housing, never reverses. It only goes up, but it’s always below the market. It’s a one-way street. That’s a very good thing to have. ■

Christina P. O’Neill is editor of Banking New York. She may be reached at coneill@thewarrengroup.com.

Third Quarter 2013 | 35

TENTH AVENUE FEES-OUT | By Steve Viuker

Financial Firms, Online Banks Working to Protect Customers from Bank Fees

ately, some banking customers have begun to feel an ill wind from overdraft fees. MoneyRates.com reported in a survey that average overdraft fees rose by 18 cents in a recent survey, reaching an average of $30.01 per occurrence; but the significance of this fee depends on how consumers use their checking accounts. Since overdraft fees are usually assessed for each transaction that occurs while the account is overdrawn, even a few mis36 | Banking New York

takes can cause these fees to run into the hundreds of dollars – but busy entrepreneurs and financial companies across the country are coming up with ways to combat fees and save clients money. Software engineer Josh Reich and Shamir Karkal, created Simple, an online banking start-up company based in Portland, Oregon. The company now has 20,000 customers and has processed transactions worth more

than $200 million. Simple is not a bank, but has arrangements with BW Bank and Bancorp, federally insured banks, to hold its customers’ money. Customers receive a plain white card that can be used like a debit card. The company offers direct deposit and money transfers. Simple customers cannot make cash deposits and must rely on the Internet and phone for service. Simple makes money by earning interest on the cash it carries and from interchange fees, which it gets from each swipe of the card. BancorpSouth in Tupelo, Miss., is rolling out a prepaid debt card. The $13.2 billion-asset company has joined with prepaid card manager TransCard to offer a MasterCard prepaid debit card as an alternative to traditional checking accounts. The card carries no minimum balance or overdraft fees. BancorpSouth is offering the program through the American Bankers Association’s Community Bank Prepaid Program, which aims to make the prepaid card market easy for community banks to tap. The reloadable card, which costs $5 to set up and $4 a month thereafter, can hold up to $5,000 and accepts direct deposits of paychecks and federal benefits. The card carries no fee for purchases. Overdrawing the TransCard account at an ATM in the U.S. costs customers $1 each time it happens. MoneyRates.com pointed out one of the best bets for avoiding maintenance fees may be to choose a checking account from an online bank. Twothirds of the checking accounts from online-only banks surveyed have no monthly maintenance fee. Those that did have a monthly fee charge an average of $9.42, compared to an average fee of $12.32 at traditional, branch-based institutions. Besides offering lower fees, the survey’s

online banks also offer lower barriers to opening a checking account. The average minimum amount required to open a checking account at an online bank is $151.19, compared to $393.60 at traditional banks. Stewart Rose, president at Truebridge Financial Marketing, says that if conventional banks want to maximize their opportunity, they should go beyond just training people on how to open online accounts, and should show them some value-added services that help them meet other needs, current or future. Aite Group said the compound annual growth rate for prepaid debit and payroll cards will increase 19.9 percent from 2010 to 2016. “For cards not issued by a bank (e.g. Amex’s Bluebird card), state money transmitter laws provide safety and soundness protections,” said Michael Flores, CEO of Bretton Woods Inc., who has

researched and written extensively about payments and banking issues. Last year, consumers loaded about $57 billion onto prepaid financial products nationwide, up from $41 billion a year earlier. The total should jump to $167

with high cost structures will suffer. Market pressure from regulators and competitors will force some smaller players to perhaps exit the market.” Said Rose: “The credit card people figured out long ago how to do affinity

Last year, consumers loaded about $57 billion onto prepaid financial products nationwide, up from $41 billion a year earlier. billion in 2014, researcher Mercator forecasts. “Navigating regulatory waters will be tricky at best,” wrote Madeline Aufseeser, senior analyst at the Aite Group. “Prepaid providers will need to keep a sharp eye on the ball relative to product pricing, regulatory pressure and consumer behavior. Programs

marketing with every conceivable affinity to drive card acquisition. Now the same with a bank account. … People are 43 percent more likely to buy a financial product around a life event. It is during those times that people are looking for help. They will do business with the one who is there to provide it.” ■

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Third Quarter 2013 | 37

SMALL CHANGE

BANK OF AMERICA MERRILL LYNCH Pauline Banks has joined Bank of America Merrill Lynch as global custody agency services (GCAS) senior product manager responsible for custody in the APAC region. She will report directly to Ivo Distelbrink, head of Asia Pacific Global Transaction Services, and to Stephanie Colaric, global custody product head in New York. In her new role, Banks will develop the bank’s local and global custody product capability and strategy in the region, migrating existing custody clients to a standardized international platform whilst establishing a sub-custody business model to drive new firm wide revenues.

CATTARAUGUS COUNTY BANK

Lynn Stefanik

Cattaraugus County Bank has promoted Lynn Stefanik, a CCB employee who formerly worked at the bank’s South Dayton location, to retail loan specialist, working primarily in the main office in Little Valley. She will be responsible for assisting retail loan applicants in the areas of mortgage loans, home equity loans and lines of credit, home improvement loans and installment loans. She will also be assisting with loan training and development of new retail loan products.

FIRST NIAGARA FINANCIAL GROUP

Deb Burgess

First Niagara Financial Group, Inc. has appointed Deb Burgess as the multi-state bank’s senior vice president and director of treasury management. She will work to build out the company’s Treasury Management division’s sales and product capabilities, and enhance the group’s marketing capabilities and technology infrastructure for increased functionality for customers in the small business, business banking, commercial banking and specialty banking sectors. Burgess will manage a team that consists of an experienced group of product and sales professionals.

for-profit organizations and select individuals in metropolitan New York. Before joining Hudson Valley, Swadba served as a market analyst and strategy consultant with Inveraray Capital Management. Previously, he was managing director, loan portfolio management at Merrill Lynch & Company and the chief credit officer of Merrill Lynch Bank USA.

SIGNATURE BANK Signature Bank has announced the addition of a new private client banking team to be based in the Brooklyn area. This marks 10 teams now dedicated to serving the growing Brooklyn marketplace. Leon Kratsberg and Gary Shulevich were each named senior vice president and group director, and Deborah Raffone was appointed senior client associate. Kratsberg and Shulevich, who have worked together for eight years, will serve the entire Brooklyn marketplace from the bank’s office at 84 Broadway in Williamsburg, Brooklyn. As the bank further expands efforts across Brooklyn, the team will be relocating to another private client banking office in the area. Signature Bank has also appointed a new private client banking team to be based in its White Plains office. David Pilossoph and Marie Moreno were each named group director and senior vice president. Joining Pilossoph and Moreno is Diane Fracasse, as senior client associate. Additionally, the bank appointed several new banking professionals to various existing teams: Thomas Pappas was named group director at the bank’s office at 261 Madison Ave. in Manhattan. Zoe Koutsoupakis will serve as group director and senior vice president, and joined recently named group director and vice president Monika Buono in Borough Park. Also joining the team is Denise Longworth, associate group director.

SUFFOLK COUNTY NATIONAL BANK HUDSON VALLEY BANK Hudson Valley Holding Corp., parent of Hudson Valley Bank, has named John M. Swadba, CFA, to serve as chief credit officer of Hudson Valley Bank, serving small- and midsized businesses, professional services firms, not38 | Banking New York

Suffolk Bancorp, parent company of Suffolk County National Bank, has promoted Jeanne P. Kelley and Patricia M. Schaubeck to executive vice president. Kelley serves as the bank’s chief risk officer, and Schaubeck serves as general counsel and corporate secretary. ■

Third Quarter 2013 | 39

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