Banking New York Spring 2011

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SPRING 2011 • VOLUME 17

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Inside

Sky Not Falling on Muni Bonds Workforce Optimization in the Branch Pre-Emptive Strike for Credit Risk Management

Niagara calls How CEO John R. Koelmel Plans To Make A Splash In New England

First Niagara President and CEO John R. Koelmel

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With the acquisition of NewAlliance, First Niagara takes its first steps into the New England market, where challenges – and opportunities – abound.

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SPRING 2011 • VOLUME 17

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InsIde

Cover Feature

Niagara calls How CEO John R. Koelmel Plans To Make A Splash In New England

12

Superintendent’s Spotlight

4

Mortgage Servicing Standards

for Market Confidence

current affairs

6 6

NY State Muni Bond Panic: Smoke but No Fire

Guarding the Gate

10

Security Gifts for Your Customers

Compliance

22

16

Calling All SEC-Registered

Depository Institutions

COMMENTARY

20

Taking a Swipe at Sanity

Products and Services

24

18

The Bank Branch is Changing:

Are You (and Your Staff) Ready?

28

The Top Five Benefits of Server Virtualization

Risk Management

22

Sky Not Falling on Muni Bonds Workforce Optimization in the Branch Pre-Emptive Strike for Credit Risk Management

NiagaRa calls How CEO John R. Koelmel Plans To Make A Splash In New England

First Niagara President and CEO John R. Koelmel

Volume 17 Spring 2011 Vincent Michael Valvo Group Publisher & Editor in Chief Timothy M. Warren Chairman Timothy M. Warren Jr. CEO & Publisher David B. Lovins President Jeffrey E. Lewis Controller Dir. of Operations George Chateauneuf Publishing Group Sales Manager Sarah Cunningham Director of Events Emily Torres Advertising, Marketing & Events Coordinator Cara Inocencio Advertising Account Manager Richard Ofsthun Advertising Account Manager Christina P. O’Neill Custom Publications Editor Cassidy Norton Murphy Associate Editor John Bottini Creative Director Scott Ellison Senior Graphic Designer Ellie Aliabadi Graphic Designer

Credit Risk Management Practices

Dodd-Frank Fallout

24

The Well-Capitalized Bank

Management

28

26

Loan Workouts

Identifying and Remedying Troubled Loans

30

Small Change

©2011 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210.

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superintendent’s spotlight

By Richard Neiman

Mortgage Servicing Standards for Market Confidence Years after the subprime crisis first shook the housing market, we have once again found ourselves facing disarray and confusion on residential mortgage loans.

This time allegations of faulty mortgage servicing are the culprit, with continuing documentation irregularities and dubious paperwork procedures raising serious questions about the viability of foreclosures.

F

irst we need to acknowledge that this is more than just a paperwork issue. Real harm is being done to the integrity of the judicial system, even in states with comparatively lower levels of foreclosure like New York. Further, these allegations call into question the integrity of all aspects of servicer decision-making, such as whether to modify a mortgage or to foreclose, or whether to only modify through a proprietary modification that may be less sustainable than modification under the federal Home Affordable Modification Program (HAMP). That uncertainty is creating a crisis of confidence in the foreclosure process, the modification process, and in the housing market more broadly.

While in-depth investigations by government regulators are underway to address these harms and to punish potentially illegal activities, more still needs to be done. We must quickly address growing market concerns that could delay an already anemic housing recovery.

We urgently need nationwide mortgage servicing rules to address these concerns. The number of permanent modifications that have been made under HAMP has been disappointing, but HAMP did help to standardize loss mitigation by servicers. The goal now is to build on this provisionary and voluntary process, to create rules with staying power and real consequences for noncompliance.

4 | Banking New York

New York set a strong model for such regulations last year by establishing the most comprehensive set of mortgage servicer rules in the nation. They directly address the servicers’ responsibilities with respect to loss mitigation, in addition to covering many of the day-to-day aspects of mortgage loan servicing such as how payments should be credited, what fees are permissible, and the servicer’s obligation for providing payoff statements and payments histories.

For too long, we have heard complaints from homeowners about servicers’ overall unresponsiveness and sometimes unprofessional behavior. It is these practices that have led to much of the confusion and frustration that we face today, with preventable foreclosures going forward and adding to mounting investor and homeowner losses. New York’s business conduct rules attempt to address these widespread grievances by creating a clear system of accountability for the servicing of mortgage loans from their beginning to their end. Key provisions include: 1. A general duty of fair dealing: Servicers must act in good faith with borrowers on loan transactions and provide them with clear, accurate communications on their accounts; 2. Servicers must pursue appropriate loss mitigation efforts with homeowners, such as loan modifications or short sales to avoid preventable foreclosures, and to make these decisions within a specified timeframe; 3. Servicers must have adequate staffing, written procedures for handling consumer inquiries and complaints, and methods for making sure that homeowners are not required to submit multiple copies of required documents; 4. Approvals must provide “clear and understandable written information explaining the material terms, costs and risk of the option offered;” 5. Denials must state with “specificity” the reasons for denial, contact information for a person who can reconsider the denial and any other foreclosure prevention alternatives.

These regulations apply to all servicers handling New York-based mortgages. They set the basis for what modern residential mortgage servicing should look like – providing servicers with the guidelines they need for developing appropriate loss mitigation procedures and properly investing in staffing. New York borrowers now have rights when it comes to saving their homes for foreclosure, and servicers will be held accountable for violating those rights.

In short, our financial and economic recovery depends on this type of smart regulation. By working together to restore public confidence in the housing market – ensuring both consumers and investors that the mistakes of the pasts cannot be repeated – we can look forward to a revitalized and vibrant New York economy.

Richard Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.

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current affairs

By Robert Brannum

N.Y. State Muni Bond Panic: Smoke but No Fire For the past several months, the municipal bond markets have been roiled by predictions and prognostications that the markets may be teetering on the brink of major defaults. After witnessing the severe impacts to other markets, including the mortgage and credit markets, any dire forecasts can make investors jittery. Such has been the case facing muni bonds.

M

uni bonds are issued by the state and federal governments to finance large scale projects, including highways and airports. They generate interest yields that are free from federal and often state income taxes, making them a preferred investment vehicle for wealthy investors as well as for those in retirement.

Many investors hold muni bonds directly, or through the ownership of mutual funds.

Reasons for Concern In sharp contrast to the boom investment years, when investors pledged blind faith to any over-hyped stock opportunity, today’s savvy investors question everything – even traditionally secure muni bonds.

Certainly the size of the muni bond market itself may be cause for concern: currently, combined municipal obligations in the US have reached $2.9 trillion, which is almost a quarter of the country’s gross domestic product. Outstandings grew $85 billion in the past year, and has increased by $1 trillion since 2006.

News articles have reported a flurry of negative facts and statistics which have raised market concerns: the Center on Budget 6 | Banking New York

and Policy Priorities reports that states must cope with a combined budget gap of $125 billion as they head into their current fiscal years; the widespread under-funding of public pensions are better understood; the 2009 stimulus support from the federal government has ended.

Respected analysts and investors have also claimed concern with the markets.

Standard & Poor’s issued a report in January that warns of a surge in potential downgrades in state and local government bonds, stating “We believe that continued revenue decreases for state and local governments may increase fiscal strain on budgets, and monitoring of liquidity will be especially important in 2011,” raising worries that governments could run low on the cash needed to make their muni bond payment obligations. In December, Wall Street analyst Meredith Whitney announced on “60 Minutes” her projection that the market might see hundreds of billions in defaults in 2011, stemming from as many as 50 to 100 muni bond defaults and restructurings. JP Morgan Chase CEO Jamie Dimon warned muni bond investors to be “very, very careful” at a January conference, and in mid-

2010, investor Warren Buffett added his observation that muni bonds were facing a “terrible problem.”

The accumulated results of these forecasts have been significant on the municipal bond market: municipal bond investors have been leaving the market in large numbers since November – almost $13 billion in net outflows in January alone from bond-based mutual funds during a time when other fund categories have had large inflows. And when investors fear larger risks from holding bonds and withdraw capital, they demand larger yields, raising the borrowing costs to states and local government issuers.

Reasons to Believe How close to “teetering” are we? How concerned should investors be about the $2.9 trillion in current outstanding municipal obligations? And how is New York State positioned in this current climate of uncertainly and concern?

First of all, not all experts agree about the dire warnings.

To start, the $2.9 trillion in outstanding obligations, analysts say, is merely the aggregation of thousands of smaller, separate and independent obligations, which exist without support or reliance on others. Of that total, for example, only $1.2 trillion is state-related – the rest are owned by local municipalities. And nearly $500 billion of the state liability is tax supported, meaning that the obligations are underwritten by continued on page 8

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Muni Bonds

continued from page 6

state tax revenues, making them highly secure. Of the remaining state-level debt, each state’s obligations are unrelated to the others’ – meaning that there may not be an “aggregation problem” at all.

Other industry observers believe states are taking the necessary fiscal steps needed to avoid an implosion. Jay Powell, a visiting scholar at the Bipartisan Policy Center, was quoted in a recent article in The Wall Street Journal saying, “The near-term budget problems of states are difficult, painful, but survivable. Yes, this is the worst stress the system has been under for many, many years, but predictions of widespread defaults are overblown.”

Hugh McGuirk, the head of municipal investments at T. Rowe Price, told CNN, “Governments are under financial stress and undoubtedly have long term liability problems related to pensions and health care costs, but they have been making substantive cuts in their budgets, and will continue to cut

more meat to balance their budgets. All the stories about the demise of the bond market are grossly exaggerated.”

Others note the difference between “downgrades” and “defaults.” An S&P spokesperson commented that downgrades are likely, but that they shouldn’t lead to a “notable increase” in defaults.

In fact, some good might be coming out of all the dire gloom-and-doom commentary.

Todd Snyder, a senior managing director at Rothschild, recently wrote in The New York Times that he believes many state leaders are using these forecasts, while not fully believing in them, to advance their own causes for austerity during current budget debates.

He argues that the crescendo of discussion around state defaults and bankruptcies are being used as “Kabuki theater” in posturing the participants’ budget positions.

What of New York State?

New York is often mentioned as a state in trouble whenever state fiscal issues are raised (along with California, New Jersey and Illinois). As far back as 2009, then-Lt.

Gov. Richard Ravitch warned about “cracks in the municipal bond market.” And as recently as mid-February, WGME television reported that Maine Gov. Paul LePage used New York as an example of a state in turmoil to warn against his own state following suit, by stating, “There are several states that I was reading this week that are teetering on default with municipal bonds. They are Texas, New Jersey and New York. And folks, we’re only a few numbers behind them.”

Is New York teetering?

By most professional accounts, the rumors of the state’s impending defaults are greatly exaggerated. True, New York has $78 billion currently in outstanding debt, with another $81 billion in unfunded obligations to state-employee pensions and retiree health care. According to the Manhattan Institute, the state owes $78 billion in the same way the nation owes $2.9 trillion – as an amalgamation of tens of thousands of smaller bonds that are issued by completely separate legal entities, each of which has independent boards, regulations, funding mechanisms and agreements with bond holders. The

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state itself only holds $3.5 billion of its own obligations.

One of the governors who appears to be using the pontificators’ muni bond warnings to advantage is New York’s own Gov. Andrew Cuomo. Cuomo has been pushing for more fiscal restraint by seeking both a reduction in spending growth for several statutory items including Medicare and education, as well as spending cuts in others by combining agencies and laying off state employees.

Cuomo has also rejected using tax hikes to attack the deficit, in addition to offering spending reductions, tax cuts in some areas, and emphasis on job creation initiatives.

His 2011-2012 budget calls for reduced spending by $3.7 billion, and has raised support from many outspoken Republicans, including Assemblyman Mark Johns, who commented, “This year’s budget could be one of the most astounding in a generation, and will hopefully alter how our government operates for years to come.”

For the time being, crisis averted.

Robert Brannum is a freelance writer.

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Spring 2011 | 9

Guarding the Gate

By Matt Lidestri

Security Gifts for Your Customers While the annual gift-giving feast has come and gone, a thoughtful gift to our customers to help protect them from online crime is always appreciated.

T

here is a wealth of security solutions available, many of them free of charge to customers. That’s a good thing for everyone, since secure customers significantly improve security for Internet banking as a whole. Here is my security shopping list for bank customers:

Your Firewall Many home banking users connect directly to the Internet through a cable modem or DSL. Even more believe their Internet Service Provider (ISP) protects them from criminal exploits. Unfortunately, that’s only partially true. If a user responds to a phishing link or is infected by malicious file, program or website, all bets are off.

Fortunately, Comodo (http:// personalfirewall.comodo.com) offers a free and very solid firewall for home use. For anyone who doubts whether they need a firewall, let me be quite clear – you do. The average time to compromise an unprotected, unpatched PC on the Internet is under five minutes. You don’t want to contribute to that statistic.

The Comodo firewall filters both inbound and outbound Internet traffic, which is critical for security. Obviously, you want to block any inbound criminal attacks. But if your computer does get infected, you definitely want to prevent the live virus from “phoning home” (outbound) to its criminal masters. Its interface is relatively simple for both power users and less tech-savvy individuals as well.

Consider encouraging your customers to get Comodo Firewall for home use if they don’t already have a firewall solution.

Your Antivirus/ Anti-Malware Software Most PC vendors automatically install an antivirus application on new PCs with a one year license, but users may allow the package to expire without renewing the license.

Malware is constantly evolving, and thus the 10 | Banking New York

most recent malware signatures are essential for protection. Rather than running on an unlicensed antivirus program with outdated signatures, consumers should consider a free alternative. Microsoft Security Essentials provides decent anti-malware and antispyware functionality, and is free for home use. Avast also provides a free version of their antivirus solution which works quite well.

Microsoft Security Essentials are available at www.microsoft.com/security/products/ mse.aspx, and Avast is available at www.avast. com/free-antivirus-download.

Your Passwords Yes, we have too many user IDs and passwords, and yes, we have to change them too often for our time-starved minds to remember. But we understand that the inconvenience of strong ID and password security keeps our information safer – much like the inconvenience of enhanced airport security.

Password Safe (http://passwordsafe. sourceforge.net) was invented to solve the problem of ID/password inflation. Password Safe was developed and open-sourced by CounterPane BT and their founder, worldrenowned cryptographer Bruce Schneier.

Password Safe acts as an encrypted “master vault” for all your software keys, website logins, personal identification numbers and e-mail logins. Basically, you can condense them all into one ID/ password combination for the wonderful price of $0. One word of caution – make your ID/password combination to Password Safe very strong!

Your Software Almost all cyber criminal attacks exploit weaknesses in software already installed on the target computer. Windows and Internet Explorer have long been favorite targets of cyber crime, and Microsoft has stepped up admirably with timely software updates, also known as “patches.” Their newer software

(Windows 7, IE8) has also been developed with better security, further protecting users.

Unfortunately, the criminals have found software holes in other common applications to exploit, particularly in Adobe products, FireFox, Java, and Quicktime.

Patch Management solutions such as Secunia PSI (http://secunia.com/vulnerability_ scanning/personal/) can help you detect vulnerable and out-dated programs and plugins which expose your PC to attacks.

More importantly, Secunia PSI finds the patches available from the software vendors – a tedious and time consuming task if you were doing it yourself. Secunia PSI automates this process and alerts you when your programs and plug-ins need to be patched. Best of all, the Secunia solution and the patches are offered free-of-charge.

Your Data Do you keep sensitive data on your home computer or laptop? Of course you do.

Electronic bank statements, 401k statements, tax returns – they’re all stored there. If a criminal were to gain access to your computer, chances are high that he would find these files pretty quickly.

One solution to the sensitive data problem is to create an encrypted drive in Windows for all these documents. TrueCrypt (www. truecrypt.org), an open-source encryption tool, enables you to do just that, keeping the documents in incomprehensible form until you access them with the appropriate encryption key.

One word of advice – don’t write the key down on a yellow sticky and put it inside your laptop!

Your Challenge With all these great, free solutions available to your customers, you might think the world would be quite safe. But bankers know the ultimate challenge is getting customers to use the solutions available to them. Solving that challenge will go a long way toward improving Internet banking security for everyone.

Matt Lidestri, CISSP, manages security and internet products for COCC, Inc.

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Expands into New England Bolstered by Successful Penn. Acquisitions, Bank Takes Next Growth Step 12 | Banking New York

First Niagara’s primary obstacle is its status as a larger, mostly unknown, out-of-state bank with a name that smacks of New York, not New England.

By Laura Schreier

W

hen it announced it would be acquiring NewAlliance Bank, Buffalobased First Niagara Financial Group ignited a firestorm in NewAlliance’s base of New Haven, Conn., with local officials railing against the loss of a major, hometown institution with 70 branches in the Nutmeg State.

The bad press means First Niagara will have to work a little harder to woo some Connecticut customers, said Thomas Grottke, president of Wethersfield, Conn.based bank consultancy Norteastern Banking Services Group. New Haven, in particular, has a close-knit community of John R. Koelmel businesses, government leaders and nonprofits, he said, and they’re not happy about losing their local bank.

Further north in Massachusetts, where NewAlliance has a dozen additional branches, First Niagara is also seen as a potentially tough new competitor. First Niagara is already flourishing in the Pennsylvania market, which it entered in 2009 with the acquisition of Harleysville Group and the purchase of 57 branches from larger rival PNC Financial. In in Massachusetts, the bank’s primary obstacle is its status as a larger, mostly unknown, outof-state bank with a name that smacks of New York, not New England.

Image Is Everything Massachusetts-based community banks are watching for the tim when NewAlliance locations officially change over to First Niagara, as any bank acquisition opens a window to woo customers unsatisfied with the change.

“We’ll make ourselves a very convenient alternative,” said Dena Hall, spokeswoman for West Springfield, Mass.-based United

Bank. If customers are already faced with the task of switching their credit and debit cards, their direct deposit and autodebit options and other products when NewAlliance converts to First Niagara, they may take the opportunity to switch to an entirely different bank of their choice – and United Bank and others like it want to be ready. While United Bank can boast of its homegrown roots in contrast to First Niagara, Hall acknowledged that the much larger, $20.8 billion First Niagara has a good reputation in the industry – an assessment backed by industry analysts.

First Niagara’s executives are aware that many in NewAlliance’s footprint are fighting the image of the new bank as a “big, bad, outof-town” institution. Daniel Cantara, executive vice president of commercial business, touted First Niagara’s local focus and emphasis on philanthropic efforts, its big lending appetite and a structure that gives decision-making powers to local executives, not the Buffalo brass. Meanwhile, First Niagara’s presence in central Massachusetts raises the question of whether it will use it as a daniel cantara jumping off point for more Massachusetts growth.

Such a strategy would certainly be consistent with recent history. Banks including Connecticut-based People’s United and Webster Bank have gradually built up branch networks in Massachusetts, both moving into the Boston area in 2010.

First Niagara, too, has grown aggressively in recent years. Its entry into the Pennsylvania market in 2009 has resulted in a thriving new market for the bank, Cantara said, and although New England may be different competitive

continued on page 14

Spring 2011 | 13

First Niagara at a Glance First Niagara Financial Group went to Boston on March 1 to make its case to investors at a conference sponsored by KBW. The acquisition of New Haven-based NewAlliance Bancshares brings FNFB to $30 billion in assets, $20 billion in deposits, $15 billion in loans and 730,000 customers across four states.

FNFB has acquired and integrated nine bank/branch deals over the past 10 years. “We do not intend to just fill in the map,” the presentation claimed. Acquisitions will have to be a good fit, and target urban areas.

Two-thirds of its total loan portfolio is in commercial loans. Of that loan portfolio, 64 percent are in upstate New York, 19 percent in Eastern Pennsylvania, and 17 percent in Western Pennsylvania. Total retail deposits are 52 percent in upstate New York, and 24 percent each in Eastern and Western Pennsylvania.

FNFB reports having more than $500 million in excess capital under Basel III rules, and says it expects to redeploy its excess liquidity into higheryielding loan growth over time. The bank has added 500 staff positions over the past 18 months, and claims that its IT capabilities are scalable to a $50 billion bank.

First Niagara

continued from page 13

and cultural terrain, good banking values are popular everywhere.

“Businesspeople are businesspeople, consumers are consumers,” he said.

Fertile Ground Despite its recent flurry of acquisitions, analysts said they did not believe First Niagara would continue its recent habit of multiple, large purchases in the near future.

“Now’s the time for them to pause and reconsider where they’re at,” said Thomas Alonso, senior banking analyst with investment bank Macqaurie. First Niagara moved quickly in 2009 and 2010 because it sensed a good buying opportunity, he says, but will likely refine its business over the next few years instead of adding to it.

Collyn Bement Gilbert, an analyst at national investment banking firm Stifel, Nicolaus & Co., also said the bank was likely to focus on 14 | Banking New York

pumping up its brand image in its new turf. “I don’t think [First Niagara] is going to go on a mad rampage of acquiring banks,” she said.

The institution did well for itself in Pennsylvania, and its service and products had a “top-notch” reputation, which should go a long way toward reconciling New England customers to the newcomer. Ultimately, customers want a bank that will service their needs – if it happens to be based in Buffalo, so be it, she said.

Cantara, however, confirmed First Niagara’s interest in growing further in Massachusetts. While it will watch for merger opportunities, for the moment it plans to build upon NewAlliance’s current commercial banking operations.

First Niagara currently seeks to hire more commercial lenders to stake out business toward the lucrative eastern Massachusetts and metro New York markets, which includes Fairfield County in Connecticut.

“We look at new England as a

very fertile opportunity,” he said.

The name “First Niagara,” referring to a landmark widely associated with upstate New York, will stick for now, Cantara said. Market research has shown that residents outside New York tend to think of the moniker as reflective of the strength and power of the falls, rather than their specific location.

That being said, Cantara noted, the bank is willing to be flexible as it moves into new markets.

First Niagara has already begun fighting its outsider status by meeting with local and nonprofit leaders in its New England footprint. Cantara said the retail side of the business would soon implement a major public relations push to familiarize New Englanders with their newest banking option.

When the transition finally happens, he said, “We want it to be as much of a non-event as possible.”

Laura Schreier is a staff writer at Banking New York.

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Compliance

By Bridget Day

What SEC-Registered Banks Can Expect at Next Review In today’s turbulent economic times, wouldn’t you like to have a crystal ball to see what questions might be posed by the Securities and Exchange Commission (SEC) or your regulators? Well, while there’s no crystal ball available, there are some visible trends in what “they” have been asking.

A

fter searching SEC correspondence for the 12-month period ended September 2010 for commercial banking, consumer lending and savings institution registrants in the New Jersey, New York and Pennsylvania marketplace, certain topics began to appear with regularity.

To no one’s surprise, allowance for loan losses was the biggest winner. Questions posed focused on adding more detail to future filings, specifically relating to trends in specific reserves, charge offs, impaired

loans, non-accrual statistics, etc. Accounting Standards Update (ASU) No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” issued July 2010, summarizes the required disclosures. A number of comments asked for a more robust discussion of the allowance for loan loss methodology and supporting trends.

With the recent unprecedented economic volatility, discussion of historic trends and their impact on reserving has become less

relevant. This causes inconsistencies in the information presented and leaving the regulators with unanswered questions. In other words, the SEC wants to know what you are basing reserves on now, knowing that history is no longer relevant.

Other than temporary impairment (OTTI) was another repeat item. You can expect the regulators to want a detailed discussion on the components of any OTTI impairment analysis (credit versus market), the methodology used to perform the impairment analysis and its frequency.

The OTTI discussion should be as granular as possible including but not limited to, disclosure of individual issuers, credit ratings, dollar value at risk and concentrations, where applicable.

Goodwill impairment was another hot topic. Current US GAAP requires a two-

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16 | Banking New York

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step process for identifying and quantifying goodwill impairment. Registrants have been asked to expand disclosures relating to their two-step process.

The first step in this process is to compare the fair value of goodwill to the carrying value for any reporting unit which includes goodwill. If this test suggests impairment, a second step is required which determines if the carrying value of the goodwill exceeds its implied fair value. In this case “implied fair value” represents the excess of the fair value of a reporting unit as a whole over the individual fair values assigned to its assets and liabilities.

All too often registrants have glossed over the detailed thought processes behind the identification of a “reporting unit” and the mandated calculations. The SEC is now challenging these registrants to discuss the calculations at the reporting unit level, specifically requesting details even where the calculations do not yield impairment, but are close. In this regard a “reporting unit” is defined as “an operating segment or a component of an operating segment that is one level below the operating segment as a whole.” A unit must constitute a business as defined by accounting technical guidance and have available discrete financial information regarding its operating results that is regularly reviewed by segment management.

Furthermore, the SEC has expressed its view that this current two-step process may be flawed in that it ignores an “enterprise value” for the reporting unit in favor of an “equity value.” The SEC notes that when the carrying value of equity is negative, a reporting unit would appear to always pass a step-one goodwill impairment test when performed on an equity basis, despite the fact that significant goodwill may exist and the operations of that entity may be deteriorating.

As such, it is important to perform a step-one analysis based on enterprise value when the book value of equity is negative.

Recent media attention to bank profitability and increased public scrutiny of certain lending institutions resulting from their role in the recent subprime lending debacle seems to have given rise to the next two areas of frequent comment, related party transactions and executive compensation.

With the ultimate goal of transparency for the investor, registrants have been mandated to provide more detail about any transactions involving insiders. Materiality doesn’t matter

and is not a valid defense against a lack of disclosure. Registrants need to include in their filings detailed disclosures and discussions regarding compensation, any performance targets used in determining compensation, incentive compensation, bonuses, details for all highly paid executives, employment agreement terms, benchmarking tools employed to determine compensation levels and discussions on any newly implemented benefit plans.

While not appearing as frequently as the five areas of inquiry discussed thus far, other real estate owned (OREO), repurchase transactions, securities lending and nonGAAP measures were also seen to repeat with some level of frequency. In all cases the regulator wanted enhanced disclosure and more details about the items presented so as to enable the investor to better understand it.

So how can all this be summarized?

Clearly registrants have been charged with giving the investor more information in an understandable fashion so as to enable the investor to make an informed decision.

While plain English might demand a better prose, it, coupled with the current economic

environment, seems to also demand more data, therefore making any discussion more meaningful to the reader.

Preparers and reviewers of financial statements and regulatory filings need to be cognizant of trends and consistencies. They need to step back and ask, “What would I want to know about a certain transaction, series of transactions or event?” “What can I include to make someone else understand?”

“What information, if I knew it, would alter my decision-making process?” “What trends need to be disclosed and potential impact explained?”

While no one can predict with any level of certainty what the SEC or other regulatory body might ask or challenge, consideration and adequate disclosure of the areas of focus outlined above might make for a more informed investor and ultimately reduce the risk of a potential restatement.

Bridget Day, CPA, is a partner with the EisnerAmper Banking Group.

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Spring 2011 | 17

Products and Services

By Jackie Hudson

Are You Ready for Bank Branch Change?

According to a survey conducted by the American Bankers Association in 2010, 36 percent of bank customers prefer to do their banking online over any other method. While this trend continues in popularity, don’t think for a second that it has lessened the impact of the bank branch experience.

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ustomers want convenience, but they still crave the personal touch that can only truly be delivered through branch contact. Reinforcing this message is the report “Top Ten Reasons Why the Bank Branch is Not Dead” from research firm IDC Financial Insights. It revealed that when it comes to opening an account, a visit to the branch is preferred by eight out of 10 consumers. Even after measuring preferences over a period of four years, the numbers remained pretty consistent – 75 to 85 percent of respondents shared that their preferred method for opening an account was at the branch. This further reinforces that a growing number of consumers are turning to their banks for financial advice, viewing them more as trusted advisors.

Banks today realize that delivering professional expertise and managing relationships in the branch are essential to supporting new and existing customers, as well as up- and cross-selling services that increase their profitability. However, many face challenges in how to effectively adjust resource models to better utilize existing staff, as well as improve their skills and knowledge to meet the shifting needs of today’s customers. With widely distributed networks, banks also are faced with how to effectively train large workforces on relationship management and changes in their product and service portfolios, and how to consistently monitor performance and focus on frontline staff development.

Leveraging Technology to Automate the Branch Until recently, there has been no easy, automated way to monitor or track branch staff and customer interactions. This is where a workforce optimization (WFO) strategy and supporting technology enter the picture.

Comprised of staff forecasting and scheduling, strategic planning, process and application analysis, performance management scorecards, learning and reporting, WFO technology designed expressly for retail financial service organizations helps banks 18

Banking New York

better manage and respond to these “new branch” challenges.

Traditionally, WFO in the branch has focused on forecasting and scheduling resources to meet customer demand, and ensuring the right people with the most appropriate skills are being leveraged at the most optimal times. The latest generation of branch WFO tools, however, extends well beyond these capabilities. It provides management with critical insight into how employees are actually spending their time, how effectively they’re interacting with customers and how their performance compares to goals. One component of the WFO solution tracks employee desktop activity, enabling managers to understand the applications employees are using the most, how each individual employee navigates those applications and the time it takes to complete important transactions. Desktop activity monitoring also enables managers to gauge whether staff perform the right steps in a process, access the proper information and/or capture customer data correctly to yield optimal results. These tools can even provide guidance, with reminders to assist newly-trained employees in following the correct processing steps.

In addition, banks can leverage WFO to measure employee performance against role-specific goals and key performance indicators (KPIs) to benchmark success.

WFO can track individual employee targets or quotas and monitor indicators – such as schedule adherence and sales productivity – to help ensure customer service and performance objectives are met. Further, by monitoring KPIs at individual, work team, branch and higher organizational levels, banks can proactively assess performance trends, skill alignment and training efforts to help ensure they are yielding the desired impact.

Central to WFO is its ability to help banks manage and maximize their branch staff with the high level of flexibility required to be competitive in today’s changing environment. It not only address the need to effectively schedule to meet customer demand, it also enables banks to address the effectiveness of their employees – a concept that is critical to driving success as banks move to having more multi-skilled staff. Take a bank like Umpqua Bank, for instance, which does not distinguish between tellers and sales staff. It employs “universal

“Traditionally, WFO in the branch has focused on forecasting and scheduling resources to meet customer demand, and ensuring the right people with the most appropriate skills are being leveraged at the most optimal times. ” associates” that are given extensive training on all job functions in a branch. With WFO technology as an asset, banks can now gain valuable insight into how these associates are performing their work, how well customer interactions are being handled, where additional training may be required, how to gather and share best practice examples with employees across the branch network, and

ways to improve processes and the ultimate customer experience.

Learning to Adapt Despite the rise and popularity of channels such as online banking, many consumers still visit the branch to make financial product purchases. Changing customer demands and the subsequent shift in branch staff support needs have raised the stakes for bank management.

Delivering optimal customer service and transitioning staff to meet consumers’ more sophisticated advisory-role expectations are both a challenge and opportunity for many banks. Backed by a workforce optimization strategy and supporting technology, today’s banks can benefit from a powerful approach and set of tools to navigate and differentiate themselves, enhance the skills and knowledge of their frontline staff, monitor performance for continuous improvement, and keep the customer experience front and center.

Jackie Hudson is director of the retail banking practice of Verint Witness Actionable Solutions.

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Spring 2011 | 19

Commentary

Taking a Swipe at Sanity

By Christina P. O’Neill

Lessons Learned from Durbin When national banking trade associations and national credit union trade associations join a coalition opposing a pending law, and regulators offer concurring opinions, Washington may have a ReadyFire-Aim problem.

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s the April 21 deadline for drafting a final version of the Durbin Amendment drew near, it got plenty of review in the court of public opinion and in the court of law.

Seven senators, 15 congressmen and three regulatory bodies weighed in with calls to delay the implementation of Durbin by at least a year.

Last October, TCF National Bank, headquartered in Wayzata, MN, filed a federal suit in Sioux City, SD against the Federal Reserve and the OCC, alleging that the amendment imposed an unfair burden on large banks by subjecting them to fee caps from which smaller banks were exempt. But small banks say the exemption won’t help them, as they’ll be forced to cut their fee income to stay competitive with their larger, fee-capped brethren.

On Feb. 22, nine national trade associations, among them the ABA, the ICBA, NAFCU and CUNA, issued a 72-page comment letter to the Federal Reserve outlining what they describe as serious flaws in the bill. On March 2, Fed Chair Benjamin Bernanke said it was questionable that the agency would be able to meet the April 21 deadline for a final draft of the Durbin amendment. On March 10, dozens of small-business owners went to Washington to advocate in favor of interchange fee caps. In the March issue of IB, the official magazine of the ICBA, Senate Banking Committee Chair Tim Johnson (D-SD), who didn’t support or vote for the Durbin amendment, expressed caution on its unintended consequences.

And on March 16, the U.S. Senate and the House of Representatives introduced legislation to delay implementation of the 20

Banking New York

amendment – the Senate’s version calling for a two-year delay and the House for a one-year delay.

The FDIC and the OCC called for dismissal of the suit on Feb. 18. On March 11, the members of the coalition, including the ICBA, filed an amicus brief in support of TCF’s suit. TCF has since responded, and was heard on April 4 (after this publication’s press deadline).

Whether or not we end up repealing the amendment or buying time to retool it, it behooves us to examine just what went into the making and potential unmaking of the Durbin amendment.

Imposing restrictions on an industry segment that has been functioning well.

What’s the problem, and what’s the hurry?

Debit cards have actually reduced costs by streamlining the payment process because they reduce the need for using checks.

The Federal Reserve has the ultimate decision on debit card regulation, and has had second thoughts about Durbin since mid-March.

Imposing price controls. The TCF suit challenges the formation of rules that would cap debit card interchange fee at an amount far below issuers’ costs. It asserts that such rules are confiscatory under the U.S. Constitution, which the suit says does not permit government to dictate a price that would preclude a company from earning back costs plus a reasonable rate of return. When the Constitution is invoked, it’s a sign of one or both of these things: Extreme opposition to a rule, or the extremity of the rule itself.

No oversight to see that savings are actually passed on to consumers. If the original intent of Durbin was to help the

consumer, it got lost in the shuffle. What’s the use of confiscating financial institution profits if you’re not going to follow through on the original goal?

No oversight to see that risk-takers are compensated adequately for their risks. Costshifting without risk-shifting has drawn the unified opposition of financial institutions that seldom agree with each other on anything else. A proposal to the Fed to broaden its allowances for caps to take into consideration the cost of managing the debit product – most notably, the costs of fraud prevention – would be in order.

This presents a golden opportunity for risk management professionals on both the bank and credit union side of the aisles to make a case that would influence federal policy.

Failing to take into account the real costs of providing the service. The fee caps in Durbin would pay issuers’ transaction costs only, not the cost of developing and maintaining the debit card infrastructure.

Allegations are that rulemakers surveyed only the largest institutions – and TCF wasn’t among them. The larger the financial institutions, the more millions of transactions it processes, over which to spread the maintenance cost. TCF’s exposition, in its complaint, of where its fee income comes from and where it goes is an example that should be studied by policymakers before they bring out the crowbars.

The banking industry believes that the statutory language of Durbin does not require the fee caps proposed by the Fed, which focus only on the transactional cost, and that the Fed currently has the authority to broaden the allowable costs to provide a reasonable profit on the maintenance costs of debit.

Stay tuned for the next act.

Christina P. O’Neill is editor of Banking New York.

Risk Management

By Jeffrey Marcotte

Take Action Now to Improve Credit Risk Management Practices The Dodd-Frank reform law has been signed, and the specific details are expected to be worked out by regulators over the next 12 to 24 months.

However, the pressing issues raised in the legislation – risk management, accountability, transparency and uniformity – give us some insight into what examiners are going to be focusing on moving ahead.

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hile the law will have the greatest direct impact on commercial lending institutions with assets of $10 billion and above, there will be a trickledown effect that will impact smaller institutions. Examiners will be using DoddFrank as a guideline for best practices which will apply to banks of any size. Credit risk management will definitely be placed under the looking glass. In the meantime, lenders have an excellent opportunity to get ahead of the game.

First Trickle-down from Dodd-Frank An early example of the trickle-down effect, on Nov. 9, 2010, the FDIC issued a proposed rule for the Federal Deposit Insurance Fund (DIF). In an effort to rebuild the fund to adequately cover future losses, it will begin charging heftier insurance premiums for banks in higher risk categories.

These premiums are impacted by two key factors: a bank’s CAMELS rating and its capitalization. If a bank’s CAMELS rating improves and its capitalization is high, it will be placed in a low risk category and will pay lower insurance premiums.

This is significant for commercial lenders 22

Banking New York

because asset quality (and whether we like it or not, good loans) plays a large part in the CAMELS rating equation. Effective credit risk management practices help banks strengthen asset quality by putting good loans on the books that generate positive returns. This in turn, improves institutions’ CAMELS ratings – and they can realize big savings in deposit insurance premiums.

This is just one area where we’re already seeing the effects of the law and there will be many more to come, but the bottom line is that banks have to start lending again to make money. That’s why there is so much emphasis on looking at the asset side of the balance sheet. To make good loans that generate the earnings their shareholders are expecting, institutions must have in place sound lending practices and take a proactive approach to credit risk management.

Establish Uniform Processes Commercial lenders have some time before they will be forced to specifically address the issues that fall out of the reform legislation. If they establish best practices today for complex credit analysis and portfolio risk management, they will be able to address those issues and examiners’

expectations head on. Technology is essential to that effort. Innovation is coming to the rescue to help lenders effectively assess and mitigate complex credit risk (i.e. commercial real-estate, commercial and industrial, small business, construction and agriculture loans) in ways not possible before.

Here are three key areas where institutions should be focusing in the coming months.

Standardization. It will be crucial moving forward that banks standardize their lending processes across all commercial loan disciplines. Technology has evolved that aggregates data into one system of record for the lending area, similar to what the core processors provide. Lenders can now obtain, for the first time, a clear view into the risk that lies across all loan disciplines, and down to the individual loan level. Examiners will be specifically looking to see that banks are breaking down data silos and taking advantage of technology to put a repeatable process in place for identifying risk and uniformly managing all of their loans, from origination through payoff.

Visibility. Examiners will expect banks to have greater visibility into each loan so that they can take a more proactive approach to each borrower relationship. The only way to really evaluate risk is to get a complete picture of customers at macro and micro levels; some may no longer fit the bank’s risk profile and actions need to be taken to make them a better fit. Lenders also

need to be able to see the overall risk make up of their portfolios in order to identify where they should focus on attracting new borrower relationships. Utilizing advanced reporting and analysis tools, banks can gain the visibility – all the way up to the board of directors – that’s crucial to making sound, profitable loan decisions that will improve the bank’s overall performance. And, it instills confidence in the examiners that the bank truly has a handle on its credit risk.

focusing their attention moving forward, and even though all the details are still being ironed out, commercial lenders have enough ammunition to be able to launch a beneficial preemptive strike. By embracing automation and applying best practices now to some key areas, institutions will

not only be able to meet future regulatory requirements for credit risk management with confidence, but also drive more profitable loan businesses.

Jeffrey Marcotte is vice president of lending strategies at WebEquity Solutions.

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Stress Testing. To really be proactive, banks will need to be stress testing loans at individual and portfolio levels. One of the most compelling advances in lending technology is the predictive power offered by new risk management tools that provide modeling and pre- and post-approval stress testing capabilities that allow you to avoid potential credit problems well before they become problem loans. If commercial lenders can readily identify problematic loans early on, they have a much better chance of maintaining a healthy asset. Examiners are going to place heightened emphasis on stress testing loans and putting risk rating systems in place that will allow for thorough portfolio analysis. The latest technology innovations enable lenders to look at loan risk overviews by interest rate and risk rating, evaluate risk concentrations and run sensitivity analyses – to actively manage borrowers’ risk.

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Spring 2011 | 23

Dodd-Frank Fallout

By Megan L. Desso

What It Takes To Be Well-Capitalized Today As a result of the Dodd-Frank Act (DFA), there is no longer a cut-anddried definition of a well-capitalized bank. The term may mean one thing to a seasoned banker, while a regulator’s definition may be quite different. Standard capital ratios no longer mean what they did in pre-DFA days.

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DIC Chairman Sheila Bair has stated that excess leverage and thin capital cushions were primary drivers of the financial crisis. The Dodd-Frank Act now requires regulators to review current capital regulations and make sure the amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the company.

However, the act does not provide specific guidance as to what the new capital levels should be. It merely states that minimum leverage and minimum risk-based capital requirements “shall be established … and shall not be less than the generally applicable leverage capital requirements … that were in effect for insured depository institutions as of the date of enactment of the act.”

The act goes on to state, specifically, that the current levels should serve as a floor for new ones. Reading between the lines, banks should expect higher required capital levels; risk-based, of course.

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Banking New York

Bankers, fighting to survive the economic crisis, probably have not had time to notice a new challenge: the demand for additional capital. Mandated higher levels of capital would hit community banks hard. In this market, banks are typically left with one of two alternatives to improve ratios – either raise new capital or shed assets (typically good assets).

The effect has already been felt across the country, as examiners from all regulatory bodies are ordering banks of all sizes and complexities to increase their capital ratios well beyond the regulatory established well-capitalized minimums.

It’s easy to spot the trends. Specifically, examiners are seeking 9 percent to 10 percent Tier 1 leverage capital ratios and 12 percent to 14 percent risk-based capital ratios.

It is anticipated, as dictated in the Dodd-Frank Act, that trends will be more towards capital requirements based on risk profiles. This is a move from the old industry standards, which were specified

by regulation, to a more individual or dynamic approach. For example, banks with significant credit concentrations or deteriorating asset quality will be expected to hold higher capital levels than peers with the same level of assets but lower risks. As a result, the guidelines are not precise and are subject to interpretation.

However, there appears to be some good news. It seems that the regulatory bodies are attempting to manage this change on a bank-by-bank basis, instead of raising the minimums across the board.

There is still hope that community banks will be treated in accordance with their characteristically lower risk profiles. If that’s the case, the largest banks will bear the burden of the majority of the increased mandates.

It seems fair to conclude that, yet again, public monetary and fiscal policies and regulatory bodies may be fueling the very fire the Central Bank has been attempting to extinguish. While monetary policy is attempting to provide for an expansionary environment, regulatory actions are deflationary in nature.

The Central Bank wants banks to lend, but the regulators are issuing enforcement actions to raise capital ratios and Congress is passing bills that call for stronger capital requirements. The positions seem contradictory and at odds with each other.

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Higher capital levels for many healthy community banks are counterproductive because they force otherwise healthy institutions to shrink their balance sheets – make fewer loans and/or sell good assets.

What action should a community bank take now? First, develop a plan. And, second, don’t put it off. Begin now.

The goal of every financial institution is, of course, to be well capitalized. But how can a community bank plan to meet that objective when bankers can’t be sure what that means for their institutions?

The prudent view is to develop several alternative plans and options for raising capital and do it as quickly as possible.

Although the game has not changed, the rules have. When it comes to finding sources of capital in today’s market, financial institutions need to be creative, resourceful, and prepared. Plans should, at a minimum, identify multiple and diverse funding sources and financial instruments.

Anything less is playing with fire.

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Megan L. Desso is enterprise risk manager for Bankers’ Bank Northeast.

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Spring 2011 | 25

Management

By Frank Simon

Identify and Remedy Troubled Loans

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hat is a “troubled loan” and how do you know that a loan is “troubled?” A troubled loan, also known as a “sour loan,” arises and can be identified through one, or a combination of, the following warning signs: • Decline in and/or insufficient income • Liquidity questions and strain on working capital • Shortfall after debt servicing • Low or negative equity • Adverse business and employment conditions • Guarantor weakness • Insufficient collateral • Credit score problems

In recent years, the number of troubled loans grew exponentially. Fortunately, the trend appears to be easing. The FDIC recently reported that the proportion of troubled loans on bank books fell to 9.1 percent of all loans, down from 10.3 percent at the end of 2009. This does not mean that the lending industry is out of the woods – yet.

Handling Troubled Loans Although most have come to grips with troubled loans, one must continue to ask if your institution is strategically positioned to handle troubled loans. To answer that question, a lender needs to look internally.

Does the infrastructure exist to handle troubled loans? Should the lender have a separate, specialized department, like a special assets group, to handle troubled loans?

A separate department brings with it greater objectivity. The separation allows for a minimizing of a natural sympathy, anger or hostility that may arise between borrower and loan officer after a loan goes sour. Having a separate department also sends a very strong message to the borrower that this is a serious matter, and works to avoid or minimize lender liability issues.

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Banking New York

The separate department should be given authority to implement important procedures and policies. It should report and have access to senior management for important policy development, decisions, and resource allocation.

Troubled Loan Identified – Now What?

The importance of investigation and information gathering cannot be repeated enough. Great effort should be made to gather information on the borrower’s financial situation before the relationship takes a turn for the worst, or the borrower becomes unresponsive. Among other things, a lender should gather sales figures for borrowers with operating facilities, along with updated financial statements, tax returns and credit reports for the borrower and any guarantors.

In addition, all loan related documents should be assembled, and a history of the lending relationship prepared.

A loan document review should be conducted immediately after identification of a troubled loan. Generally, the loan documents will provide the parameters of the initial lending relationship, including repayment terms, affirmative and negative covenants, and events of default. The loan documents may also provide valuable information regarding a borrower’s asset situation, related guarantees and possible indicators for fraud by the borrower in the inducement to contract.

Title searches can also be obtained to assist in deciding on the course of action to be taken. A title search may be invaluable in determining the present status and value of collateralized property, or liens, mortgages and ownership interests in property considered for cross-collateralization as part of a workout scenario.

Once all necessary information and documents are gathered, it should be fully analyzed and evaluated with appropriate personnel, and a strategy developed.

The available action(s) are wide ranging

and include: do nothing; workout or restructure; seek a receiver; initiate collection or foreclosure proceedings; requesting a Deed in Lieu of Foreclosure; or initiate involuntary bankruptcy proceedings.

The involvement of outside counsel may be essential to the strategy chosen.

Although many institutions have existing relationships with counsel, one must be cognizant of possible conflicts in retention. It is not uncommon, especially in smaller communities, to find counsel in a conflict of interest situation for having previously represented a borrower. In addition, counsel may be disqualified from litigation if involved in the negotiation or generation of the loan documents in the first instance. Counsel may be conflicted out by a court for representing both sides in the negotiation, even though retained by the lender, and may be found by a court to be a witness to the lending relationship.

Upon review of the file, counsel should conduct an independent analysis and investigation, as necessary. Counsel may have a different or fresh perspective on the relationship, or discover new information.

Once familiar, outside counsel should work with the lender to either confirm or develop a new strategy. With a strategy in hand, counsel can work towards its successful implementation. These cases are often very fluid, making regular reporting by counsel on case developments, and identification of changes to strategy, important to eventual success.

Answering “yes” to one or more of these questions may weigh in favor of a workout. Indeed, the workout option gives the lender the opportunity to remedy any problems identified in this list.

Once deciding to pursue a workout, the lender’s next step is to determine what form the document evidencing the workout should take. If only a waiver or modification of a financial condition is contemplated, then a simple letter agreement may suffice. The letter agreement would set forth, among other things, the waiver or modification, the period of the letter agreement, and consideration given by the borrower for the relief received.

If the workout is more involved, then it will more likely be memorialized by a forbearance agreement. The forbearance agreement should include recitals and terms that give a snap-shot of, and lock in, the status of the lending relationship at the time the agreement is entered into. This snap-shot makes it more difficult for the borrower to later challenge the original loan documents and the workout itself.

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Steps TO

The forbearance agreement should include recitals and terms acknowledging the validity of the initial lending relationship and obligations, the validity of the loan documents, and confirmation of related security interests and priority of same. The agreement should also identify the events of default, provide for the borrower’s acknowledgment of those events, identify terms of the forbearance and repayment of the loan, identify any additional events of default that may arise under the agreement, and re-acknowledge all guarantees.

An important protection which should be included in all forbearance agreements is a release of claims from the borrower and any guarantors. The release should cover the original loan transaction and related documents, the entire lending relationship and the workout negotiations.

Frank Simon is a founding member and shareholder of Simon, Galasso & Frantz.

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Saving the Relationship A multitude of questions arise when a lender decides whether to pursue a workout or its legal remedies. Those questions include, without limitation: • Is the lending relationship still viable?

• Will a greater recovery result from the borrower and asset liquidation?

• Will a greater recovery result from preservation of the borrower as a going concern?

• Is the loan fully or partially secured?

• Are any security interests perfected and enforceable?

• Are the guarantors a viable source of repayment?

• Are there legitimate lender liability issues?

Compliance

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Bank Regulatory Safety and Soundness Examinations continue to focus on Board Compensation Governance, Board Fees, Executive Salaries, Incentive Compensation, Benefits, SERPs and Perquisites

“ I work in partnership with more than 100 community banks in 12 states to identify compensation issues and develop practical solutions.”

Arthur Warren, Esq.

Compensation and Benefits Advisor

Arthur Warren Associates 1600 Boston-Providence Highway Walpole, MA 02081 508-660-0280 | arthur@afwarren.com | www.afwarren.com

Spring 2011 | 27

Products and Services

Server Virtualization

By Chris Sutherland

The Indecipherable Technology That Will Boost Your Bottom Line Virtualization is a proven software technology that is rapidly transforming the IT landscape and fundamentally changing the way that people compute. Virtualization allows you to enhance the way your IT environment operates. It simplifies the physical infrastructure, providing centralized management and better flexibility for resource sharing.

From data centers to desktops, virtualization lets banks pool and share IT resources centrally and standardize computer deployment and resources so data is more secure.

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or years, bankers have been watching and waiting for the definitive direction of virtualization. Although the technology isn’t new, there has been a delay in adoption for reasons ranging from an overall lack of knowledge about the benefits, to banks fearing a shift in their day-to-day operations.

Today, virtualization technology is maturing and the tangible benefits are being realized – and the timing couldn’t be better. In the recent uncertain economic environment, the industrywide virtualization initiative is generating immediate and ongoing operating efficiencies and cost savings for many banks

nationwide. And more and more banks are progressively plugging in.

Below are the top five reasons banks are implementing server virtualization.

Get More out of Resources With virtualization, banks can pool common infrastructure resources and break the legacy “one application to one server” model with server consolidation.

Virtualization can dramatically reduce the number of physical servers and dynamically redistribute excess computing power to where it is needed most. As the processing power of today’s servers continues to increase, it is now easier than ever for one more powerful server to replace multiple smaller servers.

Reducing the number of physical servers also reduces ongoing energy requirements, making it a more environmentally friendly way of doing business. This option is attractive to banks that are adopting “green” business practices.

Reduce Data Center Costs Cost reduction is one of the primary reasons banks are increasingly taking advantage of virtualization. Virtualization requires fewer servers and related IT hardware and can reduce real estate, power, and cooling requirements. It also provides more efficient management tools, which can enable banks to improve their server‐to‐admin ratio and even reduce personnel requirements. And looking at the big picture, virtualization dramatically reduces the hassle and costs associated with ongoing hardware maintenance.

Enhance Availability and Security Virtualization increases availability of hardware and applications, improving business continuity and disaster recovery.

It enables banks to securely backup and migrate entire virtual environments with practically no interruption in their day-to28

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day operations. With virtualization, banks can eliminate planned downtime and recover quickly from unplanned business interruptions.

management, disaster recovery, and cost savings. And make sure you’re working with a trusted and proven vendor that is experienced with evaluating and implementing virtualized environments.

Look for a vendor that offers custom network solutions and consultation that support virtualization, server consolidation, storage, communications, conversions and migrations.

Gain Operational Flexibility Virtualization enables banks to respond to market changes with dynamic resource management, faster server provisioning and improved desktop application deployment.

Banks need to be able to change software and add new products in a reasonable time frame. With a virtual server infrastructure, they can do this without having to find new hardware, order it, and wait on having it shipped to the bank. If you have the growth room in your setup you can configure and test without having to wait for equipment.

Server virtualization can generate

significant cost and time saving benefits to banks. If you haven’t researched how this operational enhancement can help your bank save money, improve disaster recovery, and simplify day-to-day processes, there’s never been a better time than right now.

Around the world, companies of all sizes are benefiting from virtualization – don’t be left behind!

Chris Sutherland is a network engineer at Jack Henry & Associates, Inc.

Do your statements look like this?

Improved Desktop Management and Security Virtualization provides environments that users can access locally or remotely, with or without a network connection on almost any standard desktop, laptop, tablet PC, or device. With desktop virtualization, banks can secure and manage desktops from one centralized location. Using simple management tools, all desktops can be configured the same and the data is stored at a data center to help ensure that security and backup policy requirements are upheld.

Getting Started with Virtualization Banks that are interested in getting started with virtualization should begin the process with discovery and planning. It’s important to analyze the current operating environment and use that information to decide how and where virtualization should be utilized.

Discovery – First, take inventory of your entire environment, including servers, workstations, and switches. Monitor the performance of your environment, which includes building a history of performance for servers, diagramming what each workstation needs physically, and tracking performance of bandwidth locally on wide area networks.

Planning – Review your discovery documentation, and determine what elements of your environment are good candidates for virtualization. Determine your future needs in areas such as

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Spring 2011 | 29

Small Change Ridgewood Savings Bank Elects Two New Trustees, Announces Officer Promotions Ridgewood Savings Bank, the largest mutual savings bank in the state and serving customers throughout the metropolitan area, announced it has elected Henry A. Braun and Paul C. Fitzpatrick as new trustees of the bank, effective Jan. 1.

Ridgewood Savings Bank Trustee Robert J. Crimmins is retiring after 11 years of dedicated service to the bank.

Henry A. Braun has more than 40 years of experience in banking, and has successfully managed several bank acquisitions in addition to data and stock conversions.

From 1995 to 2008, he was senior vice president of banking operations for Flushing Financial Corporation/Flushing Savings Bank. Previously, he was senior vice president, banking operations for Greater New York Savings Bank.

Paul C. Fitzpatrick has more than 35 years of investment banking experience with a concentration in the hospitality industry. From 1979 to present, he has been president of Fitzpatrick Associates Inc., a real estate investment banking firm representing both institutional and private clients to facilitate asset sales, debt financings and investment counseling related to commercial real estate. From 2004 to 2007, he was a senior managing director and founder of the hotel transactions group with Cushman & Wakefield.

The bank also announced the promotion of Annette Welsh to vice president and deputy auditor. Formerly, she served as assistant vice president and deputy auditor. She joined the bank in1990.

In addition, the bank’s board of trustees approved the following junior officer promotions: Luis Basaldua, assistant vice president; Helene Hahn, assistant vice president; Coretta Johnson, assistant vice president and chief accounting officer;

Lucy Mangru, assistant vice president and director of treasury; Joan Piccione, assistant vice president; Gary Tateosian, assistant vice president; and a new officer promotion of Barbara Giglio to assistant risk officer.

Bankers’ Bank Northeast Names Megan Desso to New Position of Enterprise Risk Manager Megan Desso has been named to the newly-created position of enterprise risk manager at Bankers’ Bank Northeast, based in Glastonbury, Conn. Her new duties include developing and implementing a framework for risk management including identifying events and circumstances relevant to the organization’s risk objectives and opportunities, development of a response strategy and risk mitigation controls, management of existing risks and internal controls, and developing goals and objectives based on identified risk priorities.

She also chairs the bank’s Internal Risk Council and will continue to serve in the role of compliance officer.

Before joining Bankers’ Bank Northeast, Desso was an internal auditor and privacy officer at a multi-billion dollar Connecticut bank. She is a graduate of the University of Connecticut with a degree in actuarial science and mathematics.

Signature Bank Adds Two Private Client Banking Teams, Appoints New Group Director Signature Bank has named two private client banking teams to its growing network.

Concurrently, the bank expanded one of its existing teams with the addition of a new group director, bringing the total number of group directors to 98.

George Taitt was appointed group director and senior vice president, while John Millwood was named associate group director and vice president and Cindy Sankar, senior client associate. They will be based out of the bank’s Jamaica, Queens private client banking office, marking the second team to join this recently opened office.

Taitt most recently served for five years as branch manager and vice president for CapitalOne Bank in Jamaica. He previously was vice president and branch manager for JPMorgan Chase in the Bronx.

Millwood joined from JPMorgan Chase, where most recently he was assistant vice president and business banker, catering to real estate and property management clients.

Sankar worked with Taitt at CapitalOne as a relationship banker focused on serving commercial clients.

Vincent E. LoPreto and Keti Dervishi were each named group director and senior vice president, while Claudia E. Aviles was appointed to the post of senior client associate. This team will work out of the bank’s 261 Madison Ave. (at 39th Street) private client banking office.

The team joined from Metropolitan National Bank, where they worked together for a total of 10 years at both this institution, as well as HSBC. LoPreto spent the past eight years as a branch manager and vice president in midtown Manhattan.

Dervishi was a relationship manager and vice president working with LoPreto, and also developed an expertise in serving commercial real estate firms. Previously, she was a corporate sales officer and assistant vice president at HSBC, where she dedicated her 17-year career to business banking.

Aviles most recently worked with LoPreto as a senior account representative.

While at HSBC, she held several roles including customer service representative, consumer banker and branch operations assistant.

Concurrent with the team expansion, Signature Bank named Todd Flamenbaum group director and senior vice president.

Flamenbaum joins David Saunders’ team in Melville, Long Island. Previously, he was a senior vice president and senior client relationship manager at Bank of America in Melville. He also was market manager for the Long Island Business Banking Group.

To submit personnel changes at your bank or credit union, email Cassidy Murphy at cnortonmurphy@thewarrengroup.com.

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