Banking New York 1Q 2014

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • FIRST QUARTER 2014 • VOLUME 31

TALKING ABOUT

DATA SECURITY TARGET BREACH ONLY THE LARGEST OF MANY

THE END OF FREE CHECKING DOUBLING DOWN ON NEW YORK CASINOS

+INSIDE: SPECIAL SECTION ON THE FUTURE OF BRANCH BANKING Produced in partnership with the Independent Bankers Association of New York State

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BANKING NEW YORK Volume 31 | First Quarter 2014

TALKING ABOUT

DATA SECURITY 16

TARGET BREACH ONLY THE LARGEST OF MANY

04 FROM THE EDITOR

The Psychology of Change

14 STOP THE BLEEDING

06 P RESIDENT A PRO

Veteran Community Banker John Witkowski Named President and CEO of IBANYS

Free Checking is Dragging Down Bank Profitability

20 IT’S A SMALL WORLD Sharing Responsibility for

08 JUST WHO DO YOU WORK FOR AGAIN?

08

10 ATTRACTING, REWARDING AND RETAINING TOP TALENT

Data Breaches

22 FULLY WIRED BRANCH

New Technologies Enhance the Banking Experience

24 BANK OF THE FUTURE Retail Banking Down, but Not Yet Out

12 PROMOTING PROSPERITY AND OPPORTUNITY IN NEW YORK STATE

26 TAKE MY CASINO – PLEASE! Cuomo Gambles on a Second Act

for Upstate New York

28 BANK PROFILE Jeff Bank 20

CONTRIBUTING WRITERS THIS ISSUE Laura Alix, Linda Goodspeed, Scott Van Voorhis, Steve Vuiker 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

30 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

©2014 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher.

Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210 www.thewarrengroup.com

Scott Ellison GRAPHIC DESIGNERS

Amanda Martocchio & Tom Agostino

ADVERTISING ACCOUNT MANAGER

Bob Holzhacker, Mike Lydon, Claire Merritt

24

First Quarter 2014 | 3

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

The Psychology of Change

T

he fallout from the Target data breach continues to unfold. One thing we have noticed since its announcement – along with the inevitable rumblings about litigation – is that other retailers and at least one hotel chain have announced data breaches occurring within their own systems. The psychology, on the surface, seems to be: “Our breach wasn’t as bad as Target’s, and now we’ll get points for prompt disclosure.” But there’s something else going on, too – a new groupthink that concedes that the current point of sale payment system in the U.S. is dangerously fragmented and vulnerable.

Now, it’s OK to criticize the flaws in the payment system without looking as if you’re trying to deflect criticism.

We’ve kept the magnetic strip technology because no one – card issuers, banks and retailers – wanted to be the first to jump into large investments just to get payment security back to baseline (or, rather, what we thought was baseline). But hackers and technology have made such vast end-runs around current security measures that the cost of replacing millions of cards is making the cost of a technology upgrade look a lot better.

For more discussion of change, see our special section on the future of retail banking. Brent Biernat calls for the role of the branch office to expand to a teaching opportunity, to help tech-wary customers become more comfortable with new technologies. Mary Buffett also calls for branches to embrace a teaching opportunity, but on a more holistic level for customers.

That’s something from which many bank management teams have historically shied away (with the exception of wealth management teams, of course), but Buffett warns that they continue to do so at their peril.

Both of these subjects herald the new age of banking in terms of what customers expect from their financial institutions. Convenience without compromising security. Technology without sacrificing connectedness.

Stability, but not at the expense of innovation. Customers may have changed over the last century, but innately, they still want what they always did.

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

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PRESIDENT’S A PRO IBANYS Board of Directors

Veteran Community Banker John Witkowski Named President and CEO of IBANYS The Independent Bankers Association of New York State (IBANYS) has named John J. Witkowski as president and CEO, culminating a comprehensive search begun last fall.

W

itkowski brings significant experience in the New York banking industry. He served as a president and CEO of Wyoming County Bank, and was regional president and executive vice president of retail banking at Five Star Bank, where he was responsible for business John Witkowski development for small business, mortgage, investment services, fee-based services, the retail branch network, and provided leadership for the bank’s western region. He also served as president of JW Consulting Group, advising banks, small businesses and entrepreneurs.

“This is a great opportunity to lead an organization that recognizes the importance of the community bank in New York state,” Witkowski said. “I look forward to working with, and for, all of our member banks while continuing to build IBANYS’ presence throughout the region.”

IBANYS Chairman Greg Hartz, president and CEO, Tompkins Trust Co., said, “We are thrilled to welcome John Witkowski as the president and CEO of IBANYS. York 6 | Banking BankingNew New York

John’s community banking experience and his extensive leadership experience will be a tremendous value in leading the organization during a time of significant change in the financial services industry.”

Earlier in his career, Witkowski spent 13 years with Fleet and Bank of America, where he developed the strategic business initiative of remote relationship management for small business customers. A former board member of the Western New York SBA Council, he was also a director of the New York Bankers Association and vice chair of its retail and small business executive committee. He is a director of the Genesee Community College Foundation, and of the Buffalo Bills Alumni Association.

Prior to his banking career, Witkowski was a sixth-round draft pick of the Detroit Lions of the National Football League. A quarterback who set a host of school and Ivy league records while playing for Columbia University, he also played for the NFL’s Houston Oilers and in other professional leagues. A graduate of Columbia, he holds a bachelor’s degree in economics and was inducted into the university’s Athletics Hall of Fame as a member of its inaugural class.

■

Officers Chairman Gregory Hartz Tompkins Trust Company, Ithaca Vice Chairman Christopher Dowd Ballston Spa National Bank, Ballston Spa Treasurer/Secretary John Buhrmaster First National Bank of Scotia, Scotia Directors Thomas Amell Pioneer Savings Bank, Troy Ronald Bentley Chemung Canal Trust Company, Elmira Brenda Copeland Steuben Trust, Hornell 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 Richard Koelbl Alden State Bank, Alden Douglas Manditch Empire National Bank, Islandia Salvatore Marranca Cattaraugus County Bank, Little Valley Paul Mello Solvay Bank, Solvay David Nasca Evans Bank, N.A., Hamburg Joseph Perri Gold Coast Bank, Islandia G. William Ryan Cayuga Lake National Bank, Union Springs Glenn Sutherland Catskill Hudson Bank, Monticello Mark Tryniski Community Bank, N.A., DeWitt Kathleen Whelehan Upstate National Bank, Rochester IBANYS STAFF John J. Witkowski President & Chief Executive Officer Stephen W. Rice VP Government Relations & Communications William Y. Crowell, III Legislative Counsel Linda Gregware Director of Administration & Membership Services

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PUBLIC AFFAIRS UPDATE | By Stephen W. Rice

Just WHO Do You Work for Again?

Over the holidays, a young acquaintance asked me where I worked. “Why, I work for you,” I replied, to her surprise. Once she concluded that she didn’t really owe me a pay raise or a week’s vacation, she asked for an explanation. So, I gave her a quick quiz.

W

here had she and her husband gone to get their home mortgage and their two car loans?

Where did they get the small business loan last spring to expand their small restaurant? Where had her fatherin-law gotten the financial help he needed to keep the family’s small produce farm operating? Lastly, did she Stephen W. Rice know the source of many of the people and dollars that had helped make the local holiday fundraiser for families in need such a success?

Guess what? She answered each of my questions by naming one local 8 | Banking New York

community bank after another. “Well, I work the Independent Bankers Association of New York State,” I explained, “and as you just demonstrated … we work for you.”

Now, obviously the answer to any of my random questions could have been different. Certainly, larger banks, credit unions, other financial institutions and a myriad of civic and charitable organizations also contribute greatly to our personal and civic needs.

So, my “quiz” could have backfired.

But I liked my chances.

With a new year upon us, it’s a great time to reiterate what New York’s community banks do each and every day, and why they play a vital role in the fabric and economy of New York.

We are commercial banks, thrifts,

stock and mutual savings institutions.

Community banks’ assets range from less than $10 million to over $10 billion. We constitute roughly 97 percent of all U.S. banks. More than 90 percent of us have assets under $1 billion – 31 percent under $100 million!

Most community bank loans benefit the neighborhoods where depositors live and work. We are the primary source of lending for small businesses and farms, in New York state and across the nation. In small towns, suburbs and city neighborhoods, we improve the quality of life for our customers and communities. We invest deposits locally, using them to help customers purchase a home, car or truck, finance their kids’ college education, start a business and build their financial security.

Community banks are locally operated financial institutions that empower employees to make local decisions to serve their customers.

Community banks’ boards of directors consist of local citizens who want to advance the interests of the towns and cities where they live, and where their banks do business.

Yet make no mistake: “community bank” doesn’t mean “too small” or “too limited.” We are engaged in nearly every aspect of the business of banking, at very competitive rates, and have the level of technology and delivery systems you desire.

Yes, it is a new year, but some things just don’t change. Your local community bank is still the place to go for your banking and financial needs. So, come on in, or log on with your laptop or smartphone, and see for yourself: we do work for YOU! ■ Steve Rice coordinates government relations and communications for the Independent Bankers Association of New York State. He has worked in the New York banking industry and New York state government for more than three decades.

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EXECUTIVE BENEFITS PLANS | By Fabrizio D’Uva

Attracting, Rewarding and Retaining Top Talent Building a competitive advantage is one of the biggest challenges facing community banks today. What is the key?

Attracting, retaining and rewarding employees needed to ensure success. Your total rewards package is the key competitive resource for employee retention, and a critical investment for your bank. Retirement benefits are a significant component of that package – qualified plans being only part of the equation.

Executive benefit plans are an essential component of any corporate benefits strategy.

• Provide replacement income at retirement based on total (non-limited) compensation.

• Reward, attract and retain key executives.

• Replace benefits lost due to IRS limits on qualified plans.

• Provide benefits in addition to those underqualified plans.

• Defer compensation.

• Provide enhanced benefits in the event of an acquisition or other change of control.

Qualified plans must be offered to a non-discriminatory group of employees; however, a non-qualified plan may be offered to a prescribed group of employees. The Department of Labor requires that the plan be designed to cover a select group of management and/or highly compensated employees, such as presidents, chief executive officers, chief financial officers, senior or executive vice presidents, general counsel and treasurers. Other employees may be eligible based on their level of compensation and responsibilities.

TYPES OF EXECUTIVE BENEFIT PLANS

E

xecutive benefit plans are “nonqualified” plans and differ from “qualified” plans, like pension plans, 401(k) plans, KSOPs and ESOPs, which are governed by the Employee Retirement Income Security Act (ERISA).

Qualified plans must be offered to all company employees. Non-qualified, or executive benefit plans, can be designed exclusively for key employees and directors, providing an optimal solution to benefit limitation issues.

An executive benefit plan is an employer’s contractual commitment to a 10 | Banking New York

select group of employees to provide supplemental retirement benefits at a future date. Because there are no coverage, eligibility or participation requirements, an employer can decide to provide nonqualified deferred compensation benefits only to a select group of executive or highly compensated employees. This allows the employer to provide rewards and incentives based on an employeeby-employee approach. Executive benefit plans provide flexibility in developing benefit compensation strategies and can be used to:

Deferred compensation arrangements permit designated executives to defer additional compensation to avoid current taxation. These plans are typically established to provide a vehicle for key employees, highly compensated employees and directors to defer compensation until retirement.

Benefit equalization plans (BEPs) restore retirement plan benefits lost due to the various limits placed on IRS qualified plans. A BEP can “correct” the plan salary limit, the defined benefit plan maximum benefit limit, and various defined contribution plan limits including maximum 401(k) deferrals and ADP/ ACP compliance refunds.

Supplemental executive retirement plans (SERPs) can provide benefits beyond those provided under the qualified plan and might include: • Benefits based on a more generous formula than in the qualified plan.

• Credit for additional years of service under a defined benefit plan.

• Enhanced retirement benefits for executives who retire early.

• A benefit reflecting compensation excluded under the qualified plan’s salary definition such as bonuses and deferred compensation.

• A defined contribution incentive retirement plan that allows a bank to reward their top executives & directors based on the performance of specific bank benchmarks.

ployer and employee join in purchasing an insurance policy on the life of the employee and enter into an agreement to split the benefit of the policy’s death proceeds. The employer retains ownership of the policy and its earnings.

PLAN DESIGN

Designing a program that can help your bank attract, reward and retain top talent begins with establishing benefit and cost objectives. Determine the objectives to be achieved with a nonqualified program by analyzing which employees are being impacted by IRS limits, and which key employees you might wish to reward with coverage under a non-qualified arrangement.

Next, address these questions: • Where does the bank attempt to position its compensation and benefits programs relative to its competitors?

In a split-dollar arrangement, cash value life insurance policies are used to form a non-qualified plan. The em-

• How does the bank want to apportion its retirement benefit dollars among various benefit vehicles?

• What is the bank’s attitude toward allocating benefits based on an overall company performance?

• What are the bank’s benefit and cost objectives?

No two banks are alike. Executive benefit plans are highly customized for this reason. As banks deal with a complex regulatory environment, new challenges are faced on the key areas of attracting, retaining, rewarding, and motivating talent. Positioning your benefits program competitively can make a critical difference.

■ For more information about Pentegra’s retirement plan offerings, please contact Fabrizio D’Uva, regional director, at (609) 584-7400 or fduva@ pentegra.com.

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MISSION-BASED LENDING | By Patrick J. MacKrell

Promoting Prosperity and Opportunity in New York State Almost six decades ago, New York’s banks recognized the need for an additional resource for our small businesses and created New York Business Development Corporation (NYBDC). From the beginning, NYBDC has been a bank-crafted and funded alternative when conventional bank financing is not available.

N

early 125 banks hold membership in NYBDC and provide the leveraged capital necessary to support a more expansive approach to credit. The NYBDC alternative is not separate or independent of its member banks, but instead represents members’ commitment to serve small business – both directly through their own product offerPatrick J. MacKrell ings and indirectly through their support of NYBDC. NYBDC is unlike any other organization in that it represents the collaboration of virtually every bank doing business in New York state to facilitate loans to small businesses that do not qualify for conventional financing. This collaboration highlights the commitment of New York’s banks to small business and recognizes that “sharing risk” among the member banks of NYBDC allows for a more expansive appetite for risk and, therefore, a greater likelihood that the requests by creditworthy businesses will be approved.

In uncertain economic times, such as those experienced in late 2008 and the years that followed, NYBDC has a well-established history of increasing its small business lending to address gaps in the marketplace – all facilitated by the support of New York banks. The member banks that make up NYBDC 12 | Banking New York

recognize the value of the shared risk collaboration and consistently support NYBDC with the lines of credit necessary to provide loans to creditworthy small businesses.

Most, if not all, member banks have robust “second look” programs that are tasked with carefully reviewing loans that would otherwise be declined. While these programs capture some opportunities, there are cases where a declination is nonetheless determined to be appropriate.

NYBDC provides member banks with another opportunity to serve their customers through a referral to NYBDC. These referrals allow NYBDC to do precisely what its members intended it to do – serve as an alternate resource for small business loans where a conventional solution is not available.

NYBDC routinely makes loans to start-up and early stage companies, challenging industries, and in cases where repayment is based on projections. It combines traditional underwriting with careful structure and maximum use of technical assistance providers and loss mitigation measures, such as U.S. Small Business Administration loan guarantees. It works closely with the small business throughout the term of the loan, providing the flexibility that is often necessary to meet the challenges and uncertainties attendant to owning a small business.

As a “mission-based” or “alternate” lender, NYBDC looks beyond sim-

ply generating shareholder value and return on investment to focus on the broader mission of promoting prosperity and opportunity. Although its operations, in many respects, mirror the commercial lending function of a traditional bank, it is focused on providing leveraged capital to small businesses that are unable to obtain loans through traditional means.

Notwithstanding NYBDC’s focus on providing alternate lending solutions, it cannot accomplish its mission without support from lending and community partners. NYBDC relies on referrals from partners.

The wide range of financing programs and loans funds it administers cannot be deployed without the assistance of lending partners. The organization’s work begins when a lender realizes that it will not be able to provide a loan, but engages with the business to identify alternate lending opportunities available to the business. Lenders that refer businesses to NYBDC may not be able to make the loan, but they can certainly facilitate the loan by making the referral and in the process develop a relationship across other business lines.

The process starts with a referral of your customer to NYBDC. The referral can take many forms, ranging from the direct introduction of the business to a loan officer, to simply providing contact information to the business and advising that NYBDC is available to consider the request.

Businesses can access this program via NYBDC’s website, www.nybdc.com, email, anotherlook@nybdc.com, or telephone, (800) 923-2504.

■ Patrick MacKrell is president and CEO of the New York Business Development Corporation.

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M&T Bank, an FHLBNY member, used an advance to fund the purchase of a commercial real estate property for Cooks’ World, a gourmet kitchen store in Rochester, New York. The move to the new space ensured that this small business was able to keep jobs in the Rochester community.

Contact us to see how the power of an advance can improve your community.

101 Park Avenue, New York, NY 10178 | (212) 441- 6700 | www.fhlbny.com Note: The Federal Home Loan Bank of New York uses the word “advances” to refer to the loans it provides to our member lenders.

STOP THE BLEEDING | By Dan Roderick

Free Checking is Dragging Down Bank Profitability

T

he viability of free checking has been a topic of conversation across the industry for many years. Unfortunately for most community banks, little has been done to effect significant change regarding what has become an outdated strategy for quite some time.

Free checking has traditionally been subsidized in large part by overdraft fees, as well as debit card interchange revenue. But overdraft revenue and debit card interchange has dropped dramatically due to regulatory and legislative changes since 2010. Worse yet, the historic decline in interest rates since late 2008 has severely reduced the value of deposits – a problem that has been compounded by lower loan demand.

The chart below shows this impact on fee income over the past six years. Since 2007, deposit fee income across the community banking industry (excluding banks larger than $25 billion in assets and specialty banks) as a percentage of average assets has declined from 0.34 percent to 0.26 percent last year – a 24 percent reduction! To put this fall off in terms of dollars, community bank fees on deposit accounts have dropped by more than $1.5 billion over this period.

When we look at the impact the decline in fee income has on demand deposit account (DDA) profitability – coupled with the impact caused by low interest rates and rising costs – the picture gets even worse.

Since the early 1990s, when “free checking” was first introduced, there has been a radical transformation in the retail banking business. Twenty years ago, banks weren’t providing costly services like online banking, automated bill pay or mobile banking. While these technologies have provided improved service and convenience to consumers, they have also added substantial cost for bank DDA

products. Most institutions today do not charge consumers for any of these add-on solutions, so the cost base for a DDA product has gone up with no corresponding increase in fee income. Rising costs and declining interest rates have had a catastrophic effect on DDA profitability at the average community bank.

In the table below, we see that in the early 1990s, free checking was a pretty good idea. It allowed financial institutions to acquire customers that might one day become more profitable – and still earn a small profit in the meantime – with the typical DDA earning just over $12 per year, pre-tax.

However, by the early 2000s, free checking was beginning to look like a questionable proposition, with the typical DDA losing almost $50 per year due primarily to declining interest rates (funds value) and rising operating expense. Rolling forward to today, free checking has become a truly terrible idea – the typical DDA is now losing almost $200 per year! In addition to historically low interest rates and higher expense, reduced fee income is now taking a toll. What was once marginally profitable or a manageable loss leader is now a serious drain on bank profitability.

A loss of $200 per typical DDA account sounds ominous enough, but what implication does that loss have on the profitability distribution of our customer base? It plays a major role in concentrating profitability for community banks to the top 5 percent to 10 percent of the client base. As shown in the table below, the typical community bank generates 100 percent of the “strategic value” of its customer base via the top 7 percent of the client base – Tier 1. The second customer tier represents 19 percent of the customer base and produces 25 percent of strategic value. Unfortunately, things head downhill from there. The middle tier consists of

COMMUNITY BANK FEE INCOME/AVERAGE ASSETS

PRE-TAX INCOME/DDA ACCOUNT

Source: FDIC

Source: FDIC/Boston FHLB/Strunk Research

14 | Banking New York

25 percent of customers but only drives 10 percent of value, and the bottom two tiers – almost 50 percent of customers – produce negative strategic value! (The strategic value of an account is calculated by multiplying the balance by the projected long term spread on the balance net of projected losses, adding actual fees and subtracting estimated variable costs. Relationship strategic value is the sum of the strategic value of the accounts that are part of that relationship.)

So now what? The solution to this problem is fairly simple, but proper execution of that solution is critical to its success. As an industry, we can no longer afford to give away our outstanding services for nothing. It costs the typical community bank just over $320 per year in operating expense to support the average consumer DDA account.

For the vast majority of customers, that relatively expensive service is given away for nothing! At best, there are nominal requirements in place, such as a requirement to have direct deposit or a maintaining a minimum balance, but these measures don’t come close to providing the necessary revenue to offset cost.

services created that drives balance consolidation, increases fees and creates value for each segment.

The optimal way to drive strategic value within the deposit base is to increase balances. Unfortunately, for the vast majority of customers, this simply won’t be possible.

Optimistically, increased deposit balances may generate a profitable relationship with 20 percent of the customer base. The remaining 80 percent will need a fee strategy – because increased fees will be the only avenue to achieve profitability with these customers. To avoid a complete elimination of free checking, there may be a free e-checking product as a fallback for clients who want only very basic banking services and are not willing to pay a fee. The resulting product structure would look something like: • Premier checking – relationship-based account with meaningful relationship recognition features and no monthly fee.

• Value checking – fee-based product enhanced with features from which most everyone can benefit.

• E-checking – limited service/functionality, no fee, targeted to a small segment of customers.

THE SOLUTION Significant, ongoing fees must be generated from the vast majority of DDA customers. At the same time, most community banks will feel the need to maintain some type of free checking account. Free checking has a valid part to play in supporting the financial institution’s mission in its community; however, free checking should be reserved for a relatively small part of a community bank’s audience, such as students or active military.

Unfortunately, as an industry, we’ve spent the last 20 years convincing consumers that free checking is a birth right, that no one should pay a fee for their DDA relationship. To execute this solution effectively, a simple customer segmentation strategy will need to be implemented, and a package of

The trick here is to provide enhancements to the value checking product that are in high demand – and that consumers are willing to pay for. These enhancements must be low cost to the bank, but high value to the consumer.

The days of free checking have passed. The industry is facing increasing regulatory pressure that is both increasing the cost base and decreasing sources of fee income. The interest rate environment and low to modest loan demand has squeezed margins. Increasing capital requirements will create additional pressure. The time has come to diversify sources of fee income – and the large, and largely unprofitable – DDA base is a great place to start that diversification.

■

Dan Roderick is CEO of Strunk LLC, an information technology consulting firm.

CORE VALUE MANAGEMENT MODEL

Source: Strunk Research

TALKING ABOUT

DATA SECURITY TARGET BREACH ONLY THE LARGEST OF MANY

The massive credit and debit card breach at Target over the 2013 holiday season was only the largest of almost two dozen similar data breaches over the past year alone. But it’s the one that finally got the attention of both the banking and the merchant world to focus on the costs and consequences of a massive payment system that’s vulnerable to smart teenagers and the lack of vigilance on the part of employees and vendors.

BY STEVE VIUKER

A

ccording to various initial reports, the malware used to hack into Target’s credit card system may have been written by a 17-year-old Russian, although investigators were doubtful the programmer was involved in the actual security breach. Andrew Komarov, CEO of cybercrime firm InterCrawler, posed as a cybercriminal 16 | Banking New York

and chatted with the teen, and said the hacker told him he would sell him the malware for $2,000 or 50 percent of all intercepted credit cards. In an email to its Canadian customers, Target said that Canadians who crossed the border to shop in the U.S. between Nov. 27 and Dec. 15 could have had their personal information stolen. Target noted that

credit and debit card information wasn’t stolen from stores in Canada, which is among the many countries that use more secure chip-based credit cards.

Target, the nation’s third-largest retailer, issues proprietary debit and credit cards known as the “Target REDcard.” The credit and debit versions of the Target REDcard were

The Federal Bureau of Investigation said it has identified around 20 cyberattacks in the past year similar to the one that hit Target.

also impacted along with most credit cards used at Target stores during the breach. Attackers began skimming data from credit and debit card transactions at Target’s cash registers beginning Nov. 27 and continued to do so until the breach was shut down on Dec. 15.

The software also found its way to another Target system where it stole

personal data such as email addresses and phone numbers for 70 million people.

Subsequently, The Wall Street Journal reported that the Target breach was facilitated by the use of stolen vendor electronic credentials. Target confirmed the report but did not reveal how the credentials were stolen or

what portal the hackers used. The company did say it has limited access to some of its computer systems during an ongoing investigation.

Advanced hackers often try to take advantage of low-level employees or outside contractors. They then move continued on page 18 ď ľ First Quarter 2014 | 17

Photo by Gabe Hernandez, The Monitor/AP Photo

A McAllen Police detective collects credit cards that were confiscated by police after arresting a man and a woman on fraud charges on Jan. 20 in McAllen, Texas. According to a South Texas police chief, the suspects used account information stolen during the Target security breach to buy tens of thousands of dollars’ worth of merchandise, but a spokesman for the U.S. Secret Service said an investigation is ongoing into the possibility of a link between the Target data breach and the arrests.

laterally through networks to gain access to more valuable information, in this case payment card data.

The Federal Bureau of Investigation said it has identified around 20 cyberattacks in the past year similar to the one that hit Target. The U.S. Secret Service is taking the lead in the investigation into the attack on Target and other retailers, but as of the end of January, had said little publicly since the breach.

BIG DISTRESS DOWNSTREAM Saying that safeguarding of customer information is central to maintaining public trust, Independent Community Bankers of America President and CEO Camden R. Fine called on Congress to take action to mitigate the negative impact on the public of security breaches. Additionally, ICBA called for a single national standard to replace the patchwork of state laws on data security breaches that fosters confusion and puts consumers at risk. The association said it strongly supports notification to allow consumers to take steps to protect themselves from identity theft or fraud resulting from data breaches.

The data security breach has cost credit unions between $25 million to $30 million; according to preliminary results of a survey by the Credit Union National Association. In addition, more than one in three credit unions report having to increase staffing as a result of the breach, and 38 percent of credit unions reported call volume from members increased 10 percent to 25 percent after the breach.

Said Scott Tangney, executive vice 18 | Banking New York

president, financial and professional services at New York City-based Makovsky Integrated Communications, warns that cyber break-ins will push consumers to other retail brands and will shake customer confidence in online sales. “Will consumers increasingly hold retailers accountable for this type of situation and the speed and course of action taken?” he asks. “Will regulators force retailers to have a certain level of cybersecurity program in place? How will the payments industry respond?”

Tangney notes that the open letter from Target CEO Gregg Steinhafel, published in newspapers and on the company’s website was straightforward “and hit some good points,” but did not cover the steps the company will take to prevent another data breach.

“Yes, it was a criminal act, but if you leave the keys in your friend’s car and it gets stolen, don’t you have some accountability?”

For Dave Kowal, the breach cuts two ways. “As a credit card holder, I feel fortunate that my credit card company addressed the matter quickly and efficiently. As a public relations professional, I believe Target has a lot of work ahead to restore its reputation.

Target also needs to make a major investment in security to prevent such a breach from occurring in the future and it needs to publicize its efforts.”

Alan Towers, a senior consultant at Water & Wall Group said, “Based on the sterile messages in Target’s public advertising, litigation protection, not reputation recovery, appears to be Target’s priority. While this may help reduce costs, it further damages the

retailer’s credibility with its shoppers.

Too often, the near-term certainty of litigation prevails over longer-term reputation damage with customers. This could well be a costly miscalculation in reputation management. My advice to Target: accept responsibility, coddle both the banks and customers and win back your reputation. If lost, it will be harder and more expensive to recover than the writeoffs.”

The National Retail Federation declined comment to Banking New York in January, but published an open letter to House Speaker John Boehner and Senate Majority Leader Harry Reid on January 21, calling for the payment card industry to adopt PIN and chip technology now used in Europe, Canada and many other countries. The NRF also called for a federal cybersecurity law to allow the sharing of information about cyberthreats, and also, called for a uniform federal breach notification law to allow retailers to focus on a single compliance regulation and to give consumers around the country a uniform, consistent law to protect their rights.

THINKING ABOUT THE NEXT MOVE Electronic Transactions Association CEO Jason Oxman told Banking New York in January that the Target breach could not have been prevented by the use of EMV cards alone (EMV is short for Europay – Mastercard – Visa, the three entities that developed the chip and pin standard used in Europe). “It’s too early to be pointing fingers,” he said. “Target has taken responsibility for the breach of its systems. The lack

of chip technology has been cited as the reason the Target breach took place. The Target breach, from what we know, was an internal breach of Target’s system and had nothing to do with EMV and would not have been prevented by EMV cards. EMV makes it harder for criminals to use stolen information to manufacture stolen credit cards but it doesn’t prevent breaches such that happened at Target or Neiman Marcus. Target maintained its customer information in an unencrypted form.”

According to FierceRetail. com, cybercrime firm InterCrawler confirmed in mid-January that at least six unnamed retailers have been hit with data breaches similar to Target’s.

Those merchants use POS systems infected with the same malware used in the Target breach. InterCrawler has reportedly alerted law enforcement, Visa Inc. and intelligence teams at several large banks regarding the discovery. A report from iSIGHT Partners, titled “Indicators for Network Defenders,” maintains that the malware used to extract personal data from POS terminals at store check-outs was “almost certainly derived” from BlackPOS software that contained malware scripts with Russian origins.

“The issue of credit card data theft is larger than any retailer, any bank, and even than any country. It is transnational, trans-industry, and growing rapidly,” said Davia Temin, president of Temin and Company.

“It is a powerful form of financial terrorism. The remedies to the problem need to transcend specific companies and industries. That means cooperative efforts of government law enforcement, across borders and in cooperation with private security. I do doubt that governments will have the resources to help banks with costs, however. Bank “bailouts” are such a red flag to the public that I doubt that there is an appetite for the government to help subsidize banks or retailers for their losses. The real solution will only come through multiple-party cooperation to help identify and stop the behavior, as well as [to] find technological solutions to lessen the impact of the theft.”

■

TOO EARLY TO POINT FINGERS, CONFEREES SAY In New York City, the Better Business Bureau held a conference sponsored by the Online Trust Alliance (OTA) and moderated by Tim Rohrbaugh, chief information security officer at Intersections Inc. “This is a business,” explained George Schultzel, special agent of the New York FBI division. “The FBI found criminals posting hacked date information on an online forum and offering to trade data with each other.

They have this information and this one way they can monetize it.”

Craig Speiezle, OTA executive director, called for business entities to examine all security checkpoints, from web sites to how they authenticate their emails.

In selecting vendors to do some of this work, some critical questions must be answered. “How do they secure the data and what are their notification requirements back to you contractually? This has to be a collaborative process. We think of breaches as being hacked but 30 percent of these incidents last year were Craig Speiezle accidental. Coca Cola failed to encrypt a hard drive and the computer was stolen. That wasn’t a breach, per se. There is no perfect defense against a determined criminal. And in the Target case, the National Retail Federation is saying the problem is banks haven’t implemented chip and pin; the banks are saying that retailers aren’t willing to invest in new technology.”

Jordan Adler, Assistant Attorney General, New York State Internet Bureau, said the state has a notification law in the event of a data breach.

The state also has other rules to insure that companies are following their own privacy laws.

“The hardest thing is for companies to reach out to law enforcement,” said the FBI’s Schultzel. “We’re very discreet and we don’t share information.” He noted InfraGard, a partnership between the FBI and the private sector to bring issues to the FBI, as well as the FBI’s legal attache offices across the world which work with foreign law enforcement.

After the conference, Tim Rohrbaugh told Banking New York, “I’m not placing anyone at fault, It’s not simple to change all of the point of sales devices to support chip and pin and EVM. It’s costly and time consuming and won’t solve every problem. But it would have [prevented] point of sales machines [from] potentially exchanging this data. Perhaps the government can drive this discussion and say it’s in our best interests to go forward with this. Both Canada Tim Rohrbaugh and Europe are using chip and pin. If there was no magnetic strip, I believe that the malware (associated with the breach) would have failed. That doesn’t mean that the malware can’t be rewritten.

And it’s not one 17-year-old individual. It’s linked to a group of individuals who had an objective and saw a weakness in point of sales machines.”

First Quarter 2014 | 19

IT’S A SMALL WORLD | By Laura Alix

Sharing Responsibility for Data Breaches

D

iscussion of the cost and consequences of data breaches inevitably calls for a more even distribution of financial responsibility for dealing with breaches at retailers, though bankers meanwhile have done what they can to mitigate their own security threats and recoup their customers’ losses.

In Massachusetts, there’s a bill pending before the state Legislature – introduced a year ago, well before the Target breach – that calls for some of the same measures advocated by the National Retail Federation in a Jan. 21 letter to U.S. lawmakers. The discussions in Massachusetts very likely mirror concerns raised in other states, and some of the provisions in the proposed bill are sure to have national resonance in the months ahead.

David Floreen, a senior vice president at the Massachusetts Bankers Association (MBA), likens it to the assumption of liability in an automobile accident: The driver who caused the accident is responsible for assuming whatever automotive or medical costs the other driver may have incurred.

20 | Banking New York

Likewise, a retailer whose lax data security posed an easy target for hackers would have to reimburse those banks who shell out to reissue their customers’ compromised cards.

Secondarily, the bill would also repeal a state statute that prohibits banks from informing customers as to where the breach occurred – something the National Retail Federation brought up in its letter.

Floreen pointed out that the legislation doesn’t single out retailers, or any other link in the payment chain. Under the Massachusetts bill, banks, card processors and retailers would be equally responsible for protecting consumers’ sensitive data from cyber thieves.

But though retailers may have suffered the PR fallout from these data breaches, banks have actually been footing the bill for replacing their customers’ cards.

During a hearing before the Massachusetts Committee on Consumer Protection and Licensure in late January, James Gordon, a banker speaking on behalf of the MBA, noted the irony in capping the interchange fees banks collect on debit and credit card transactions, while retailers are largely free of having to absorb the financial losses resulting from card fraud.

“Currently, merchants and other data processors have little legal or financial incentive to ensure compliance with high data security standards and imposing financial liability on those entities to cover the card replacement and fraud losses absorbed by banks that are associated with a breach will provide a greater incentive on those entities to develop, implement and monitor stronger protections for their customers,” Gordon told the committee.

But banks are also using the crisis as an opportunity. “Some used their social media presence very well in trying to educate their customers on the situ-

ation and giving a heads-up to keeping an eye on their credit reports,” said Matt Putvinski, director of IT assurance and security services at Wolf & Co. “It’s definitely an opportunity for banks to act as the customers’ ally, and if any of them didn’t take that opportunity, they missed out.”

While the safest course might seem to be a wholesale reissuance of every potentially compromised card, that solution could also prove prohibitively expensive, particularly for smaller banks.

“If financial institutions start reissuing cards every time one of these breaches happens, it’s just going to become extremely costly. You’re going to start regularly seeing these incidents occur,” Putvinski said.

Some banks did reissue those potentially compromised cards, others reissued cards only upon the customer’s request and still others carefully monitored their customers’ accounts for fraud.

Meanwhile, John Carlson, executive vice president of Technology Risk at the Financial Services Roundtable (FSR), thinks the onslaught of cyberattacks will galvanize more support for EMV, or chip-enabled cards, which are harder to duplicate than the magnetic stripe cards presently used by most Americans.

Carlson said a number of players, including FSR and multiple law enforcement agencies, are working behind the scenes to improve information sharing, crisis management response and legislative advocacy on this front, as well.

“The cyber threat environment is such that, whoever’s behind this, they’re getting much more sophisticated,” Carlson said. “We know that from working with our security professionals and our financial institutions, it’s in some respects an arms race. Even the consumer has to be constantly vigilant.”

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FULLY WIRED BRANCH | By Brent Biernat

New Technologies Enhance the Banking Experience

P

hysical branches certainly don’t serve the same level of traffic they once did, but we find that the branch is far from dead. Why? Older accountholders have yet to embrace the new banking channels and have doubts about their safety. Our younger accountholders are finding that mobile and Internet banking can’t entirely replace the in-person experience. To put it bluntly, Siri doesn’t know which account best meets your customers’ needs.

There’s a common thread to both young and old accountholders – neither group seems to know the full range of services offered by banks and credit unions.

What a terrific opportunity to train them!

The bottom line? Your physical branches are still part of your service mix. Many institutions are adapting their branches to the reduced volume of checkbased services (cashing checks, depositing checks, etc.) and the increased need to

consult with accountholders and to train them in new services and technologies.

New branches tend to be smaller, use fewer staff members and focus on crossselling. Appropriate technologies can help deliver greater value to your accountholders while freshening your brand and strengthening your bottom line. Here are a few technologies to consider: TABLETS

These all-in-one devices can help you project a clean, modern image, similar to the Apple Store. Tablets can replace workstations, pamphlets, even signature pads.

If your institution provides video conferencing to experts at the main office, the tablet can serve as a video conferencing terminal.

One note – there are lots of tablet options beyond the iPad – some for as little as $250. So don’t let the price of tablets derail your branch of the future strategies.

Brent Biernat is first vice president of network services at COCC Inc. 22 | Banking New York

LARGE TOUCH SCREEN & KIOSKS

Size matters, especially when you are trying to attract attention to your branch and brand. Large screens are also helpful for customers or members who prefer to serve themselves with a banking expert close by. Some institutions use large screens through their store front windows to show prospective accountholders that this institution is relevant and connected.

They’re great training tools, too!

PERSONAL TELLER OR VIDEO ATM

These sophisticated ATMs are almost like having a human teller, because they are really a remote device for human tellers. This extends the reach of your physical branch, offering ID verification, digital signature capture and video conferencing to greatly enhance the interaction and capabilities for the customer or member.

Integration options are still developing, so work closely with your vendor.

TABLETS What they can do: Replace paper brochures Open access to new media – like video!

E-signatures Video conference Capture photo documentation

PERSONAL TELLER What it can do: Adds cash, video, verification to the self service mix Maintains the personal touch since staff are nearby Requires: State-of-the-art ATM equipment Enhanced connectivity

Requires: Wireless connectivity Full security A private space for consultation

CASH RECYCLERS What they can do: Tear down barriers between staff and customers Promotes an open floor plan Introduces customers to the branch of the future

LARGE TOUCH SCREENS & KIOSKS What they can do: Raise awareness of your services Host training sessions Increase your self-service options Replace paper brochures Video conference Change your message quickly

Requires: Connectivity Full security ON THE HORIZON Google Glass Natural voice recognition Face recognition Virtual humans Transactions activated by QR codes

Requires: Connectivity or stand-alone workstation

CASH RECYCLERS

If anything characterizes a branch of the future, it’s cash recyclers. These machines remove the barriers between the customer and the teller. They can be deployed in the open and are rarely more than waist high. Staff can use them to process standard banking transactions without worrying about security.

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WHAT’S COMING

Equipment manufacturers have a full pipeline of devices designed to improve the banking experience. Google Glass will enable staff to keep their eyes on the person while calling up account details. Natural Voice and Face Recognition systems will enable the branch itself to respond to an accountholder’s profile without a card swipe or a teller transaction. Imagine the “next best product” appearing on the large screen beside the customer/member within seconds of entering the branch!

Key your ATM transaction into your cell phone, then receive a QR code to activate that transaction on the ATM. ■

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First Quarter 2014 | 23

BANK OF THE FUTURE | By Mary Buffett

Retail Banking Down, but Not Yet Out

I

recently found myself sitting with a number of bank executives over lunch and I asked them about future trends within retail banking, particularly what goes on inside a branch, because it’s the public face of so many financial institutions.

These days, retail banking is going through an uncertain period. Some banks, like Citigroup, are talking layoffs and branch closures, while other banks are doubling down and building new locations. The layouts for new Bank of America branches look more like a Starbucks, while floor plans for other institutions look like the main bridge of the starship Enterprise.

The comment that Academy Award-

winning screenwriter William Goldman hung on Hollywood rings true for banking; “Nobody knows anything.” When you look beyond the bland quotes coming from senior management, you realize there is a lot of spaghetti being thrown against the wall, hoping that something will stick.

But the real question is this: With the rise in technology and the changing nature of how people shop for financial products, has your local bank branch become irrelevant? That certainly got the conversation started.

When my parents were starting out in Chicago, they had an account relationship with LaSalle Bank. Back then, people walked their paycheck into the

bank, wrote a check at the teller window if they wanted to withdraw money, and all of the tellers seemed to take a certain pleasure stamping the passbooks whenever a deposit was made.

Bank branches were more than mere buildings; they anchored the brand within communities. When Bank of America was only a California institution, strategic planners placed branches three to five miles apart in densely populated areas to ensure that there was always a branch located nearby. What made founder A.P. Giannini unique was he believed everybody – not just the wealthy – should have a banking relationship. He made a fortune. When Californians moved to the suburbs, a whole new generation of Bank of America locations were built to reflect the relaxed nature of life amongst the cul-de-sacs.

To put it another way, walking into a Bank of America or LaSalle Bank branch was like walking into the Grand Central Station of financial products.

Wise bankers acted as ambassadors, guiding customers through a maze of products, including checking, savings, CDs, debit cards, retirement accounts and safe deposit boxes. They also referred customers to branded lines not normally found in retail banking, including investments, business services, home mortgages and other lines that fell outside the teller’s role. And everything always took place during business hours.

SUDDEN CHANGES Then technology changed everything. The first ATMs emerged in the late 1960s and became commonplace by the early 1980s. Within a decade, debit and electronic funds transfer at point of sale (EFTPOS) networks wired the globe, and cards once used to withdraw cash could now purchase a pair of shoes in Rome. The first computer

Mary Buffett is an author, international speaker, entrepreneur, political and environmental activist. Her website is marybuffett.com.

24 | Banking New York

PORTALS OF KNOWLEDGE

banking programs began to emerge in the late 1980s (as people began buying PCs) but online banking did not explode until the advent of broadband.

Within a short period of time, banks introduced smarter versions of online billpay, which allowed customers to pay their bills through their laptops.

However, smartphone apps was the great game changer; it allowed customers to make their deposits online by taking a digital image while sitting in their backyard, lounging among their plants, or even in the middle of Thailand.

Today, people can pay their bills, move money around, get a real time update of balances, receive email alerts, or connect with their e-wallet through their iPhone 24-7, and I have no real reason to walk into a branch anymore.

Or do I? What terrifies bank executives is that their core customer is doing more and more of their business outside the bank. As a result, it’s getting much harder to cross-sell them new products to build a lifetime relationship. That means customer loyalty is increasingly up for grabs.

How do you retain a profitable customer who you may never have met?

How do you build new relationships when customers may open an account online and handle their finances at home on their iPads?

Technology has allowed banks to cut costs while giving customers 24-7 access and control over the banking relationship. Banks have trained customers to handle their simple transactions outside of the branch, via online chat, live conversation, or by managing it themselves through online banking.

When it comes to customer acquisition, major banks have made the mistake of confusing marketing with sales.

I receive mail from Chase offering me $250 if I open up a checking account.

These mailers address nothing of value – their pitch runs to the dollar amount.

If I’d leave my current bank for $250, I could just as easily leave Chase for half that amount.

Capturing operational accounts of small to medium-sized businesses still remains the Holy Grail of retail banking. Bankers can expand that business relationship with new products. They can also reach out to the employees of those businesses and sell other banking products to those employees.

Banks walk a fine line – the current economics of retail banking make it challenging to sustain retail branches and ATM networks for the long term.

However, bank executives believe that they need a branch presence to create new relationships or else they’re doomed.

Here are my two cents on the issue.

I believe that major financial institutions could gradually reduce their branch network by 40 percent over a five- to seven-year period with minimal customer interruptions if executed correctly. However, like any decision, it’s making sure that you reduce the right 40 percent.

Merely taking an ax to your branch network is the short-sighted approach.

Customers with complex personal and financial relationships still need a banker to guide them through the minefields of life. If you run a small or medium-sized business, you’ll need the help of a financial professional. If you have language challenges, having bilingual assistance at the teller line is critical.

However, most large banks still have huge outlays in square footage, with staff levels that could either be reduced or repositioned to better serve customers.

There are some who believe that once you plant a flag by opening a branch, it should never be closed. That strikes me as leadership which is both insecure and blind to the changing nature of banking; it should also raise a red flag at the board level.

So what should be the role of retail branches in the 21st century? Attract new clients by consistently educating and informing them. In today’s world,

people looking for banking services are not fools. There is little difference between the mega brands. Banks are not going to attract lifelong customers on a mailer that promises $250 only after customers jump through a series of hoops.

Branches should be positioned as portals of knowledge. Tomorrow’s banks will be all about building financial literacy. They should be about teaching their customers how to filter out the noise and focus on building plans that will carry them from their first checking account until their funeral.

Each location should be its own learning annex, and should have weekly lunchtime or evening classes addressing building a financial nest egg, opening a business, preparing for a long-off college tuition, or simply living within one’s own means. Then banks should leverage the technology in which they’ve invested billions of dollars to push that information outward – not unlike what Khan Academy does for academic courses.

Assume you live in a medium-sized city of 150,000, and it has four to five Bank of America locations. If to the footprint is reduced to two Bank of America money centers, branches that primarily cater to the needs of business clients, complex personal transactions, and serve to anchor your community for other personal needs, Bank of America will have maximized their branch outreach with more focused resources.

It is the missing consultative piece that contributes in a significant fashion to the bank’s value proposition. That is also how you can build relationships as opposed to merely signing up checking accounts. A bank’s retail branch should focus should be squarely on teaching their customers how to fish, because that’s how you build lifelong relationships in the 21st century.

This article previously appeared on the Huffington Post. This is an edited version.

■ First Quarter 2014 | 25

TAKE MY CASINO – PLEASE! | By Scott Van Voorhis

Cuomo Gambles on a Second Act for Upstate New York and politicking, Empire State voters approved a constitutional amendment last November legalizing full-scale, Las Vegas-style gambling. The freshly minted New York Gaming Commission has been charged with licensing four upstate casinos by next fall.

The casinos are the heart and soul of Cuomo’s ambitious plan to help turn around the sluggish Upstate economy.

“If you were to break off New York City and the adjacent counties, what would be left would be an extraordinarily poor and unsuccessful state,” Joshua Stein, a top New York real estate lawyer and committee chief for the New York Mortgage Bankers Association. “You have a mindset that government should do something to kick-start the economy.”

DOUBLING DOWN

G

ov. Andrew Cuomo’s campaign to revive upstate New York’s chronically depressed economy should be a boon to regional banks. The centerpiece of his plan is four large, destination resorts, targeting high-rolling gamblers and tourists, and slated for the Catskills and other struggling Upstate areas. They’ll cost up to $1 billion to build, expected to generate hundreds of millions in annual revenue.

Some upstate banks might gain some new business, said Jay Masurekar, gaming, travel and Internet investment banking chief of KeyBanc Capital Markets Inc., whose parent company has a major presence in Upstate New York. He considers casinos “a shot in the arm for the region,” bringing in tourists and in-state business.

After a two-year push by Cuomo that saw lots of legislative wheeling, dealing 26 | Banking New York

The governor’s plan attempts to lay the foundation for a long-term plan to turn the region into a tourism showcase that will draw deep-pocketed visitors.

Under the new law, the Catskills are likely to land two of the four planned casinos, with the other two slated for the Capitol Region and the state’s southern tier/Finger Lakes.

Bidders have already emerged, with Mohegan Sun and the Monticello Racino, owned by a branch of Asian casino mogul Genting Group, putting forth resort casino proposals for the Catskills.

The Saratoga Racino, which has video slot machines but no table games, has applied for the Albany area license, as well as a private developer with a competing plan for the same market.

Masurekar estimates that construction spending on all four Upstate casinos will amount to a combined $800 million, while the Cuomo administration pegs that number at $1 billion.

A ZERO-SUM GAME? The question is how much of casinodriven growth is new, and how much may simply take business away from local shops and stores.

If Cuomo’s casino campaign works, the region will see a net gain in new jobs, as well as new restaurants, stores and shops, particularly in the Catskills, said Robert McLaughlin, former chief executive of the New York Lottery and now a partner in Hodgson Russ’ real estate and finance group.

Upstate banks could benefit in a couple of ways; an influx of nearly 3,000 jobs in an economically depressed region would provide opportunities to gain new customers and deposits, and spark demand for homes and condos and their attendant mortgage business, McLaughlin said. Related commercial development would lead to increased demand for commercial loans. “If you increase your wage earnings, your bank accounts and increase and so do your major purchases, such as houses and cars,” McLaughlin said.

A PIECE OF THE ACTION Developing a lending relationship directly with various casino developers and operators is likely to prove more challenging. Most major casino developers and operators have their own financial networks, and won’t go to the local market for financing to build their gambling palaces, Masurekar said. But the casino law strongly encourages gambling developers to build relationships with local “retail businesses,” a purposefully broad definition that certainly can be interpreted to include local banks, notes McLaughlin.

And there may be opportunities for local banks to carve out profitable niches, such as payroll management.“This is a great opportunity for the small banks to get a big client,” Masurekar said.

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BANK PROFILE | By Linda Goodspeed

Jeff Bank is One of the Survivors Bank in Hard-Luck County Protects its Community headquartered in Jeffersonville, which celebrated its centennial in 2013, is the last surviving community bank in the county.

Once home to 11 Wayne Zanetti independent comPresident and CEO munity banks, SulJeff Bank livan County is now mostly banked by large, multi-state corporations.

“It gives us a leg up,” Said Wayne Zanetti, president and CEO. “We’re able to do everything locally.”

THRIVING IN HARD TIMES

Each year Jeff Bank has a team at the Sullivan County Relay for Life. Employees also participate in several other fundraising walks throughout the year.

O

ne of Krista Brink’s favorite movies growing up was It’s a Wonderful Life, the story of small-town banker George Bailey, who learns after a failed suicide attempt how his life has touched so many others.

Jeff Bank, a small community bank in upstate New York, is a lot like George Bailey, says Brink, manager of the WalMart branch in Monticello.

“Jeff Bank does so much for our community. If it wasn’t here, it would leave an awful hole in Sullivan County,” Brink said.

28 | Banking New York

Brink speaks from experience. Her 8-year-old son has autism, and when she asked her employer to sponsor a team for the autism walk, Jeff Bank stepped up. The commitment was just one of many walks, fundraisers, charities and community events the bank supports.

Once a thriving resort region, Sullivan County has fallen on hard times.

Today, it is one of New York state’s poorest, oldest and least healthiest counties, with high unemployment and an aging population. Jeff Bank,

Despite the recession and tough local economy, Zanetti says Jeff Bank, with total assets of $435 million and 12 branches, is doing “fantastic.”

For the third quarter 2013, the most recent quarter available for this article, Jeff Bank Reported net income of $1.383 million, compared to $1.105 million for the same quarter in 2012.

For the nine months ended Sept. 30, 2013, the bank earned net income of $3.563 million, compared to $3.285 million for the same period in 2012.

The increase in net income for both periods was primarily due to a decrease in the provision for loan losses, interest expense and foreclosed real estate expense.

Since the recession began, Zanetti said the bank has put aside more than $2 million to cover loan losses. In all, he said about 3.5 percent of the bank’s total loan portfolio of $270 million are nonperformers.

“We’re still able to maintain a rate of return on assets (ROA) of over 1 percent, which is very high in New York state,” Zanetti said. “In return on equity and ROA, we’re in the top 15 or 20 in the state.”

Jeff Bank offers a full range of retail

and business products, including residential mortgages and small business loans.

In 2012, Jeff Bank de-listed its common stock from Nasdaq, and converted from a national to state charter.

“Plain and simple, we de-listed from Nasdaq to save money,” Zanetti said. “Because of SEC regulations, there are a lot more reporting, exam requirements. De-listing saves us quite a bit of money.”

Likewise, he said converting to a state charter made economic and regulatory sense for the bank.

“We’re a small community bank.

It’s tough to take regulatory direction from Washington. The state knows the situation we are going through. We connect a lot better to local regulation versus national regulation.”

aging a bank in the current low interest rate environment is challenging, but is optimistic about the prospects of a casino locating in the area.

“With the extra business a casino will bring, it expands the number of small retail stores and businesses.

It should put a lot of people back to work.”

As a small local bank, Jeff prides itself on knowing and connecting to its customers and community.

“I like to brag that people can call me directly,” Zanetti said. “It’s the same way with decisions, loan decisions, how we treat our customers. We know our customers and what’s going on in their communities.”

Just as Zanetti is accessible to bank customers, he and other bank employees are accessible to the broader community, serving on nonprofit boards, supporting local charities, coaching Little League, Soccer teams, volun-

LOOKING AHEAD Going forward, Zanetti said man-

teering for Habitat for Humanity, supporting local walks, collecting Toys for Tots – the list goes on and on. Each quarter, Jeff Bank’s 120 employees choose a local charity, and donate money, matched by the bank, to that group. Last year, bank employees donated between $1,200 and $1,500 to the American Cancer society, local animal shelter, the local Boys and Girls Club, and local hospice. Employees also earn points for volunteering that can be put toward a day off, a massage, clothing or other rewards.

“It makes me very proud to work here,” said Brink, who, with the support of the bank, has raised more than $15,000 for Autism Speaks.

“We do it because we can do it,” Zanetti says simply. “We’re showing support, loyalty to our employees and also our customers. If our employees, customers and neighbors do well, we do well. It’s a two-way street.”

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First Quarter 2014 | 29

SMALL CHANGE

CIT BANK

Patricia Ball

CIT Group Inc., based in New York City, has named Ellen R. Alemany to its board of directors, where she serves as a member of the bank’s audit committee. She is the former head of The Royal Bank of Scotland (RBS) Americas, the management structure that oversees RBS’ businesses in the Americas. She also served as chairman and CEO for RBS Citizens Financial Group, Inc. Prior to RBS, she served as CEO for Global Transaction Services of Citigroup.

Alemany received her MBA in finance from Fordham University. She serves on the boards of Automatic Data Processing Inc. and the Center for Discovery.

BANK OF AKRON James J. Morris

Patricia Ball has been named vice president and residential mortgage sales manager, based out of the bank’s Clarence location.

Jennifer Smith has been named assistant vice president and branch manager for the bank’s Lancaster location. She most recently held positions at Bank of America.

Steven Mulé has joined the bank as an assistant vice president and branch manager for its Clarence Center location. He attended Buffalo State College and most recently held positions at Bank of America.

PATHFINDER BANCORP Chris R. Burritt has been named chairman of the board of directors of Pathfinder Bancorp Inc. He replaces Janette Resnick, who retired from her chair and board position. Burritt joined the board in 1986. He is president and general manager of R.M. Motors Inc./Chris Cross Inc., an automobile dealership located in Oswego, and has long been active in the community. He is currently a member of the board of directors of Oswego Hospital, and also serves as chair of its finance/operations committee. Additionally, he was past president

of the Oswego Chamber of Commerce, served on the State College at Oswego’s Foundation board, and is past chairman of the New York State Automobile Dealers Association, where he served as treasurer.

ELMIRA SAVINGS BANK Elmira Savings Bank has elected Dr. Robert K. Lambert to its board of directors. He is president and CEO of the Arnot Health System in Elmira, NY, a three-hospital regional health system employing approximately 2,800 medical staff and employees. He is certified by the American Board of Internal Medicine, received his medical education from the University of Rochester School of Medicine and Dentistry, and completed his internship in internal medicine at the University of Nebraska College of Medicine in Omaha.

KINDERHOOK BANK Kinderhook Bank has appointed James J. Morris IV as vice president, commercial real estate and development financing. Morris is the former director of the Westchester/Mid-Hudson Valley Region at Paragon Prime Funding and was previously senior vice president of Commercial Real Estate at Citizens Bank, N.A. Morris earned his bachelor’s degree in finance from SUNY New Paltz. He is a member of the Appraisal Institute and currently holds its MAI designation. He is also a licensed New York state real estate salesperson.

Morris currently serves on the board of the Center for Disability Services and the board of Prospect Child & Family Center in Queensbury.

CATTARAUGUS COUNTY BANK Cattaraugus County Bank has promoted Kelly Cave to assistant vice president and Dunkirk branch manager. She has been with the bank since it purchased the branch from the former Greater Buffalo Savings Bank in 2008.

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SEND US YOUR NEWS! SUBMIT NEWS FROM YOUR BANK TO CHRISTINA O’NEILL, EDITOR, AT CONEILL@THEWARRENGROUP.COM.

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