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Fintech: Friend or Foe to Banks? Uneasy Truce Forms as FIs Partner with Fintechs

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Fintech: Friend or Foe to Banks? Uneasy Truce Forms as FIs Partner with Fintechs

CONTRIBUTING WRITERS Ian Murphy and Steve Viuker



A Whirlwind of Activity on Behalf of New York’s Community Banks


06 PUBLIC AFFAIRS UPDATE New Year Brings Big Changes in

Washington, Albany


08 FEATURE Managing Credit Risk in 2017

New Approach to Bank Governance Needed




Strong Customer Loyalty Could Be a Sign of Weakness, Not Strength What Top-Performing Business Developers Know



10 BANK PROFILE PCSB Bank Continues Growth

Workforce Transformation


with Stock Offering



New DFS Cybersecurity Requirements for New York State


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First Quarter 2017 | 3


A Whirlwind of Activity on Behalf of New York’s Community Banks In the past year, the Independent Bankers Association of New York State (IBANYS) continued our efforts on behalf of New York’s local community banks, and I’m pleased to report we have had significant success across the board. Last year, and now the beginning of 2017, have been jam-packed with challenges.


e have a strategic vision in place and are committed to providing real value to our membership, pursuing programs, policies and activity that will continue our consistent growth, and continuing to expand our presence across the entire state. Let’s review some John Witkowski of our 2016 activities and accomplishments, and preview some of our 2017 goals: • On the advocacy front, IBANYS lead the efforts in Albany with the NYS Legislature and the state Department of Financial Services to carve out meaningful exemptions for community banks from new regulations on cybersecurity and abandoned or vacant “zombie” properties. We did so through long and difficult negotiations, comment letters, testimony at legislative hearings and media coverage. 2017 has begun on the fast track, with a new administration in Washington and new players in key positions in Albany. Regular meetings with our Government Relations Committee ensure we remain actively engaged on behalf of New York community banks on both state and federal issues. • On the education front, we offered our members a wide array of informative and timely programs. These include sessions for CEOs, CFOs and other members of senior man4 | Banking New York

agement, bank directors, compliance officers, security officers and lending officers. Many are offered regionally for the convenience of our members. This year, we continue to develop an increased presence downstate with both meetings and activities. • Through our member services and benefits program, IBANYS continues to offer innovative and bottom line value to our member banks and our affiliates. This effort has been strengthened and reinforced by the establishment of our new Innovation Committee, where member bankers review presentations on potential products and services and make recommendations. Recent additions such as a wellness/health care alternative, online lending program and a secure, enhanced internet presence have added to our menu. • Our preferred partners and our associate member allies are growing in numbers, and their contributions to our membership is considerable – through their participation in meetings and conferences, providing bottom line benefits and serving as our valued allies to improve the future for community banking. IBANYS is a growing and vibrant association, and over the past few years has become a stronger, more effective full service trade association representing community banks throughout the state. continued on page 6 

IBANYS Board of Directors Officers Chairman Doug Manditch Empire National Bank, Islandia Vice Chairman R. Michael Briggs USNY Bank, Geneva Treasurer/Secretary Thomas Amell Pioneer Bank, Albany Immediate Past Chairman John Buhrmaster First National Bank of Scotia, Scotia Directors Thomas Carr Elmira Savings Bank, Elmira Brenda Copeland Steuben Trust, Hornell Randy Crapser Bank of Richmondville, Cobleskill Ronald Denniston First National Bank of Dryden, Dryden Christopher Dowd Ballston Spa National Bank, Ballston Spa Robert Fisher Tioga State Bank, Spencer E. Peter Forrestel II Bank of Akron, Akron Stephen Gobel First National Bank of Groton, Groton Gerald Klein Tompkins Mahopac Bank, Brewster Richard Koelbl Alden State Bank, Alden Paul Mello Solvay Bank, Solvay G. William Ryan Cayuga Lake National Bank, Union Springs Anders Tomson Capital Bank/ a division of Chemung Canal Trust Co., Albany Kathleen Whelehan Upstate National Bank, Rochester Michael Wimer Cattaraugus County Bank, Little Valley IBANYS STAFF John J. Witkowski President and CEO Stephen W. Rice Vice President of Government Relations and Communications William Y. Crowell III Legislative Counsel Linda Gregware Director of Administration and Membership Services

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New Year Brings Big Changes in Washington, Albany


ew York community banks will operate in a new environment in 2017 and the immediate future. The winds of change have swept through Washington, D.C. and, to a lesser extent, through Albany in terms of the legislative and regulatory arenas. There is a new chairman of the U.S. Senate Banking Committee, Sen. Mike Crapo (R-ID). There are four new members of the New York Congressional Delegation (Republicans John Faso and Claudia Tenney, and Democrats Tom Suozzi and Adriano Espaillat) – and there are two new New Yorkers on Stephen W. Rice House Financial Services Committee (GOP Reps. Lee Zeldin and Claudia Tenney), bringing the total number of New Yorkers on that key committee to six. The new Trump administration pledged a new focus on deregulation and tax reform, with strong support from Congressional Republicans. The president signed an executive order requiring federal agencies to identify two regulations they plan to cut whenever requesting a new one. The president also described the Dodd-Frank law as “a disaster,” and his choice for Treasury Secretary, Steven Mnuchin, signaled a preference to “roll back” the act, perhaps including addressing the Volcker Rule and the restructuring of the Consumer Financial Protection Bureau. House Financial Services Committee Jed Hensarling (R-TX) plans to enact his Financial CHOICE Act to replace much of Dodd-Frank. Among other things, it would repeal Durbin Amendment price controls on debit card interchange, reform burdensome and costly mortgagelending requirements, and provide relief from excessive call report and data-collection mandates.

In Albany, there has also been a flurry of activity and change in both personnel and initiatives that could impact community banks. There are new chairmen of the State Senate and State Assembly Banks Committees (Sen. Jesse Hamilton, IDC-Brooklyn and Assemblyman Ken Zebrowski, DRockland County). The Department of Financial Services has enacted new regulations on both cybersecurity and abandoned or vacant “zombie” properties. (IBANYS worked hard to craft exemptions for community banks in both regulations.) Gov. Andrew Cuomo’s proposed state budget legislation for 2017-18 included establishing a “bad actor” ban provision, based on “Wells Fargo” type behavior; higher DFS assessment fees for examined institutions, and empowering the State DFS Superintendent in legal actions vis-à-vis the state attorney general. So, change has come in large doses. Clearly, it has been a very active winter for IBANYS as we work to represent the interests of New York community banks in Albany and, working with the Independent Community Bankers of America, in Washington, D.C. New policymakers and policies pose new challenges – but also new opportunities. The present, and future, will require the continued active engagement and participation of our member banks. Together, we will work to protect and enhance our industry and the communities and customers we serve all throughout New York state. ■ 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.

continued from page 4

Thanks to our 2015-16 Chairman John Buhrmaster (1st National Bank of Scotia) for his outstanding leadership over the past year, and thanks to our new chairman, Doug Manditch, CEO of Empire National Bank, as he picks up the gavel for the year ahead. We’re excited about our future, and ready to work 6 | Banking New York

together with our members to make the future even brighter! ■ John Witkowski is president and CEO of the Independent Bankers Association of New York State. He may be reached at or (518) 436-4646.


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FEATURE | By Bo Singh, President, T. Gschwender & Assoc. Inc.

Managing Credit Risk in 2017


017 is upon us. Improving economy. Rising interest rate environment. Stable net loan losses back to 2006 levels. New administration focused on reducing regulatory burden. Based on our experience of conducting loan reviews for over 30 years, here is what you can do to ensure credit concerns do not inordinately imBo Singh pact your financial institution going forward. Setting Risk Tolerances

Good credit risk management starts with setting, and communicating, reasonable credit risk tolerance levels. This is the board of directors’ responsibility and cannot be delegated. Banks that had the most problems during the last recession failed to adequately establish risk tolerances related to “industry” risk. Basically, the board of directors often failed to establish reasonable limits on industry concentrations to guide senior management. For example, banks that did well had limited construction/land development loans to less than 5 percent of capital. Whereas the banks that failed had much higher limits or did not properly monitor their concentrations at all. Banks should clearly outline their credit risk tolerance limits in the loan policy and then continually monitor compliance with these limits. Risk Rating Loans

Risk rating loans is not a simple process but it’s essential in managing credit risk. A risk rating is dependent upon many variables and how these variables interplay with each other. It is not merely dependent upon on the Debt Service Coverage Ratio (DSCR). The days of simply stating risk rating definitions in 8 | Banking New York

your policy and then assigning those risk ratings to the bank’s loans are long gone. This dated approach has led to incorrect assignment of risk ratings, leading to miscalculation of the risk within the loan portfolio and unfortunately in some cases, failure of the financial institution. Banks need to develop a sound structured methodology to assign the correct risk rating for each loan in a transparent and consistent manner. This methodology should be fully described in the loan policy and tested to ensure it is producing the proper right risk rating. There will always be some subjectivity involved in assigning risk ratings to commercial loans; however, having a good methodology in place can eliminate the majority of the errors resulting from this subjectivity. Game Plan For 2017

Here are some important items to keep in mind as you manage credit risk this year. 1. Identify any variable rate loans that are to reprice in 2017 and 2018 and stress test their DSCR based on increasing the rates by 1 percent and 2 percent. Discuss results with borrowers where cash flow is tight. 2. It has been TGA’s experience that most banks will realize the greatest losses from commercial real estate (CRE) loans where the collateral value has significantly declined. These are primarily associated with investor owned properties where value is based on income approach using market rents at stabilization. Banks should monitor current Net Operating Income (NOI) for investment owned properties with the NOI used in the appraisals. NOI significantly less than those used by the appraiser can result in dra-

matic devaluation of the collateral property in case the loan becomes impaired, requiring large ALLL allocation. Management should monitor and report such loans in the Allowance for Loan and Lease Losses (ALLL) Report. Reserve should be increased periodically if NOI of a particular loan is not achieving stabilization and the loan is showing credit quality concerns. 3. Review your Pass/Watch loans to determine how you can mitigate any weaknesses in these credits. If most of your pass loans are skewed toward your highest pass rating, the probability is greater that you will experience credit challenges in an increasing rate environment or if the economy takes a downturn. We have learned that the majority of the loans that are rated Pass/Watch fall into three main categories. • Loans for which you do not have current financials and that are paying as agreed. Now, you don’t have to immediately move Pass credits to Pass/Watch once the extension periods for tax returns have passed. However, if the financials are two or more years old and the borrower is not responsive in providing them, then the loan should be moved to

4. Make sure you have set good credit risk tolerance limits. Best way to do this is to use the Weighted Average Risk Rating (WARR). Once you are confident that all your loans are risk rated accurately, you can use the WARR to control how much risk is in your portfolio, monitor which segments of your portfolio have the greatest risk, and determine how much more risk you can safely take on. For example: • It shall be a goal of the Bank to maintain an overall WARR of all commercial loans at 4.251 or better. • No loans with exceptions will be considered if the WARR of the com-

mercial loan portfolio exceeds 4.25, unless they are rated 4 or better. • WARR of all loans in a specific industry (NAICS Code) shall not exceed 4.25 if the industry is more than 25 percent of Bank’s Tier 1 Capital + ALLL (regulatory concentration limit). New loans in the industry will not be considered if the WARR exceeds 4.25, unless they are rated 4 or better. 5. Lastly, ensure investment in credit administration keeps up with your growing portfolio so it can be properly maintained. Conclusion

Effectively managing credit risk starts by setting good risk tolerance levels. You must, at all times, know how much risk you are carrying in your loan portfolio. One of the best ways to do this is by us-

ing the Weighted Average Risk Rating. However, in order to use this approach, your loans must be risk rated properly. Hopefully, the guidance we have outlined in this article will help you toward achieving this goal. If you would like to discuss the above topics in more detail, or if you need assistance in accomplishing any of these items due to your current workload, please contact us, we are happy to help.  ■ T. Gschwender & Assoc. Inc. is a consulting company that has been providing services to financial institutions since 1984. Contact T. Gschwender & Assoc. Inc. at

Footnotes 1. Based on a 5 pass risk rating scale. Tolerance levels will vary based on how many pass risk ratings you have. 



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Pass/Watch. You simply do not know the current financial condition of the borrower to rate it otherwise. If you don’t have current financials and the loan is delinquent, you should risk rate it Special Mention or worse. • Loans approved based on projections. These are typically startup companies and it is uncertain if they will be able to meet projections. In these cases, obtaining quarterly financial statements to ensure projections are being met is essential. Typically, a bank will not upgrade or downgrade these loans until a full fiscal year performance is available for review and the stabilization period has passed. • Loans dependent upon the cash flow of the guarantors. In these cases, the borrowing entity (or your collateral property if a loan is made to purchase an investment property) does not show sufficient cash flow to service the debt. However, the owner/guarantor has sufficient liquidity or excess income to support the loan. The loan is essentially dependent upon your secondary source of repayment. Our experience has been that these are the loans that owners/ guarantors will divest of first during a rising rate environment or during an economic downturn.

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First Quarter 2017 | 9

BANK PROFILE | By Ian B. Murphy

PCSB Bank Continues Growth with Stock Offering


resh off an acquisition, a rebranding and a new corporate headquarters, PCSB Bank will look to continue its growth by converting from a mutual bank to a public company and offering at least 20.1 million shares of stock for sale. Bank executives received the official go-ahead for the bank’s conversion from regulators in February, and the stock went on sale on Feb. 21. PCSB Bank had consolidated total assets of $1.24 billion, total deposits of $1.11 billion and total equity of $112.8 million, as of year-end 2016. “These last five years we’ve made a Joe Roberto huge effort – pretty much a total makeover of the bank – and have put ourselves in the position that we believe we could become the leading community bank in the marketplace,” said Joseph Roberto, chairman, president and CEO of PCSB Bank. “We think that there is a void in our market for a true community bank that can service the footprint where our franchise sits, and our main competition is the Steve Elser money center banks and the regional banks. So, I think, with the extra capital, we can compete with those regional banks in that marketplace. We would have the size to do it, and we’d have the branch network to do it.” PCSB Bank acquired CMS Bank in April 2015, which at the time had approximately $250 million in assets and a significant presence in Westchester County. Since that acquisition, PCSB Bank has rebranded itself (it was formerly Putnam County Savings Bank), moved its 10 | Banking New York

corporate headquarters to a central location in Yorktown Heights, and relocated its branch in Pawling, its 16th in total. Roberto said those moves, along with the ability to raise capital with a public offering, have put the bank in a fantastic position to be the premier community bank in the Lower Hudson Valley. “It’s all about thinking that you could do a better job than the money center banks and the regional banks in really understanding what the community is all about, and what the community needs as far as a banking institution,” Roberto said. While continued growth is the bank’s biggest goal, Vice President and Director of Marketing Steve Elser said it’s paramount that PCSB Bank stay true to its core values. The bank was founded in 1871 and has flourished by maintaining a connection to residents and small businesses in the communities it serves. “It really comes down to the PCSB brand, and what the brand stands for has not changed,” Elser said. “It was created as a local community bank to serve local businesses, local families, and those core values remain in effect today. I think that’s the key as we expand and we continue to try and serve a larger footprint; staying true to those core values is really what this is all about.” Both Roberto and Elser said keeping the character of the bank the same while converting from a mutual bank to a publicly traded company won’t be a challenge; the commitment to the customer permeates the entire bank, from the executive level on down. “The leadership of the bank is so steadfastly committed to the original charter,” Elser said. “Everybody in the bank understands that, so when they go to work every day, they

know what their task is. They know what the brand stands for, and they know that their job is to stick to that as closely as possible.” With a lot of changes and growth coming for the bank in a short period – the acquisition of CMS Bank, the rebranding, moving of the headquarters and now the conversion – Roberto said PCSB Bank has maintained its focus on doing what’s best for its employees and customers. The relocation of the company’s headquarters was a prime example; the Yorktown Heights location is almost in the exact geographical center of PCSB Bank’s footprint, giving employees an easier time with commuting.

“We were headquartered in Putnam County, New York, and [after the acquisition of CMS Bank] we are now headquartered in Westchester, really on the border of Putnam and Westchester,” Roberto said. “I think people understood that even though we moved our headquarters, we still had the same commitment to our community. It was difficult to operate as a group when [the staff was] spread out in different locations, and certainly being able to get everybody under one roof has allowed us to operate more efficiently. It wasn’t just moving the headquarters, we also re-branded the bank with a new name and a new logo at the same time, and I think people will attest that the whole process went very well.” ■

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Fintech: Friend or Foe to Banks? Uneasy Truce Forms as FIs Partner with Fintechs


F Steve Schnall

Noor Menai

Stephen Sheinbaum

12 | Banking New York

ins are back in style. Not the Cadillac fins from the 1950s – we’re talking about financial technology, better known as fintech. According to Fintech Weekly (yes, there is a publication and website devoted to the sector) fintech aims to provide financial services by making use of software and modern technology. And the traditional financial industry is taking note – a recent panel of the New York Society of Security Analysts was devoted to fintech. “Five years ago, venture capital totaled $5 billion in fintech. In the last two years, it has reached $20 billion globally,” Justin Brownhill, managing partner of SenaHill Partners LP, said at the panel. “The breakdown is divided equally between Silicon Valley, New York City, Europe and the rest of the world. There have been fintech startups in the past few years that haven’t performed particularly well – On Deck, Lending Club and Square to name three. I believe these are early-stage hiccups. Financial services is a one trillion dollar industry; fintech will soon be the same.” “Banks should explore fintech, because it will affect each institution and their small business services differently,” said Stephen Sheinbaum, founder of Bizfi, an aggregation marketplace that offers many kinds of alternative funding. (Bizfi has origi-

nated in excess of $2 billion in funding to more than 35,000 small businesses.) “For some, partnering with fintech will be an opportunity to quickly and easily improve loan application and loan servicing technology without diverting resources from compliance and other institution-wide programs,” said Sheinbaum. “For others, partnering with fintech will be an opportunity to provide funding services to small businesses that cannot be profitably served by the bank itself while retaining the small business as a customer for other products and services.” Fintech provides new possibilities “that banks should seek to embrace and collaborate on,” said Alex Baydin, CEO of PerformLine. “Fintech has provided consumers with new ways to take out loans and conduct online banking. In our increasingly consumercentric environment, banks would benefit from learning about fintechs’ consumer banking solutions and even working together to ensure consumers have access to banking options.” Indeed, Fifth Third Bank is partnering with VC firm QED Investors to bring new products and services to its banking customers. The firm will advise the Ohiobased bank and support its NorthStar strategy to “enhance offerings through technology.” Tim Spence, executive vice president and chief strategy officer for Fifth Third Bank, said the partnership “should enable us to identify new, high-potential

technologies to complement our internal R&D and innovation efforts.” (It should be noted that if an entity owns 25 percent of a bank, they are bank holding company and all the other assets are subjected to banking regulations.) Another advocate of the partnership business model is Noor Menai, president and CEO of CTBC Bank, who spoke at a recent Marcus Evans fintech event. He told Banking New York that “banks are rarely early adopters, and not only because of the sunk cost. Fintech will be an addition to the channels they have, or it might become the core product of the business model. Fintech firms are well aware of the regulation factors which is why many are partnering with banks. In Britain, there has been a pause in fintech investment in part due to Brexit. But Britain set up incubators for small fintech firms and helped them navigate through the waters.” There is a hope in the financial services sector that President Donald Trump will ease the regulatory burden. “With Trump in office, there is a change in the tenor of regulation,” said Divya Narendra, CEO and cofounder of SumZero. “Banks have benefited after the election in ways no other industry has. Within six months to a year, we will see what regulatory turbulence happens, New York will be affected more than any city. Some of those will be cost-focused – how reducing regulation can save money in terms of legal and compliance.” If deregulation at the federal level is to occur, it will likely be offset by increased regulation at the state level, said Baydin. “Banks will need to remain vigilant about their consumer-facing actions and ensure they are not deceptive, unfair or abusive,” he said. “Previous enforcement actions by the CFPB and FTC will serve as a guide for state attorneys as they potentially take more responsibility for noncompliance in the banking industry.” There are three types of innovation in fintech, Anna Garcia, a partner with Runway Venture Partners, said at the NYSSA event, and the first one, product innovation, has been harmed by recent regulation. The financial services industry has historically been good at product innovation, she said, “but I believe regulation has put much of it on the back burner. In the past few years, banks have had to spend their resources on legal and compliance. That doesn’t excite venture capital.” Separately, Steven Schnall, chairman and CEO of Quontic Bank, pointed out an evolution “where fintech is carving out a significant place in the market.” “Many fintech firms have partnered with banks on a quasi ‘rent a charter’ scenario because of the nuances surrounding state by state licensing,” he said. “Banks are accessing this whole universe. The need for brick and mortar branches is waning and the need for Millennials to have access to financial products online is increasing.” Charles Wendel, president of Financial Institutions Consulting, pointed to the positives of alternative finance companies. “They bring technology that can allow a bank to expand its customer base and lower its cost,” he said. “Many alternative finance firms are looking to the banks as partners, because the banks can originate loan volume and the alt finance firms can provide insight that many banks don’t have available.”

Brexit Wrecks It for UK Fintech Investment Brexit has had a chilling effect on fintech investment, concludes an article in Banking Technology. Uncertainty over Brexit has created a 33.7 percent decrease in UK venture capital (VC) investment for fintech firms, according to research by Innovate Finance. Investment was down to $783 million – less than twothirds of 2015’s investment of $1.2 billion. Lawrence Wintermeyer, CEO of Innovate Finance, says the UK’s fall is “largely attributed to the uncertainty of Brexit and geopolitical and macroeconomic factors.” Wintermeyer adds: “The loss of passporting rights will hit fintech payments firms if special provisions to the single market are not negotiated upon leaving the union. However, maintaining and further improving access to global fintech talent has superseded passporting across the fintech community’s post-Brexit priorities.” The UK has retained its global ranking in third place, behind China (first place) and the U.S. According to Innovate Finance, 29 percent of the UK VC investment in 2016 was into alternative lending and financing, followed by challenger banks (20 percent), wealth management (10 percent) and money transfer and FX (10 percent). Overall global VC investment for fintech increased by 10.9 percent to $17.4 billion in 2016 with 1,436 deals. This level of funding surpassed the 2015 total of $15.6 billion. China outpaced the US for the first time in deal value at $7.7 billion while U.S. investment decreased in 2016 by 12.7 percent to $6.2 billion, despite being the global leader in deal volume at 650 deals.

Fintechs to Receive Charters from OCC The Office of the Comptroller of the Currency will start granting limited-purpose bank charters to fintech companies. Fintech firms had sought such a charter because they did not want to register in multiple states and face different laws and restrictions in each. A federal charter for fintech firms would largely allow them to comply with a single set of national standards – and gives them a single agency to apply to when seeking a license. State regulators have warned that a federal charter is unnecessary. Some within the banking industry fear fintech firms will have now have the advantages of a bank without their obligations. “Currently the state regulators have the authority. There had not been a federal charter available for these types of companies,” Andrew Wein, who specializes in regulatory compliance and litigation for Greenberg Traurig, told Banking New York. “Each state has its owns rules and licensing requirements [and] the state regulators have a lot of authority over these entities. And the OCC charter is not something that doesn’t come with its own cost. But if you’re an entity that wants to do a national business without adjusting your business model for every individual requirement in a state, a national charter would be appealing.”

Fintechs Guard Little-Known Dodd-Frank Measure Fintech startups are preparing to fight for a little-known provision in the Dodd-Frank Act that lets them mine customers’ bank accounts for data that facilitate use of investment apps and other third-party banking tools. Online investment manager Betterment and other fintechs formed the Consumer Financial Data Rights group in January to promote consumer choice and access to financial data.

First Quarter 2017 | 13


New DFS Cybersecurity Requirements for New York State: What You Need to Know

The swath of organizations that are affected is wide; the DFS oversees the following industries and types of organizations: • banks and trust companies • budget planners • charitable foundations • check cashers • credit unions • domestic representative offices • foreign agencies • foreign bank branches • foreign representative offices • health insurers, accident and related entities • holding companies • investment companies • licensed lenders • life insurance companies • money transmitters • mortgage bankers, brokers, loan originators and servicers • New York State regulated corporations • premium finance agencies • private bankers • property and casualty insurance companies • safe deposit companies • sales finance companies • savings banks and savings and loan associations (S&Ls) • service contract providers 14 | Banking New York


he state of New York late last year adopted a set of compliance requirements for businesses and organizations that report to the Department of Financial Services (DFS). The regulation, known officially as 23 NYCRR 500, will affect a wide array of industries, from banking and insurance to mortgage brokers. Although it went into effect as of March 1, the regulation is allowing affected organizations a transitional period of 180 days (i.e., until Sept. 1) to achieve the first round of compliance. Specifically, the new requirements mandate any organization overseen by New York’s DFS to comply with regulations meant to anticipate, address and thwart cybercriminals. According to 23 NYCRR, Section 500.0, “This regulation requires each company to assess its specific risk profile and design a program that addresses its risks in a robust fashion.” Limited exemption does apply to covered entities with

fewer than 10 employees or less than $5 million in gross revenue, or less than $10 million in year-end total assets. Additionally exempt are employees, agents, representatives or designees of a covered entity, and covered entities that do not directly or indirectly operate, maintain, utilize or control any information systems. Those that do qualify for the limited exemption must file a notice with the DFS. Either way, these new requirements will significantly impact thousands of businesses throughout New York. Organizations need to be aware of what they need to do and leave themselves enough time to comply.

WHAT TO DO NOW For businesses that fall under the oversight of the DFS, proposed requirements that need to be met by the first (Sept. 1) deadline include establishing and maintaining a cybersecurity program, implementing and maintaining a cybersecurity policy, designating a qualified individual (internal or outsourced) to serve as chief information security officer (CISO), limiting user access privileges as part of the cybersecurity program, utilizing qualified cybersecurity personnel, establishing a written incident response plan, notifying the superintendent of cybersecurity events as required, and filing a notice of exemption with the superintendent. Later requirements include submitting an annual certification of compliance to the superintendent, implementing a third-party information security policy, requiring multi-factor authentication, implementing limitations on data retention, ensuring training and monitoring, and encrypting nonpublic information. The cybersecurity program must also include penetration testing and vulnerability assessments, audit trail systems, access privileges, application security and risk assessment. To meet these requirements, businesses might consider several options,

depending on the size of the organization within the marketplace, as well as what level of internal IT capabilities they already possess. For some, specifically those smaller organizations with no current internal IT capabilities, a turnkey solution would make the most sense. In these cases, businesses should look for a package of services that meets all of the requirements set forth in 23 NYCRR 500. (Be sure to partner with an IT provider that is fully aware of these requirements.) Small to mid-size businesses that may have some internal or outsourced IT capability might need to look for assistance in ensuring compliance with all of the regulations; e.g., identifying an organization that can serve as the company’s CISO. Larger organizations with established internal IT departments might find they need assistance with only one or two of the regulations;

in this case, finding an IT partner that can offer a la carte services based on 23 NYCRR 500 makes the most sense. As cybercriminals continue to become more sophisticated every day, the concerns that inspired the new regulations are real, and other states are considering similar measures. No doubt many businesses are already doing the right thing in terms of protecting their clients’ and their own critical information. 23 NYCRR 500 is meant to ensure that nothing is overlooked in terms of cybersecurity, and to ensure that systems are in place to continually asses and improve an organization’s cybersecurity protection. ■ Al Alper is founder and CEO of Absolute Logic (www.absolutelogic. com). He may be contacted at or (855) 255-1550.

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FRESH PERSPECTIVE | By Tom Campanile and Mark Watson

New Approach to Bank Governance Needed Bank Boards’ Transformation Approaches Tipping Point

I Mark Watson

Thomas Campanile

n recent years, bank boards of directors have been approaching a tipping point in governance: regulators are pushing them further into overseeing strategy transformation, conduct and culture; and regulatory and other pressures challenge existing business models and the structures and operations that support them. Important obligations related to risk and regulatory reform continue to be heaped on top of long-standing board responsibilities, such as regulatory compliance. Bank boards are now expected to oversee major changes in their institutions: • Multiyear transformations: This includes strategies, businesses, operating and structural models, and customer and digital transformations. • Overhauled approaches to risk governance: Regulators are pushing banks to strengthen frontline accountability, embedded risk appetite, controls effectiveness and culture. • Increased board responsibilities: Major emerging risks, notably cybersecurity, call for material board and senior management engagement.

16 | Banking New York

Adding more directors and committees or increasing time commitments is no longer a viable long-term solution. If directors are to offer credible and constructive guidance amid significant changes taking place in their organizations, they’ll need a new approach.

RETHINK HOW BOARDS OPERATE Banks must transform their board operating model, much as the firms themselves are transforming. Banks are on the cusp of the third major overhaul of board practice in 15 years: Reform 1: independence and internal controls: The post-dot-com upheaval catalyzed a major focus on audit committee responsibilities and enhanced the focus on internal controls around financial reporting (e.g., Sarbanes-Oxley) and effective whistle-blowing mechanisms. The epoch of lead directors or independent board chairs, coupled with the introduction of separate meetings of non-executive directors, enhanced board independence. Reform 2: risk oversight and regulatory remediation: Since the financial crisis, banks have

prioritized risk oversight with the introduction of risk committees, risk appetite frameworks, expanded stress testing, and more detailed and expansive risk reporting. The board and risk committee in particular have played a major role in overseeing the implementation of stronger risk governance approaches and of risk-related regulation. Reform 3: strategy, conduct and culture: Now regulatory changes and other pressures are pushing boards to focus more on bank strategies and on the structure and operations that will support execution and expected future performance. The pace and scale of change in the industry require substantive board engagement. At the same time, regulators are indicating that the next major evolution needs to be in conduct and culture.

EXPEDITE THE EVOLUTION Bank boards must rework their agendas: Boards and committees need to have a systematic process to move regular agenda items into a business-as-usual (BAU) monitoringand-oversight mode to allow time for dialogue about emerging issues. Regulatory updates should focus on material and thematic developments and implications, and banks must avoid getting mired in every specific rule or regulatory examination finding. Directors must pay attention to areas that currently appear to be problem-free: This includes those initiatives, controls and risks that appear “green” in a firm’s dashboard but the success of which is critical – green can quickly turn to red. Boards must adopt a more integrated oversight process: Though board committees are critically important, in some ways they have inadvertently contributed to some of the siloed thinking in firms. For example, the audit and risk committees oversee internal audit and compliance and risk, respectively. Yet who owns the three lines as an integrated program? This is important, given regulators’ recent push for strong frontline accountability for all risks inherent in the businesses and realigned and robust second and third lines. If management is to address these issues in an integrated manner, so too should boards. Boards should establish time-limited oversight groups: Time-limited, less formal working groups can oversee the development and launch of major transformation plans and keep the entire board fully abreast of key issues, but can be disbanded as the project progresses and is successfully implemented and as the groups’ roles are absorbed into BAU structures. Such groups could be established by the full board or its committees.

Banks have to invest more in directors’ education: Do directors really understand what’s necessary to transform the bank’s operating model in today’s environment? Its digital strategy? Its three-lines-of-defense model? Its culture? More firms should invest in a more integrated, ongoing and stronger board training program – one that is truly tailored to the needs of their board and the bank and that doesn’t depend almost exclusively on training by management or generic outside events or conferences. Dramatically different board risk reporting is required: Management is developing faster, more effective and more accurate ways to oversee performance, risks and controls through enhanced reporting. Boards need to acquire the same capabilities – not to micromanage the firm, but mainly to stay focused on the top issues, with details accessible for necessary interrogation, especially within committee dialogues. The goal is a better board-level management information system, not simply putting more on a tablet or using board portals. Boards may need to consider previously rejected proposals: Over the past decade, boards have rebuffed several suggestions for board reform – most notably, full-time directors (those spending more than 75 days a year on those roles) and analytic support staff for boards. Both were rebuffed because they potentially overstepped the role of the board by bringing directors into the realm of management. It may be time to revisit these ideas and also to evaluate whether boards need dedicated internal staff. This can enable board engagement on the most important issues. Several firms already employ this approach.

THE BOARDROOM IN 2020 Many of these recommendations are already in practice at leading-edge firms. For many banks, however, the boardroom of 2020 will look very different from today’s. Some directors will devote much more time than others. Some committees will remain, and others will fade as they address and solve their focus issues. And meeting agendas will be materially different – fostering substantive dialogue on the most important issues of today and, more importantly, tomorrow.  ■ Tom Campanile is a partner in and Mark Watson is executive director of Ernst & Young LLP’s Financial Services Office Advisory Services practice. They may be reached at and mark.watson@, respectively. For more information, please visit First Quarter 2017 | 17


Strong Customer Loyalty Could Be a Sign of Weakness, Not Strength


t’s one of the first lessons you learn in business school: Loyal customers are the best customers. They love your brand, wouldn’t dream of switching banks and have been with you for years. Focus on loyalty and you’re sure to beat the competition, right? Wrong. Loyalty isn’t all it’s cracked up to be. While there is inarguably a benefit to having existing customers evangelize your brand, particularly in a social media world, loyalty as a single measure isn’t all it’s cracked up to be. In fact, strong loyalty is often a sign of underlying problems. First, it’s important to look at loyalty for what it is: A look that sounds like it evaluates customer happiness but really measures how willing a customer might be to leave for another brand. “Loyal” customers can be the kind you really want, the ones who recommend your bank to friends, post on social media often about their experiences and go to your bank to buy more products and services from you. Loyalty could just as easily be a measure of apathy. Think about it: When a customer says she is loyal, the assumption is that she’s perfectly satisfied with her service. But sometimes a customer just isn’t interested in making a move. It’s the law of inertia. Someone might want to switch to another brand, but the thought of cancelling an account, transferring assets and buying completely new products is just more trouble than its worth. Some customers might characterize an unwillingness to move as loyalty. And then there’s the issue about generation. Customer loyalty is higher with older generations than, say, Millen18 | Banking New York

nials. In fact, research shows loyalty weakens consistently from old to young customers. For instance, data from Informa Research Service’s SEA Score, which measures member and customer engagement, show that those over 55 years of age – the Baby Boomers – are 37 percent more likely than Millennials to be loyal to their financial institutions. Or, stated the other way, Millennials are 73 percent less loyal than Boomers. Knowing that, having high loyalty may correlate to having an aging customer base. While those are stable customers, they are often not growth customers, certainly not the ones who will be seeking new business loans, buying a vacation home or increasing deposits for saving. For those younger customers, loyalty doesn’t matter. They want competitive rates, a strong online experience, convenience and execution. The whole idea of loyalty is foreign to them, so any focus you put on loyalty in marketing to these highgrowth customers is misplaced. That isn’t to say that loyalty isn’t important. You obviously want to cultivate customers who remain with you for a long time. But it is a single data point. Without context, and a strategy beyond simple customer retention, you might be putting your future growth at risk. ■ Sue Hines is head of customer engagement at Informa Research Services, a provider of customer/member engagement and loyalty studies, competitive product rate and fee intelligence, and delivery channel experience measurements to the financial services industry.

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SUCCESS STORIES | By (Dima) Neil Berdiev

What Top-Performing Business Developers Know Best Practices from Commercial Banking’s Elite


s commercial banking industry’s profit margins near retail grocery business, demand for performance at all levels of an organization becomes critical. It is vital to understand what best performers do and how they do it, and to apply that knowledge within your team. Below is a collection of the best practices from some of the best business developers in our business. This know-how can be easily applied in other industries. 1. Educators first and foremost Best business developers are educators, whether they deal with clients or their colleagues, including credit and risk management professionals. These successful peers may be educating their clients about the bank’s products and services and how they can solve their problems. Or they may meet with their credit colleagues to familiarize them with how a particular industry or borrower operates. 2. Not the most important team member The true success of a commercial bank lies in the ability of different teams to work well together, solve problems, and jointly and zealously overcome conflicts. Best teams have no revenue generators and cost centers, but everyone works toward common goals, one of which is becoming a strong profit center. High performing sales executives know well that they are only as good as their team’s weakest link. 3. Be a facilitator Truly successful business developers are the glue that pulls together the business development and credit processes and helps make things happen. They help steer a deal through the hurdles of competitive situations or the difficult situations of a client’s intent to move the relationship. One of my former colleagues was always known for understanding what and why each team member needed something and that everyone had a job to do. As a result, he worked more closely than any other team member with credit colleagues to ensure that he had all the most relevant credit risk angles covered. 4. Don’t change the system in the middle of a deal Problems arise on just about every deal at various points of the credit process. Perhaps the loan system does not work well, the credit policy is too stringent or outdated, or the credit team does not have sufficient resources to support relationship managers. Whatever the issues, successful commercial bankers know that complaining, expressing discontent, fighting or trying to change the process instead of getting the deal done is counterproductive. 20 | Banking New York

5. Selling by focusing on credit Some of the most successful business developers were first and foremost experienced credit people. At a minimum, sales executives with limited credit background pair themselves with experienced credit professionals to offer a strong balance to their sales background. By wearing a credit hat, top performers are able to truly understand the clients’ financial situation, what’s behind the numbers and how financing elements connect with operations, strategy and direction for the company. 6. Think several steps ahead Accomplished business development professionals do not operate in today. They look at clients’ current needs and challenges, and they also take the time to understand where they are likely to be a year from now and how it will affect the banking relationship. Perhaps the client is already reaching the organization’s lending capacity. If that’s the case, their relationship managers are actively thinking what they will need to do to support the client in the next few years, if the plan is to grow. Some solutions may be in starting discussions with another commercial bank and potentially bringing it on in a club deal basis. 7. They are not your clients It is easy to get caught in the riddle of who “owns” the clients, especially if you’ve had relationships with management teams for years or decades. The sense of ownership can even be stronger if you brought those clients to your current organization, and even more if they’ve been following you from organization to organization. It is not always easy to recognize that your employer’s name is on the paycheck, and it is your employer who will bear the loss, should something go wrong with the relationship. 8. If you can’t be hyper-organized, you are toast The job of a relationship manager is a constant juggling of clients’ needs that can range from complex annual meetings to fire drills to daily administrative requests. If you have a few dozen accounts, the day of an established relationship manager may remind the screen of an air traffic controller with lots of things happening concurrently (without the risks of overseeing human lives in the air). Top performers know what’s happening at any given point in time, what needs to be done, when, where and how. 9. Proactive communication Another quality of highly successful business develop-

ment professionals is constant and proactive communication with various parties from clients to internal and external business partners. Many things can fall apart if you do not inform them of timelines and interim deadlines, what you and they will need to do and should expect, what the process is like and many more factors. Lack of proactive communication is similar to being stuck underground on a subway and having no information. You may not always appreciate the information but at least you know what to expect, having some ability to change the course of action and make alternative arrangements. 10. Ask for help For those who like and need to be in control, and business developers are certainly in that category, asking for help is perhaps one of the hardest things to do. It is especially hard if your credit is not performing as expected. Yet the best in our field know that waiting and hoping that things will work themselves out is the strategy that is fraught with

unpredictability and is contrary to being in charge. After a few times of trying to reach out and ask for help, it becomes easier and easier to ask.

FINAL THOUGHTS Not meeting sales goals won’t kill your career, but bad credits will. If your organization is heavy into sales goals, sales incentives, performance management, and dealing with underperformance quickly, there is always a risk that you may lose your job for not meeting your sales goals. As long as you’ve had strong years, decline in sales performance can be carried by those better years for some time. What can absolutely kill a commercial banking career is a credit gone bad.  ■ (Dima) Neil Berdiev is a managing partner and co-founder of DNB Advisory LLC, a Boston-based advisory firm. It provides advisory and on-demand credit services for commercial lenders. He may reached at dnb@dnbAdvisory. com or (617) 233-1405.

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Workforce Transformation 3 Essential Ideas to Help Solve The Bank Talent Crisis


he banking industry is experiencing a double tsunami of disruption – on one side by a radically changing banking environment, and on the other by the need to attract, engage and retain the right talent to anticipate and address these disruptive changes. Whether it’s addressing the emergence of new fintech competitors, heightened regulatory and political scrutiny, robotics, cloud computing, contingent employees or planning for Brexit, banks struggle to match their evolving needs with strategic, business and workforce plans. There are three essential concepts banks Bhushan Sethi can adopt right now to better anticipate the future and manage it with the right talent: using data analytics, creating dynamic workforce demand/supply models and developing or accessing “talent exchanges.”

USE DATA TO ASSESS THE PRESENT AND PLAN FOR THE FUTURE Data analysis can show if an organization has a correct executive succession plan in place, whether its workforce is top- or bottom-heavy, what its future needs are for contingent versus in-house staffing, and more. Together, HR and business leaders can usually find these descriptive analytics in existing reporting dashboards, but there also are visualization tools to further analyze how changes in business priorities might impact workforce projections. Workforce analytics, creating a powerful understanding of a bank’s current situation, can examine engagement and performance trends to drive hiring and retention effectiveness. It also can inform the next crucial step in the process, developing a supply/demand model.

DYNAMIC WORKFORCE MODELS BASED ON DATA A dynamic workforce model can reveal the drivers that impact future workforce needs. Maybe those needs require a different mix of capabilities, a workforce reduction or new onshore or offshore locations. New specialties may be required to address such disrupters as processing automation, unique digital identifiers within trading lifecycles or the need to digitize the workplace with the latest generation of cloud-based technology. You won’t know without a model. As well, models can help predict the impact of other disruptive forces, such as changing customer preferences, interest rate increases, unexpected geopolitical events or new regulations that strain particular types of talent. As for the contingent workforce, a workforce model can examine such factors as the balance between fixed and variable costs, capability gaps, recruitment cycle times, risk appetite and the or22 | Banking New York

ganization’s willingness to work with external partners. A large number of mature financial institutions cannot, with a high degree of comfort, identify their contingent workforce at any point in time, particularly when it comes to the critical issue of system access.

FINDING NEW SOURCES OF VERIFIABLE TALENT With these kinds of understandings in place, banks must now look to alternative ways of sourcing talent. The plain fact is that the traditional ways simply aren’t sufficient to find and recruit the best folks for the changing times. The bank hiring process is pretty opaque. There is the potential for employees to go from one job to another without their new employers having any real understanding of their prior performance, personal ethics and values, whether they’re a good cultural fit, or if they can even fill the employment needs of the future. The current processes for background checks seem inadequate to filter out bad apples who might expose the firm to reputational and financial damage. As a remedy, consider the concept of “talent exchanges,” an approach to hiring similar to how today’s sharing economy works. Here, banks and job seekers are matched through technology, algorithms, data and a little human judgment. In addition to validated prior employer references, this might include psychometric profiles, social media footprints and social sentiment. Recruitment technology vendors might choose to build and launch a talent-exchange platform, or the industry itself might create one. In October, The Wall Street Journal quoted Federal Reserve Bank of New York President William Dudley, speaking at a workshop devoted to fixing conduct problems in banks, urging the creation of an industry-wide “bad banker” registry, which would require changes in hiring, information sharing and employment law. The talent exchange concept also can help banks attract the best and the brightest. A competitive market has shifted the balance of power to the job seeker; a major question in the industry today is whether young talent even finds a job in banking attractive. To address this, banks could employ former employees to provide to prospects reviews of their work experience, or immersive pre-employment visualization and experience through such methods as gamification, short trials and “day in the life” previews. In the coming years the makeup of the bank workforce – how it’s recruited, organized and rewarded – will look very different than it is today, and it should. How banks make sure their workforce strategies are optimized for the future can determine their ultimate successes, or their failures. ■ Bhushan Sethi leads PwC’s U.S. Financial Services People & Organization Practice.


CITIGROUP FINED $28.8M FOR HARM TO HOME BORROWERS Citigroup Inc. mortgage units have been fined $28.8 million for keeping home borrowers in the dark about options to avoid foreclosure and making it difficult for them to apply for relief, the U.S. consumer finance watchdog said on Monday. CitiMortgage will pay an estimated $17 million to compensate wronged consumers, as well as a civil penalty of $3 million, the Consumer Financial Protection Bureau said. CitiFinancial Services will refund approximately $4.4 million to consumers, and pay a civil penalty of $4.4 million. The CFPB said the subsidiaries neither admitted nor denied the findings in the consent orders. In the first hour after the penalties were announced, Citi shares dropped to $55.52 from $55.77. They closed at $55.68, off 0.8 percent. The penalties come less than a week after the CFPB, a federal watchdog for protecting individuals against fraud in lending, sued the country’s largest student loan servicer, Navient Corp., for similarly confusing its customers over options with their loans. As part of the agreement CitiMortgage, which services the loans for Citibank and governmentsponsored entities such as Fannie Mae and Freddie Mac, must freeze all foreclosure-related activity that is connected to the flawed process for applying for relief where the borrower never received a decision on granting relief. The CFPB said the servicer sent letters to about 41,000 borrowers in 2014 requesting unnecessary documents, and it is this group who will receive the $17 million. According to the CFPB when borrowers applied to it for foreclosure relief CitiMortgage demanded “dozens of documents and forms that had no bearing on the application or that the consumer had already provided.” Many were actually not needed to complete the application, the CFPB added. CitiFinancial, meanwhile, must improve disclosure on deferments and stop sending credit raters “bad information” that settle accounts were “charged off” – an indication that the borrower was delinquent.

EVANS BANK APPOINTS NEW VP Evans Bank has welcomed Marc P. O’Hearn as vice president and director of government banking, responsible for managing and developing the organization’s municipal banking efforts. O’Hearn joins the bank with more than 30 years of banking and financial services experience. O’Hearn has focused his career on managing successful banking relationships with government entities, educational

institutions, foundations and associations throughout Western and Central New York. He provides financial and consultative solutions related to all aspects of government banking, including financing, deposits and cash management and treasury services as required under New York State Comptroller guidelines and general municipal laws. Most recently, O’Hearn served as first vice president of government banking for the former First Niagara Bank. He previously served as first vice president of public sector banking and vice president and relationship manager for government banking for KeyBank and JPMorgan Chase & Co., respectively. O’Hearn serves on the board of directors of the New York State Government Finance Officers Association (GFOA) and the Niagara Count Community College Foundation.

AMALGAMATED BANK RECOGNIZED FOR CORPORATE RESPONSIBILITY Amalgamated Bank announced that it has been certified as a B Corp. by the nonprofit organization B Lab. This globally-recognized certification is designed to highlight the work of good corporate actors around the world, and is offered to those businesses committed to creating a more socially equitable world. In becoming B Corp. certified, Amalgamated Bank joins over 1,800 conscientious organizations in pledging to the highest standards of good governance and corporate transparency. “We are honored to join the ranks of certified B Corporations, and immensely proud of this recognition of Amalgamated’s unending commitment to proving it is possible to be both a strong financial institution, and a force for positive change in the world,” Keith Mestrich, president and CEO of Amalgamated Bank, said in a statement. “This certification highlights our commitment to never stop fighting to build a more equitable world, in which corporations seek to benefit every person, not just shareholders.”

CANANDAIGUA NATIONAL BANK & TRUST RETIREE HONORED FOR HUMANITARIAN WORK New York-based nonprofit Happiness House hosted its 14th annual gala dinner and auction event in Geneva. Rick Hawks, recently retired senior vice president and trust administration officer for Canandaigua Rick Hawks National Bank & Trust and board member for Happiness House, was awarded the Humanitarian of the Year award alongside his daughter, Jackie Hawks Lyttle – also a board member. Proceeds benefitted the Ability Partners Foundation in support of the programs and services offered through Happiness House, CP Rochester and Rochester Rehabilitation. ■ First Quarter 2017 | 23


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Banking New York 1Q 2017  

In this issue, an uneasy truce forms as FIs partner with fintechs; new DFS cybersecurity requirements for New York State; and strong custome...

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