THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • SEPTEMBER/OCTOBER 2012 • VOLUME 24
LIBOR Crosses The Pond Effects On American Investments Investigated
+INSIDE: FOCUSING ON THE PEOPLE WHO MATTER: A SPECIAL HUMAN RESOURCES SECTION STERLING NATIONAL BANK’S ACQUISITION: MORE THAN A LAND GRAB BANKS STRIKE OUT AGAIN: FORCED PLACE INSURANCE LAWSUITS
BANKING NEW YORK Volume 24 | September/October 2012
04 FROM THE EDITOR
We Need Old Joe Again
06 BANK PROFILE
First National Growing Steadily – But Not Foolishly – Under CEO Vittorio
08 GUARDING THE GATE
Plunging into Social Media?
10 COMPLIANCE TECH
Technology Spurred by Turmoil, but Driven by Business Needs
12 ELECTRONIC FUNDS TRANSFER ACT
Cro sse s Th eP ond
Dealing With Remittance Transfers and the CFPB
Flood of Lawsuits Over Forced Place Insurance
HUMAN RESOURCES SPECIAL SECTION
22 Revisit Your Retail Sales Process – And Your Salespeople 24 Retention is a Two-Way Street 26 Past is not Prologue for Bank Compensation Practices 28 Attract Top Candidates by Putting Them in Control
16 COVER STORY
CONTRIBUTING WRITERS THIS ISSUE Matt Brown, Linda Goodspeed, and Steve Viuker
EDITORIAL Cory Hopkins Christina P. O’Neill ASSOCIATE EDITOR Cassidy Norton Murphy EDITORIAL DIRECTOR
CUSTOM PUBLICATIONS EDITOR
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Sterling National Bank’s Latest Acquisition Is Just Good Business
LETTER FROM THE EDITOR | By Christina P. O’Neill
We Need Old Joe Again
Long before the LIBOR scandal broke, reports in The Wall Street Journal in 2007 and 2008 made us wonder why no one other than academics had raised questions about the risk inherent in the self-reported borrowing cost estimates that are used to calculate LIBOR, which has such farreaching impact on interest rates. Self-reported numbers that reflect on a financial institution’s soundness, combined with pressure from traders, provides a prime recipe for fudging. If Bernie Madoff hadn’t been allowed to essentially make numbers up, perhaps his scheme would have been caught long before it reached $60 billion. And public pension funds, including California’s largest, might have better balance sheets today if more had been
known about the markups imposed on non-negotiated foreign exchange rates by State Street Bank and Bank of New York Mellon. Franklin Roosevelt tapped Joseph P. Kennedy as the first head of the SEC back in 1934, because of Kennedy's knowledge of how the securities business worked, and how it didn’t. He knew its vulnerabilities because he had taken advantage of them, becoming rich enough to help FDR get elected. Ironic, yes, but historians view Kennedy’s role at the SEC as his finest achievement due to his penchant for fixing problems and then getting out of the way. We need a modern-day Joe Kennedy to fix the mess we’re in, but are not likely to get him or her because the colorful record such an individual likely
would have would not survive modernday vetting processes. Today’s regulators are so busy reacting to problems from five years ago that they’re missing today’s abuses. We can’t just fine the wrongdoers who are caught (otherwise known as the Full Employment Act for Litigators). We need regulators who know what to look for, and who question why crucial numbers are self-reported. They need the legal standing – and the expertise to demand what good math teachers have always demanded of their students: Show us your work. ■ Christina P. O’Neill Editor, Banking New York Custom Publications Editor The Warren Group
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THE POWER OF AN ADVANCE
One advance can help fund hundreds of neighborhood needs. FHLBNY advances are a reliable liquidity source for our member lenders to finance home mortgage, small business, and economic development activities. Banco Popular North America, an FHLBNY member, used an advance to help provide permanent financing for Tilden Hall Residence, a New York City Tier II shelter facility in Brooklyn, New York. The eight-story facility, operated by Highland Park Community Development Corporation, provides transitional housing for 117 families who are victims of domestic violence, and helps its residents progress to independent living. 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 â€œadvancesâ€? to refer to the loans it provides to our member lenders.
First National Growing Steadily – But Not Foolishly – Under CEO Vittorio By Linda Goodspeed
hen Michael N. Vittorio took over the helm of the First National Bank of Long Island 10 years ago, the bank looked more like a securities house than
a bank. “We were over-capitalized,” said Vittorio, president and CEO. “We had a very low loan-to-deposit ratio, only 35 percent. Most banks have an 85 percent ratio. With the yield curve flattening, we had to make some strategic changes.” Those changes included a four-part plan that has helped the once-sleepy bank more than triple in size over the last Michael N. Vittorio decade. First National now has more than $2 billion in assets and a growing network of 35 branches in Long Island and Manhattan. More impressively, Vittorio grew the bank during one of the worst economic downturns in 75 years, and did it without assuming undue risk or through acquisitions. “We actually have a bias against acquisitions,” Vittorio said.“Most bank acquisitions are not all that successful. They make great country club talk, but I could care less about country club talk.” Instead, Vittorio grew the bank organically. His four-part plan started with turning First National’s composition of earnings assets from securities to loans. “With loan growth, you can drive relationships and deposits,” he said. Next, he had to make massive capital investments in First National’s aging plant and technology functions. “I didn’t even have email when I came 10 years ago,” Vittorio said. “the bank’s computers, core processing system, wiring was very old. We had to make a total upgrade.” His third priority was people. “We did very selective hiring of key people, both senior and middle management,” Vittorio said. “With people comes additional networks and, hopefully, customers.” Finally, he undertook a complete review of the bank’s policies, protocols and underwriting standards. “We wanted to make sure that as we went into credit mode, we were not going to damage the bank or our stockholders,” he said. “A lot of people go into credit without policies, documentation, underwriting guidelines, and it can be disastrous.” 6 | Banking Banking New New York York
AHEAD OF HIS TIME First National avoided disaster by adopting very conservative underwriting standards even during the heady go-go years before the financial meltdown in 2008. “Most banks were doing even 100 percent financing,” Vittorio noted. “We always did 70 percent. When most banks were not doing stress testing, I started it. We introduced FICO scoring. Credit risk is the most important thing for large and regional commercial banks to address. You have to be almost cult-like about it. It’s the fastest thing that can take a bank down.” The attention to credit risk has paid off. In the bank’s $1.1 billion loan portfolio, which is divided about equally between commercial and residential loans, there are just five nonperforming loans, and 10 delinquent loans. “They have a pristine balance sheet,” noted Brian Kleinhanzl, a bank analyst and vice president at KBW in New York City. “They have been able to avoid a lot of credit problems other banks faced, which has allowed them to take market share.” Vittorio said the bank’s stock price has increased 104 percent over the last 10 years, and that Morningstar rates the bank among the top 25 public companies for increasing dividends paid to shareholders over the last five and 10 years. Looking ahead, Vittorio says the future is fraught with peril for all banks: flat economy, continued high unemployment, declining disposable income, Uncertain political and regulatory environment, Low interest rates, turbulent world events. But he has no plans to alter First National’s strategy or direction. With a 62 percent loan-to-deposit ratio, he says the bank has room to grow its lending, branches (two more in 2013), and hiring – “We continue to look for key people.” At the same time, he remains his usual cautious self. “We’re very concerned about being over-aggressive,” he said. “We want to stay very measured, disciplined. We don’t want to expand dramatically in a low-interest environment.” Alex Twerdahl, associate director at Sandler O’Neill and Partners in NYC who follows First National, says there is room for growth for them. “Nassau is a very populous county,” Twerdahl said. “They have an excellent balance sheet and management team, and are positioned well to take market share from other competitors.” ■
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GUARDING THE GATE | By John Jaser
Plunging into Social Media? Not Abstinence – Caution
he social media drums are pounding, while voices of caution are being pushed aside – not a great formula for social media’s long-term success in financial institutions. Just for the record, social media isn’t the first “cool“ technology to appear on the banking scene. Email, Internet websites, even Microsoft Windows were cool in their day. In each case, we realized the security risks after the horse left the barn. Remember the TJX data breach? How many debit cards did your institution reissue at an average cost of $4 per card? How much fraud did you have to cover? If your institution is contemplating a social media presence, consider the risks that accompany its potential rewards. That way, bankers can participate in the conversation without having to plug the security holes later.
GOOD CHAT, BAD CHAT Conversation is the point of social media. We talk, we connect, we refer and hopefully generate traffic for businesses that receive positive comments. Marketing people around the world hope to land on the good side of chat. Land on social media’s “bad” side and your bank’s reputation becomes something to salvage. It doesn’t matter if the negativity comes from a single malcontent or an actual snafu. The social networking public may only read the subject line and bypass the underlying comment. Either way, your financial institution can quickly become a pariah.
To counteract the damage, you might consider monitoring major social networking sites for mentions of your institution and nipping the bad ones in the bud. Viralheat can monitor a site for $140 per month, but then an employee is still needed to respond to unkind posts. If social media is important to your institution, this may be something to budget.
WHO’S SPEAKING FOR YOU? Do you believe that every employee in your financial institution should have unlimited access to social media? More to the point, do you believe your employees will consistently mention your institution in favorable terms? If your answer to these questions is yes, then you might have an unusually upbeat, articulate staff. You might also have an unrealistic idea of the damage that one disgruntled employee can cause in today’s social media. Let’s face it, your employees know a lot about your financial institution. If they start posting details about your institution on their Facebook wall or tweeting about the institution, they could undo months of marketing effort. They could also slip confidential information into the conversation, increasing your potential liability should a criminal notice and act. My recommendation – assign your marketing professionals to work the social media “beat.” The beat includes online forums, Twitter and Facebook. Marketing people know what to say on behalf of your institution. Putting everybody on Facebook is not a good social media plan for a bank.
THE CRIMINALS Every media presents risks, but social media presents greater risk because its goal is trust and sharing personal information. Can you imagine a better forum for social engineering (also known as phishing)? Already 750,000 Facebook members have admitted to infection by Koobface, a computer worm that targets users of social networking websites. The total infection count is probably higher. A few weeks ago, an organization called “Control Your Info” took control of hundreds of Facebook groups. The attackers insist they were merely highlighting a security flaw in Facebook. But their stunt broadcast the flaw around the world. As custodians of other people’s money, bankers manage the risks of loan loss, physical theft, identity theft, and more. A banker’s caution may not match the excitement of a tweet or a Facebook post, but banks and bankers are obligated to protect the public's college funds, retirement assets, and other savings. That’s a different obligation than writing witty posts. Should bankers avoid social media in the name of security? Not at all. But understanding that security goes handin-hand with social media is an important message that will help any financial institution over the long haul. ■
John Jaser manages Internet Services and Security at Avon, Conn.-based COCC, Inc., a 43-year-old firm specializing in outsourced information technology and support. 8 | Banking New York
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Technology Spurred by Turmoil, but Driven by Business Needs By Ross Feldman As a global hub of financial activity and one of the world’s largest financial capitals, New York felt a significant localizing effect from these events, which could explain why many of New York’s political leaders have pushed for stricter financial procedures. If you are a New York banker, you have witnessed from the front lines a change of pace that ushered in unprecedented reforms and customer unrest. New regulations, such as the Dodd-Frank Wall Street Reform and the Sarbanes-Oxley Act, have strengthened the transparency and accountability of financial reporting, increased consumer protections against unclear financial services practices and helped decrease the chances of a large-scale financial crisis. Compliance requirements, such as the PCI Security Standard, and laws like the Check 21 Act, strive to eliminate crimes against individuals, organizations and money movement systems.
he financial industry has been mired in turmoil since the start of the new millennium. The September 11 attacks are considered by some to be an inciting factor in major government reforms and subsequent measures to promote economic activity. Shortly thereafter, the United States witnessed corporations like Enron commit large-scale fraud, and many others came under scrutiny and investigation. Market instability, a credit crisis and the government bailout soon followed, leading to widespread calls for change in the regulatory system.
TECHNOLOGY’S ROLE IN MEETING REGULATORY EXPECTATIONS AND COMPLIANCY While today’s financial reforms seek to improve business practices, consumer and investor protections, as well as the overall U.S. economy, financial institutions are struggling to meet the stringent requirements of these new compliance and regulatory statutes. To address these challenges, financial institutions are turning to technology. IT innovations are helping financial institutions secure, analyze
Ross Feldman is chief technology officer for HP U.S. Financial Services, Enterprise Services. 10 | Banking New York
and understand critical data, protect financial transactions, predict future problems and stay on top of consumer demands. Business intelligence (BI) and “Big Data” analytics are emerging technology trends that are helping financial services organizations tackle today’s challenges. Banks and financial institutions have worked for years to do more with the vast amounts of data they have on customers, channels, financials and risk. With BI and analytics technologies, financial institutions can organize and analyze this wealth of data to produce meaningful information for decision making, predictions, customer guidance, cross-selling and complex problem solving. Data analytics technologies are helping financial institutions: • Facilitate processes for management to execute adequate procedures, controls and confidence in reporting while providing greater depth in wtransparency. • More quickly and efficiently analyze transactional data to identify patterns or trends that indicate fraud, errors or misuse. • Identify early warning signs of threats to their business and enable risk exposure actions as a result.
BUSINESS AND COMPETITIVE NEEDS DRIVE ADOPTION Reforms in the financial services industry may have been driven by turmoil in the industry and the economy, but the adoption of new technologies like “Big Data” are the result of a perfect storm of business
and competitive drivers in the marketplace. New York banks join their U.S. and global counterparts in recognizing that the competitive landscape has changed dramatically. To survive, financial institutions can no longer defer plaguing questions about the viability of legacy infrastructure and complex integration needs after a decade of acquisitions and mergers. The global competitor is now onshore and able to deliver customer satisfaction at an increasingly lower price-point. How does one compete? By looking at technology with a renewed vision – one that not only considers efficiency gains, but looks to technology as a path to new service revenues and innovative outputs. While regulatory
requirements are eating up a large portion of budgetary spend, banks are ever more cognizant that staying in business means staying ahead of business. Planning for an even greater competitive environment that demands a greater share of wallet for each customer takes business foresight and a commitment to getting started now. Technology transformations within the industry will quickly render the nonadopter as a non-player in the very near future. A growing number of financial institutions are relying on outsourced IT service providers to help achieve their technology transformations and develop competitive advantage. Financial organizations can fill their budgetrelated technology gaps by shifting certain non-value added functions
to outsourced service providers. By outsourcing infrastructure, application services and go-green initiatives, financial institutions can reduce costs and focus more of their limited available spend on growth- and revenueproducing initiatives. The year 2012 has found financial institutions in New York, across the United States and worldwide in an interesting position. Although the impacts of the last decade are still present in global financial markets, 2012 is an exciting time for financial institutions to transform their existing infrastructures and take on new technologies, like “Big Data” analytics and business intelligence, to meet regulatory, consumer and economic demands while staying ahead of the competition. ■
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September/October 2012 | 11
ELECTRONIC FUNDS TRANSFER ACT
Dealing With Remittance Transfers and the CFPB By Crystal Sides
e live in an increasingly connected world, whether for business or because our personal lives transcend national boundaries. Accordingly, the ability to offer international wire transfers is important to many community banks. But new changes contemplated by the Consumer Financial Protection Bureau (CFPB) have many bankers concerned that this important product may become too difficult to offer. As the leading provider of services to banks throughout the Northeast, Bankers’ Bank Northeast (BBN) has been working diligently on this issue, both with the banking community and with the CFPB. Because bankers are seeking guidance on the proposed changes to the Electronic Fund Transfer Act (Regulation E), BBN has created a brief update and summary regarding this regulation. Although some details of the proposal may seem onerous, this rule is still somewhat in flux. It is important for banks to realize that, with patience and training they will be able to continue processing international remittances, so they can continue to retain valuable fee income and customer relationships as well as remain in compliance. As a correspondent and core provider of international transactions, BBN has been actively following this new regulation. In July, 2011 we submitted a comment letter opposing the proposed changes to Regulation E. Furthermore, in response to our original comment letter, the CFPB reached out to Bankers’ Bank Northeast to obtain additional information. They recognized that as
an aggregator of community institution international activity, we would be able to provide them with statistical data regarding foreign exchange activity in order to assist them with their final ruling. We hope, for example, that the transactional volume data we provided to the CFPB will help further amend the threshold of 25 remittances over a 12-month period. In addition, industry data support groups have both individually, and jointly, submitted comments regarding the proposed rule. Meanwhile, here is a quick primer on the regulation.
SUMMARY GUIDE TO REG E REMITTANCE CHANGES Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has issued a final rule amending Regulation E, effective Feb. 7, 2013. This new rule requires specific transaction disclosures, error resolution dispute rights and transaction cancellation rights for consumers who send money electronically to foreign countries, otherwise known as remittance transfers.
INSTITUTIONS THAT ARE COVERED The Final Rule defines remittance transfer provider (RTP), to mean any person that provides remittance transfers for a consumer in the normal course of its business, regardless of whether the consumer holds an account with such person. The term “any person” includes banks and credit unions, as well as money transmitters.
TRANSACTIONS THAT ARE COVERED A remittance transfer includes all electronic transfers of funds (such as wires and ACH) initiated by a consumer for personal, family, or household purposes to a designated recipient (which can be a person or a business) in a foreign country. Excluded from these transactions are small value transactions and securities and commodities transfers.
DISCLOSURES REQUIRED The rule requires that an RTP provide a prepayment disclosure prior to payment and a receipt disclosure at the time of payment to the sender. The two disclosures can be combined into one disclosure prior to payment, but a separate proof of payment must also be provided to the sender. Disclosures must be clear and conspicuous and in written retainable form. Disclosures must be accurate, unless an estimate is permitted. In some instances, disclosures must be provided in a foreign language. The prepayment disclosure contents include: The amount (in the currency in which the remittance transfer is funded) that will be transferred to the designated recipient using the term “transfer amount” or a substantially similar term. Any fees or taxes that are imposed by the remittance transfer provider using the term “transfer fees and taxes,” or a substantially similar term. continued on page 14
Crystal Sides is senior vice president and enterprise risk manager for Bankers’ Bank Northeast. The bank, based in Glastonbury, Conn., serves more than 200 community banks and credit unions throughout New York and New England. 12 | Banking New York
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September/October 2012 | 13
DEALING WITH REMITTANCE TRANSFERS AND THE CFPB
continued from page 12
The total amount of the transaction, which is a sum of the transfer amount and any fees or taxes, using the term “total,” or a substantially similar term. The exchange rate used, using the term “exchange rate,” or a substantially similar term. The transfer amount in the currency in which the funds will be received by the designated recipient to demonstrate to the sender how third party fees or taxes are imposed. Any third party fees and taxes imposed on the remittance transfer by persons other than the remittance transfer provider, in the currency to be received by the designated recipient. Amount to be received by the designated recipient, in the currency in which the funds will be received. The receipt disclosure must be provided to the sender once payment is made, and must include the same information on the prepayment disclosure, as well as the following information: • The date in the foreign country when funds will be available. Estimates are not permitted nor expressing the date as a range. May disclose a conservative date and state that funds “may be available sooner.” • The recipient’s contact information (name, and, if provided, telephone number and address). • Statement of sender’s error resolution and cancellation rights. • The name, telephone number(s) and website of the remittance transfer provider. • A statement that the sender can contact regulatory agencies and CFPB for questions or complaints. • The contact information for the remittance transfer provider regulatory agencies (including state regulator) and the CFPB. A combined disclosure can be used, providing both the prepayment and receipt disclosure information, as long as it is disclosed prior to receiving payment for the transfer, and a proof of payment must be provided. 14 | Banking New York
ESTIMATES RTPs are allowed to provide estimates until July 21, 2015, in lieu of exact disclosures for exchange rates, taxes and fees, as well as, the amount transferred in foreign currency, if the provider cannot determine exact amounts for reasons beyond its control. If, however, the RTP cannot determine the exact amounts at the time the disclosure is required due to laws or other circumstances within a recipient country, the use of estimates is allowed on a permanent exception basis. (Note: A list of countries that fall into the permanent exception basis will be published by the CFPB.)
ERROR RESOLUTION If an RTP receives an oral or written dispute from a sender within 180 days of the disclosed date of funds availability, the RTP must conduct an investigation. An RTP has 90 days to investigate and determine if an error has occurred, and the resolution must be provided within three business days of the RTP concluding its investigation. The types of errors are: • An incorrect amount paid by the sender. • Computational or bookkeeping error made by the RTP relating to the transfer. • Incorrect amount received by the designated recipient. • Failure to make funds available to a designated recipient on the disclosed availability date. • Sender’s request for documentation or additional information or clarification concerning the transfer. If it is determined that an error has occurred, the RTP must remedy the error within one business day of receiving the sender’s choice of remedy. The remedies available to the sender are: • If the error was an incorrect amount received, either:
•• refund the sender the amount appropriate to resolve the error, or •• send the amount appropriate to resolve the error to the recipient at no additional cost to the sender.
• If the error was based on the failure to make funds availability by the date stated on the disclosure, either: •• refund to the sender the amount appropriate to resolve the error, or •• send the amount appropriate to resolve the error to the recipient at no additional cost to the sender unless the sender provided incorrect or insufficient information. In addition, the RTP must refund any fees and taxes charged, including any third party fees and taxes, assessed on the remittance transfer.
CANCELLATION RIGHTS A sender may cancel a remittance transfer up to 30 minutes after the sender makes payment. The RTP must refund within three business days, at no additional cost to the sender, the total amount of funds paid by the sender, including any applicable taxes and fees.
CONSUMER FINANCE PROTECTION BUREAU The CFPB has issued a concurrent proposal with this new rule soliciting additional comments. Comments were due by April 9, 2012. The two areas where additional comments were requested are: • Defining further the definition of a RTP or when a provider offers remittances in the normal course of business and must comply with the rules. Under the rule, normal course of business is determined using a test of past historical transactions but does not indicate the number of transactions. CPFB is proposing to adopt a threshold based on 25 annual remittances. • Soliciting additional input on how to refine the requirements for certain recurring transfers scheduled in advance. Bankers’ Bank Northeast will continue to work with the financial services industry to educate policy makers of the impact of this rule on ACH and wire transfer systems and to seek further clarifications on the proposed rule. ■
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September/October 2012 | 15
Cro sse s Th eP ond
Banks Claim Bleeding From a Thousand Cuts
By Steve Viuker
ttorneys general in at least five states are conducting investigations tied to alleged manipulation of the London interbank offered rate (LIBOR), adding to probes by U.S. and U.K. authorities. The probes by New York, Connecticut, Massachusetts, Florida and Maryland are in different stages, according to the states. New York Attorney General Eric Schneiderman and George Jepsen in Connecticut are working together, and Massachusetts is talking with other states about possible coordination. According to Bloomberg News, “The New York and Connecticut attorneys general have been looking into these issues for over six months, and will continue to follow the facts wherever they lead,” said James Freedland, a spokesman for Schneiderman. The scandal led to the resignation of Barclays PLC CEO Robert Diamond. Massachusetts is looking into the effect on state investments and is working with state agencies and municipalities, Florida Attorney General Pam Bondi’s office is “reviewing the matter,” and Maryland Attorney General Douglas Gansler is “looking into” the allegations. Berkshire Bank, a New York lender with 11 branches, sued 21 banks, including Bank of America Corp., Barclays Plc and Citigroup Inc., for damages over the alleged manipulation. Berkshire sought undisclosed compensation and punitive damages and the right to represent other lenders in a group lawsuit, or class action, in a July 25 filing in federal court in Manhattan. The lender claims in the suit that LIBOR fraud lowered interest payments it received. Berkshire seeks to represent all banks, savings-and-loan institutions and credit unions that are based in New York or have most of their operations in the state. There are several hundred such institutions.
The Justice Department investigation of criminal activity related to LIBOR is moving on a parallel course with civil probes of the banks being conducted by the U.S. Commodity Futures Trading Commission, the Securities and Exchange Commission and U.K. regulators, including the Serious Fraud Office. The European Union promised stricter supervision of interbank lending rates and said on July 25 that it may expand antitrust probes of the manipulation. The penalties are tied to LIBOR and other indexes that have fallen to near historic lows since the financial crisis that began in 2007, forcing at least $4 billion of payments to end the agreements, according to data compiled by Bloomberg. The California Public Employees Retirement System, the largest U.S public pension with $233 billion of assets, is examining the impact of LIBOR fixing on its portfolio and will make a judgment about whether to seek damages. Until now, most of the attention has involved traders at Barclays, which last month reached a $453 million settlement with U.S. and UK authorities for its role in the manipulation of rates. But traders from at least two other banks – UK-based Royal Bank of Scotland Group Plc and Switzerland’s UBS AG – played a central role. The dollar and euro rate-rigging appears to have begun in earnest in early 2005 in the dollar market, according to the documents reviewed by Reuters. Soon, the trading had crossed to euro rate markets, according to the settlement documents filed in the Barclays investigation. And by 2007, traders at RBS and UBS were seeking to influence the yen rate market, according to documents filed in 2011 in Singapore’s High Court and in Canada’s Ontario Superior Court. continued on page 18 September/October 2012 | 17
LIBOR CROSSES THE POND In August, The Wall Street Journal reported that several large mutualfund companies, including Black Rock Inc. and Vanguard Group Inc., have launched internal investigations into whether their funds have been harmed by alleged interest-rate rigging by large banks. Mutual funds invest in a variety of securities and other financial instruments with interest rates tied to LIBOR. If some banks conspired to keep interest rates low, the returns received by the funds and their investors could have been affected. U.S. money-market funds, which have $2.5 trillion in assets, could be among the most affected because they invest in short-term debt that could be tied to LIBOR. Fixedincome securities are tied to Libor; so bond funds could be affected, as could hedge funds. Les Jacobowitz is a partner in the New York office of Arent Fox and
continued from page 17
handles public finance issues. “This will be one of the largest financial crisis-related issues of the Great Recession confronting large banks due to the dollar magnitude of the issue and LIBOR’s broad use to consumers and companies,” he said. “It is estimated that there are $150 to $300 trillion of dollars of debt tied to LIBOR. These include variable rate mortgages, variable rate notes/bonds, commercial lines of credit and commercial loans. The magnitude of the settlement by Barclays illustrates that this scandal will dramatically affect other implicated banks due to the impact such settlements have on fostering costly litigation against such banks.” Said Josh Passman, senior vice president of New York-based public relations firm Prosek Partners, “Any time we are faced with a scandal that B:7.25” causes the publicT:7.25” to question the very
underpinnings of our global financial system, it serves to increase the rampant mistrust that currently exists. With the LIBOR scandal, those that will ultimately pay the price for this alleged malfeasance are individual investors and depositors, businesses large and small and others that have zero control over how the rate is set, but are subject to its every move.” Even Britian’s Poet Laureate Carol Ann Duffy ripped the banks. Duffy’s poem, “Translating the British, 2012,” appeared on the front page of The Guardian newspaper, next to a photograph of Somali-born British 10,000 metre champion Mo Farah. She referred to the banking scandals that have rocked London in recent years. “We’ve had our pockets picked,/the soft, white hands of bankers,/bold as brass, filching our gold, our silver;/we want it back.” ■
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EURIBOR ALSO INVOLVED IN LAWSUIT An American investor filed a classaction lawsuit against British banking giant Barclays PLC, JP Morgan Chase, Citigroup and a group of other banking defendants claiming the banks’ alleged manipulation of the Euro Interbank Offered Rate (Euribor) cost investors millions of dollars in a practice that began as early as 2005. The suit was filed July 6, 2012, in the United States District Court of the Southern District of New York. Barclays, along with other defendant banks routinely attempted to manipulate the Euribor by making false reports to the European Banking Federation, a nonprofit organization charged with setting the daily Euribor rate, which is in turn used to set interest rates for trillions of dollars of transactions each year. According to the complaint, the manipulation negatively impacted
any institutional investor group that participated in any transaction tied to Euribor while the defendants were manipulating the rates. In July, The Commodity Futures Trading Commission (CFTC) announced that the London-based financial giant and will pay more than $200 million, the largest civil fine in the commission’s history, to settle the allegations. “While the settlement with the CFTC does punish Barclays and the other banks, it does little to address the losses of perhaps thousands of investors who were financially harmed by the conspiracy,” said Steve Berman, managing partner for Hagens Berman and attorney for the plaintiff. “Our suit seeks to make sure American-based investors have the opportunity to recoup losses as a result of the banks’ illegal behavior.”
The named plaintiff in the suit is a principal of an Illinois trading company involved in the purchase and sale of futures contracts, including Euribor futures contracts and was financial harmed by the alleged conspiracy to fix the Euribor rates. If approved by the court as a class action, the suit would represent all U.S.based investors who purchased or sold Euribor-related financial instruments from Jan. 1, 2005, through Dec. 31, 2009. The other defendants named in the complaint include Citigroup, Deutsche Bank, JP Morgan Chase, HSBC Holdings; HSBC Holding PLC; HSBC Bank PLC, Cooperative Centrale Raiffeisen-Boerenleenbank, BA; USS, A.G., and USB (Luxembourg) S.A.
September/October 2012 | 19
Flood of Lawsuits Over Forced Place Insurance By Steve Viuker
ub-prime mortgages. Mark-tomarket trading losses. Over-thecounter swaps. And now forced placed insurance joined the list of nono’s be claimed against the financial industry. On May 17, 2012, Nichols Kaster, PLLP, filed a class action lawsuit in the Northern District of New York on behalf of plaintiff Gordon Casey and other borrowers with mortgages serviced by Citibank or Midland Mortgage. The complaint alleges that Citibank and Midland Mortgage routinely force-place excessive amounts of flood insurance on borrowers, and improperly arrange for commissions for themselves or their affiliates on force-placed policies. “We have cases against every major bank in the country relating to flood and/or forced place insurance,” said Kai Richter, an attorney with Nichols Kaster. “We also filed a case against 20 | Banking New York
GMAC mortgage, but they recently filed for bankruptcy. So the portion of the case related to the GMAC is stayed. But it is still proceeding as to Balboa Insurance Services.” “The pace of the lawsuits has picked up as has the regulatory scrutiny,” said Richter. “From my perspective, it confirms what we thought all along. Our first case was filed at the end of March, 2010. This is not just a New York state issue, but a nationwide one. We have had cases on the East Coast, in California, Kentucky and in Minneapolis.” Earlier this year, his firm won a $9.65 million class-action suit against Chase Home Finance. In that case, Chase had to stop both taking commissions from selling force-placed insurance and requiring insurance above the loan balances. According to The New York Times, the only customers who won relief were the 40,000 who were part of the suit, and the award was only enough to refund about two-thirds of their money.
FORCIBLY INSURED In order to obtain a mortgage, lending banks often require homeowners to maintain specified levels of insurance on their property. Many homeowners do not realize that pursuant to the mortgage loan contract, if they allow their insurance to lapse, the lending bank is legally entitled to forcibly place insurance on the property (i.e. purchase insurance for the home and then charge the homeowner/borrower the full cost of the premium). However, the force-placed insurance practices of many banks appear to be unfair because these lenders have: • Purchased insurance coverage that far exceeds the value of the home-
owner’s previous coverage. • Received commissions or kickbacks from the insurer for the forced-placed coverage • Billed homeowners for additional coverage that was not required under their mortgage agreement. • Backdated the force-placed insurance policies to charge for retroactive coverage. • Allowed the homeowner’s existing coverage to lapse without providing adequate notice that they would purchase force-placed insurance. In October 2011, The New York State Department of Financial Services (NYDFS), which supervises both the New York insurance and banking industry, commenced an investigation into force-placed insurance. Earlier this year, the NYDFS began three days of hearings in connection with its own investigation of the force-placed insurance practices of several banks, including Citibank. According to the Nichols Kaster complaint, Citibank unlawfully required Casey to carry flood insurance coverage that exceeded the amount of his loan balance by more than $100,000. After Casey’s mortgage was acquired by Midland, Midland required Casey to carry an even greater amount of flood insurance ($237,349). Midland’s requirement was approximately 14 times Casey’s loan balance of less than $17,000. The lawsuit further alleges that both Citibank and Midland Mortgage purchased expensive “force-placed” insurance coverage out of Casey’s escrow account to meet their onerous flood insurance requirements, which are inconsistent with the terms of plaintiff’s mortgage, HUD requirements, and federal law. In connection with this force-placed
coverage, the lawsuit alleges that both lenders and/or their affiliates received improper kickbacks or commissions. In his class action complaint, Casey seeks relief on behalf of himself and other borrowers across the country who have been similarly affected by Citibank’s and Midland’s alleged conduct. Based on this alleged conduct, the complaint asserts claims against Citibank and Midland for: 1. Breach of contract/breach of the covenant of good faith and fair dealing. 2. Unjust enrichment. 3. Breach of fiduciary duty in connection with mortgage escrow accounts. 4. Violation of the New York Deceptive Practices Act. 5. Violation of the federal TruthIn-Lending Act.
Company; QBE Insurance Corporation; QBE Financial Institution Risk Services, Inc.; American Security Insurance Company (Assurant); American Bankers Insurance Company of Florida (Assurant); Meritplan Insurance Company; American Modern Home Insurance Company; Empire Fire and Marine Insurance Company; and Fidelity and Deposit Company of Maryland. And Kirby McInerney LLP said that it is investigating potential class action claims against Wells Fargo Home Mortgage in connection with a scheme to improperly inflate the cost of force-placed hazard insurance. Kirby McInerney is investigating whether Wells Fargo has procured kickbacks from its force-placed insurance providers in connection with the mortgage loans in its
WIDESPREAD ABUSE Nichols Kaster is currently pursuing similar cases against: JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Wells Fargo Bank, N.A.; U.S. Bank, N.A.; and RBS Citizens, N.A. “The two themes that are consistent in our cases deal with excess amounts of coverage and what we allege to be unlawful commissions or kickbacks in connection with forced place insurance either to the lender or its affiliate,” said Richter. “In some cases, the lenders have denied they have received commissions.” Abbey Spanier Rodd & Abrams, LLP, also announced that it is investigating potential federal and state claims against numerous banks and insurance companies for their unfair force-placed insurance practices. Abbey Spanier is investigating the force-placed insurance practices of numerous banks and financial services companies, including: Wells Fargo Bank, N.A.; JPMorgan Chase Bank, N.A.; HSBC Mortgage Corporation (USA); GMAC Mortgage, LLC; Bank of America, N.A.; Balboa Insurance
servicing portfolios. It is believed that the premiums paid by Wells Fargo to the providers are grossed up to include the dollar value of the kickbacks and, furthermore, that Wells Fargo’s demands to borrowers for reimbursement are based on these inflated sums. Kirby McInerney’s investigation of Wells Fargo follows the law firm’s recent filing, in the United States District Court for the Southern District of New York, of a class action lawsuit alleging similar misconduct on the part of GMAC Mortgage, LLC. “We’re not done but it’s hard for me to say when there will be anything further,” said David Neustadt, deputy superintendent for public affairs for the NYDFS. “But the hearings raised many questions and it’s safe to say that we’ll be following up on what we learned.”■
Seeking Enforcement Litigation Deputy The Office of Enforcement at the Consumer Financial Protection Bureau (CFPB) seeks to hire a Litigation Deputy to serve on its senior leadership team. As one of four Litigation Deputies reporting directly to the Enforcement Director, this Litigation Deputy will primarily: • Manage 20-30 litigation attorneys and paralegals who conduct investigations and litigate cases, as well as support compliance examinations, concerning depository and non-depository entities. • Oversee issue teams analyzing potential matters for Enforcement action relating to consumer financial products and services such as credit cards, deposit accounts, payday lending, and money services. • Serve as a member of the Office’s senior team in planning, directing, coordinating and evaluating CFPB’s Enforcement programs. Successful candidates will have the following skills and experiences: • 5+ years experience in-house at a depository institution, handling legal or compliance functions relating to Federal Consumer Financial Laws. • Demonstrated capacity to manage a complex assortment of simultaneously pending investigations and litigation.
Interested candidates should send a resume and cover letter to CFPBOfficeofEnforcement-Recruiting@cfpb.gov.
September/October 2012 | 21
Revisit Your Retail Sales Process – And Your Salespeople By Roxanne Emmerich
ost banks hire “sales training” firms, create incentive programs and set goals – only to find after two years of working hard that they’ve made virtually no progress … if any at all.
IF IT FEELS LIKE SELLING, YOUR PEOPLE ARE DOING SOMETHING WRONG The new skills of selling are more about collaborating than competing. These new skills are based on the premise of caring about finding out what the customer needs to be successful and then finding ways to help them accomplish that success. To do that, there are several steps: Ask good questions. Questions need to include the following elements to be effective: • Keep the questions short by eliminating any unnecessary words. • Include the word “you” in each sentence. • Make sure the question cannot be answered with a yes or no response, but rather will create the opportunity for the customer to talk about herself. • Ask deeper level questions. For instance, if you ask, “What is the biggest challenge you have in your business?” and receive the answer, “Inventory” – then ask “Why?” Always dig one level deeper. Examples of good questions for someone taking rate inquires in a bank might include: “Are you currently a customer of ours? Do you have children? Have you always lived in this area? How did you hear about us? What investment
goal are you using this money for?” This line of questioning opens the floodgate for easy sales that will greatly help the customer or prospect. By finding out about their children, the door is opened for a conversation about college-education funding, retirement savings, and car savings for when children are old enough to own a car. If the customer is new to the area, questioning should open the door for retirement-account transfers, a mortgage, checking, savings, and more. Once you understand the customer’s needs, you have the ability to help them by suggesting investments and products that will best serve them. Listen intently. The more you hear about a customer’s needs, the more you can help them. But unfortunately, most retail salespeople are busy talking and quoting, rather than listening. Have you ever heard this conversation from your team members? Prospect: “What are your certificate of deposit rates?” Bank employee: “Our current rates are 0.5 percent for a three-month, 1 percent on a six-month and our “special of the week” is our 13-month CD paying 2.0 percent.” Prospect: “Thank you.” Bank employee: “And thank you for calling First National Bank.” As The Emmerich Group surveyed banks and credit unions for one of the bank associations, we found that in 97 percent of the cases, this is what happened. People who called to invest money were given rates and then hung up on … politely, of course. Why is it that when someone calls
Roxanne Emmerich, CSP, CMC, CPAE, is principal of The Emmerich Group Inc. 22 | Banking New York
who says they have money, they are not helped to invest that money – a transaction that would help both the bank and the customer? It’s because most bank employees have never learned how to sell. We think that selling is backing someone into a corner that they would never get themselves into if we weren’t skilled at manipulating them into it. So the alternative is to ignore the customer and wait for them to beat down your door – hardly a professional or helpful approach. Suggest solutions to their problems and challenges. Selling is easy. The reason most employees don’t do it is because they see it as manipulating, cheating, and stealing. Not only do the best sales professionals not do that; they take great satisfaction in helping others meet their goals. Leave the manipulating to the professional cons. Just ask good questions, listen intently and enjoy the rewards of great sales. Good salespeople know that the old methods of selling, which worked years ago, today are no longer working. The only place you see those practices still reinforced is in some car dealerships where they still think that selling is about arm-wrestling the customer. Banking is far different. In fact, you can make massive strides in your retail sales area by establishing what I detail above – the ask-listensuggest formula. Assessing where you are with retail sales is an important part of the new game of banking. Take a look at the retail banking assessment we use with our top-tier advisory clients (facing page).
Retail Banking Assessment Q&A 1. CLIENT RELATIONSHIP BUILDER
What changes in the number of accounts per household or customer satisfaction have you noticed as a result of the strategies we recommended?
Is your team performing at a higher level (increased productivity and sales) as a result of coaching and are all behaviors being coached … higher/lower?
2. ASSESSMENTS Describe how Retail Sales Managers are comparing the number of accounts opened to the assessments completed and following up on any missed opportunities? Describe how the following Assessments are being used in the branches, by telephone and in person. Describe consistency of use, challenges that need a breakthrough, etc. 1. Client Deposit Assessment (CD and Rate) 2. Checking Assessment 3. Mortgage Assessment 3. REFERRALS/RECOMMENDATIONS/CROSS-SELLS Describe the referrals, recommendations, and cross-sell processes as a result of using the Assessments. How well do your people know how to recognize opportunities that are unveiled by asking questions? How do you follow-up with referrals once received? Describe the referral tactics being used in the branch by CSRs, FSRs and lenders.
After the coaching session do you see improvements? Describe the results after each session. How do you monitor and celebrate the progress? 5. BREAKTHROUGH BANKING AND SALES MEETING What are the best practices you’re implementing in your sales meetings? What does success look like in terms of goals and objectives? What does a typical success look like in your sales meetings? What will you be changing in order to improve your sales meetings? 6. OTHER What’s the one thing you’d like to see done differently regarding your sales process? What do you feel is working or not working? What are some suggestions for improvement?
Once you’ve assessed your retail sales activity, it’s time to transform your retail sales meetings. Below is a decidedly different kind of sales meeting we recommend to clients:
8 a.m. to 8:35 a.m.
How to Maximize Your Retail Sales
1. Positive Focus
(up to 1 minute)
2. Learning Time Use Breakthrough Sales Meetings™ plus product awareness
(up to 10 minutes)
3. Wins – Not just reporting wins but learning from how it was done
(up to 5 minutes)
4. Major Prospects in the Works – Ask for help on strategies to get more business ( up to 6 minutes) 5. Dead Deals and Autopsies – Lessons learned from lost business
(up to 6 minutes)
6. What’s Next – Who are we targeting and how will we get them
(up to 5 minutes)
7. Commitments and Habits
(up to 2 minutes)
Thought for the week: “It’s not what you do, but how you do it that determines your results.” SUGGESTED GROUND RULES FOR ALL SALES MEETINGS: • No complaining – only solutions • Have fun • No whining or blaming • Focus on results • Be solution-oriented • No tangents
• Celebrate successes enthusiastically • Pay attention and stick with the agenda • Be 100% accountable for all results
September/October 2012 | 23
Retention is a Two-Way Street By Cheryl Gochis and Broc Edwards
ost banks hire “sales training” firms, create incentive programs and set goals – only to find after two years of working hard that they’ve made virtually no progress … if any at all. Employees are expensive. Salaries, benefits, and training and development all add up. There is a prevalent concern Cheryl Gochis that if you develop your employees it will be wasted money because they will then leave for higher pay. The truth is, the best people will always have options Broc Edwards for where they want
to work. Sometimes people will leave no matter what you do. The unpleasant alternative is to only hire people without options. As the old saying goes, “The only thing worse than training people and having them leave is not training them and having them stay.” The most talented people got that way because they love to learn, grow, develop, and take on new challenges. They do not – and will not – suffer stagnation. Ironically, not developing people gives high performers more incentive to leave, not less. People will sometimes leave for more money. All things being equal, more money is better than less money, but things are very rarely equal. Just as businesses attract and retain customers on factors in addition to price, people join and choose to stay with employers on factors in addition to salary. Although money is important, it’s not everything.
Consider your own situation. Is it possible that there is a company out there willing to pay you more money than you’re making right now? Of course! If you’re skilled, talented, and know what you’re doing there will always be companies willing to pay for your skills. So why aren’t you looking? Sure, you might have to move across the country or even to a different country. It would probably be hard on your family. It might mean burning bridges, changing industries, leaving behind friends and families, giving up a fantastic house, working for a company you despise, etc. There are dozens of reasons you aren’t actively looking. Let’s turn it around. Would you work for less money? Would you actually take a cut in pay? No? What if it meant a much shorter commute? Significantly better health insurance? Getting away from your current boss? Doing work that really mattered to you? Was in a small town you love with a great quality of life? Meant better schools for your kids? Was better aligned with the kind of work you really enjoy? Would mean working with a phenomenal mentor who is a superstar in your field? Was for a revered company that would create tons of future opportunities? The fear that talented people will be lured away by the competition is very, very real. We get that. But not developing good people – the people you really want to have stick around – because they might leave is sort of like refusing to build a great relationship with your spouse on the fear that he or she might leave you in the future. Yes, it’s possible they will end the relationship after all the time and effort you put in. The great irony though is that the best way to ensure they leave
Cheryl Gochis is executive vice president and director of human resources for Extraco Banks, and Broc Edwards is vice president and director of learning and leadership for Extraco Banks. 24 | Banking New York
you is to ignore them or treat them like you’re expecting them to leave for someone better. So, how do you develop great people and get them to stick around? Approach everything from the perspective that it is impossible to increase the company’s performance without first increasing individual performance. A company will not do better until the people do better. The quality of your people will make or break your company. Hire and develop great managers who understand that their primary job is to hire and develop great people. People tend to stay or go based on their relationship with their manager. High performers want to work with a manager who champions, challenges, and takes a strong interest in helping them be their very best. Realize that development doesn’t have to be expensive. Sure, you can pay $80k for an Executive MBA, but you can also develop people through on-the-job training such as intentional and well-planned projects, rotations, and job shadowing. In-house libraries, lunch and learns, and memberships in professional organizations can also be very inexpensive, yet effective. When development is expensive, tie at least some of the cost to a repayment or non-compete agreement. Make ongoing growth and development a performance expectation. Not a “nice to do when you get to it,” but a job requirement. Acknowledge people. No, we don’t have to give trophies for last place, but all people want to know that their hard work is noticed and appreciated. There are plenty of opportunities for people to be recognized by their supervisor, team, department, and company. Give people room to fail. All development requires change. It requires learning new skills and habits and that is neither comfortable nor instantaneous. People need to know that they aren’t expected to get it
perfect the first time out. Money isn’t everything, but it needs to be in line with the market. One of the best ways to make someone feel unappreciated is to cheap out on their salary. If you don’t appreciate your folks, they’ll find someone who does. Loyalty comes from trust. Do you
stand behind your employees in their toughest, most human of moments? Can they count on you to be there when they need you the most? In short, the best and easiest way to improve retention is to treat your people as though you need them more than they need you. Because it’s true. ■
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September/October 2012 | 25
Past is not Prologue for Bank Compensation Practices By Arthur Warren
he fallout of the Great Recession requires changes in community bank compensation philosophies and plan design. Salary, incentives and benefit program features that were appropriate several years ago may now be unrealizable and at odds with current business objectives to increase profitability, become more efficient and better manage risk.
REGULATION Federal legislation attempting to curb abusive pay practices is phasing in slowly. But federal and state banking regulators are extending new, unwritten risk management standards to community banks. Their focus is moving from reactive to proactive by looking at all types of risk facing banks. How? Through routine safety and soundness examinations. As regulators begin to examine large banks, they also apply the new regulations to community banks. The regulations trickle down to the community bank level. Regulators will focus on the pay programs of mutual banks. Stock banks, where public proxy disclosure and shareholder oversight are sufficient controls, receive less scrutiny. Regulators will criticize problematic pay and inadequate benefits governance at the community bank level. The criticism is a message and a warning: Correct your ineffective board governance. Ineffective board governance manifests in many forms, including an unrealistic strategic plan; the CEO who runs the board; the board that runs the
bank; weak executive management and excessive risk-taking. Your strategic plan, business plan and compensation programs must support each other. Board members and compensation committee members must be knowledgeable of and involved in the planning process to comply with new regulatory scrutiny. One bright shining star I see in the regulatory sky is a willingness of regulators to recognize the uniqueness of each bank in its geographical community. There is no prescribed right way. Instead, regulators apply broad principals to examine board governance and oversight of risk.
BASE SALARIES AND INCENTIVES Salaries should reflect executive responsibilities, contributions and performance. The key role of incentive compensation is to encourage robust executive performance in achieving bank predetermined objectives and to do so without inappropriate business risk. Base salary and incentives should be balanced with all other elements of compensation, such as benefits, supplemental executive retirement plans (SERPs) and perks. Regulators pay attention to incentives outside the 75th percentile of a realistic peer group. They want boards to align incentive pay with the time horizon of risk. Annual incentives should reward annual performance. Long-term incentives should reward performance over multiple years. Make sure incentive pay is not simply delayed executive base salary and is justified by added bank profits.
Executive incentive opportunity is a measure of risk. This risk can be controlled by utilizing multiple performance metrics; asset quality objectives; caps on awards; and different metrics for short and longterm bonus programs. I expect that annual incentive bonuses will be more variable than in the past and perhaps a smaller part of executive total compensation. Longterm incentives may well play a larger role as a tool that both encourages long-term bank franchise value and mitigates risk by focusing on multipleyear goals. There is a real risk that is being overlooked in smaller banks: Executive turnover in key positions is a risk aggravator. Conversely, a talented management team is a risk moderator. This underscores the importance of a well thought-out compensation and benefits program to retain and motivate senior executives and high potential talent. In the slow growth economy, expect competitor poaching of your lenders or trust officers who can bring a book of business to a new bank. It is good board governance to protect bank assets that walk home at night. Turnover is costly, disrupting and damaging to smaller banks.
BENEFIT TRENDS Letâ€™s take a look at important executive benefit trends: â€˘ Increasing SERP participants, but shifting to defined contribution which follows the national trend of fewer defined benefit pension plans.
Arthur Warren is a compensation and benefits consultant with more than 100 community bank clients in 12 states. 26 | Banking New York
• Eliminating perks which do not have a business purpose. • Increased use of employment contracts and change-in-control contracts due to impending consolidation in the banking industry. • Decreased severance, or providing severance with limits, to preserve the bank’s tax deductions. • Zero tax gross-ups for severance payouts.
There are two noteworthy SERP design trends. Fixed percentage defined benefits without complicated offsets. An example is 20 percent of final average base salary. This is a simple formula to administer and avoids all the confusing actuarial projections of offsets like pension and 401(k) balance annuitization. Defined contribution, which does not promise a target benefit. This follows the banking industry’s elimination of qualified defined benefit pension plans in favor of 401(k) account balance type plans. Each executive SERP account is administered by the bank’s 401(k) vendor or in-house on an Excel spreadsheet. These SERPs include modest, annual, fixed contributions, and board-approved, performance-based, discretionary contributions awarded for bank or individual executive performance. This is a great substitute for long term incentive plans or lack of stockbased awards. Bank accounting liability is controlled as the bank only accrues the annual contribution expense which is not based on projected increase in executive pay.
RETIREMENT PLANS SERPs continue to be a staple in the banking industry and are persistently wide spread regardless of asset size. In mutual banks, SERPs are an especially important deferred compensation tool to attract and retain executive talent and are a substitute for lack of longterm incentive stock and option awards. Additionally, many more mutual banks will need SERPs to make-up retirement shortfalls from the inevitable reduction in increasingly expensive core defined benefit pension plans. However, traditional defined benefit SERPs are being frowned upon by shareholders, boards and some regulators because there is no apparent link to performance and executive pay inflation is increasing bank SERP costs. The regulators criticize SERPs when the design allows for unreasonable compensation or risky practices, such as including a SERP benefit based on the highest calendar year base salary, a very rich bonus, or benefit payouts which extend too long in time. Regulators also scrutinize SERPs when the design permits: • lack of SERP forfeiture in the event of executive termination for cause • understating bank SERP accrual liabilities • a present value interest rate discount that is too low when an executive receives a lump sum benefit rather than an annuity SERPs work best when they are strategically designed to balance bank long-term compensation objectives and executive retirement security.
PERKS In order to avoid negative regulator comment, or negative board, public and shareholder perceptions, perks are being curtailed. Executives will indeed be receiving less supplemental post-retirement life insurance; legal or tax advice for spouses spousal travel; and tax grossups to buy perks. Taxable auto allowances are replacing bank owned or leased cars which simplifies record keeping. Club dues must have a demonstrated business purpose.
CONTRACTS There is no rough patch for executive employment contracts and change-in-control agreements, especially in mutual banks. Annual
contract renewal (Evergreen) are the trend, but daily contract renewals or very long employment terms are discouraged. Change-incontrol severance agreements are proliferating in anticipation of future bank mergers. All employment contracts should require the executive to sign a general release promising not to sue the bank, not to compete, and not to disparage in exchange for severance payments. The norm has been mutual releases by both parties but a single release strategy should be discussed, especially in light of evolving Dodd-Frank claw-back and whistle-blower rules. When negotiating new employment contracts, you should consider the employment contract and change-incontrol trends. Bi-furcated severance: Lower severance payment for termination not-for-cause; higher severance for loss of job associated with a merger. Single trigger: Severance payment upon a change-in-control when there is no loss of job is not advisable. Double trigger: Severance payment upon a change-in-control plus a job loss is advisable. Tax gross-ups: Both federal and state regulators discourage severance tax gross-ups as unreasonable compensation. All new contracts: Change-incontrol severance should be limited to $1.00 less than the IRS 280G excess parachute safe harbor limit. This preserves the bank’s tax deduction and eliminates executive excise tax.
WHAT’S NEXT? Executives and boards are struggling with significant strategic business and financial issues that arise from their business models that were built based on their view of the world before the Great Recession. A vastly set of economic, business and regulatory rules exist today demanding new approaches to community bank compensation practices. ■ September/October 2012 | 27
Attract Top Candidates by Putting Them in Control By Brin McCagg
t’s no big secret that the financial services industry experiences high turnover. Yet, despite widespread unemployment, firms in this sector often struggle to find the right talent in an increasingly competitive environment. So the problem remains: how can financial Brin McCagg institutions find – and keep – the talent they need to achieve business goals? A major change is taking place in today’s hiring environment. The power has shifted from employers to top candidates. Job seekers have become more selective in the companies and positions to which they apply and the methods they use to do so. For organizations, this requires developing a recognizable employment brand that presents the company as a desirable place to work. But more than that, employers must recognize that candidates are seeking an easier application process with greater transparency. Without an intuitive process and increased visibility into the hiring continuum, candidates will apply elsewhere and won’t hesitate to discuss any negative experiences with their networks. To attract, engage and retain top financial talent, employers must empower candidates by providing them with more information and greater control. One of the best ways to do that is through a webbased, candidate-maintained talent
community. With this approach, employers can attract a higher level of talent - individuals who appreciate being in the driver’s seat - while building a sustainable talent pool that ensures greater access to qualified candidates.
PITFALLS OF CONVENTIONAL METHODS Conventional recruiting methods typically involve a narrow, “oneand-done” approach, by which the company searches for talent based on a specific job opening. However, the effects of the global recession have complicated and drawn out this process: a recent article from The Wall Street Journal suggests positions that typically took two months to fill can now take up to four times longer to fill, as recruiters hold out for better candidates. Moreover, if they are recruiting for the same position in the future, they often must start the sourcing process over. Using traditional recruiting models, candidates are often lost to the infamous “resume black hole” once it’s determined they’re not the right fit. Furthermore, if candidates wish to apply for another position at the same firm, they often must start the lengthy application process from the beginning, causing frustration and fostering negative feelings toward the company.
EMPOWERED CANDIDATES BECOME ENGAGED CANDIDATES Instead of relying on outdated and inefficient methods, financial
Brin McCagg is co-founder, president and COO of OneWire. 28 | Banking New York
institutions can improve their recruiting efforts and build a candidate pipeline by adopting a cloud-based talent acquisition strategy. Leveraging a software-as-a-service system, companies can put the power in the candidates’ hands through talent communities that allow them to build and maintain their profiles and ensure an easier and more engaging application process. With a candidate-controlled database, candidates can update their profiles as necessary and manage who can or can’t see their profiles, ensuring they only connect with the employers for whom they would like to work. Employers can keep in touch with candidates as they develop new skills and experiences, helping them build a healthy pipeline as new positions become available. Some talent communities also enable users to share job postings, offer incentives for referrals, and provide advanced matching technology that connects applicants to employers based on their skills, experience and qualifications. Candidates using such a dynamic and user-friendly platform will become more engaged in the application process and be less likely to abandon their applications. The result is a robust community of talent where recruiters can evaluate candidates’ qualifications to find those best suited for their positions. Moreover, such a cloud-based platform can integrate with the various sources organizations use to attract candidates – including corporate websites, job boards and social networking sites
– aggregating candidates into one information source and facilitating interactions between candidates and recruiters. Candidates become empowered with a more transparent recruiting process that eliminates the black hole effect, where they never receive feedback or status updates. Research from the Talent Board shows that only 43 percent of employers inform candidates of next steps in the application process, and 8 percent of candidates develop negative feelings about the company by the end of the process. This resentment can discourage qualified candidates from applying to that employer in the future, spur them to share their resentment with others, and also affect their willingness to become customers of the firm. Providing visibility into their applicant status will result in a more positive candidate experience
and enhance the employment brand.
FINDING RIGHT-FIT CANDIDATES WITH THE RIGHT TECHNOLOGY As competition for top talent in the financial services industry remains fierce, using the right technology is crucial for finding the best candidates, cultivating relationships and building pipelines for the future. A cloud-based, candidate-maintained solution helps to connect candidates with employers and ensure that both parties have access to real-time information. When organizations take such a broad perspective to recruiting and put candidates in control, they will gain a key differentiator and be well positioned to find the best employees at a time when top financial talent is scarcer than ever.■
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Sterling National Bank’s Latest Acquisition Is Just Good Business By Matt Brown Sterling National Bank’s acquisition of Universal Mortgage Inc. is more than just a grab for territory, the bank says. It is an opportunity to do long-term business in two of the most attractive neighborhoods of one of the city’s most desirable and dynamic boroughs. Sterling, a $2.5 billion bank based in Manhattan, jumped on the opportunity to acquire Universal in early August. Universal has offices in Brooklyn Heights and Park Slope, which, to put it plainly, are “hot,” said Michael Bizenov, a Sterling executive vice president and head of the bank’s residential mortgage division.
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On its own, Brooklyn would be one of the largest cities in the United States, a fact not lost on the folks at Sterling. Universal’s two offices will be Sterling’s first two offices in the borough. Universal’s loan volume is mostly in purchases, a near reversal of the national trend toward refinance loans, which constitute about 80 percent of national loan volume, Bizenov said. In Brooklyn, Sterling will have access to first time buyers, “stepup” buyers and luxury buyers, all of whom have a place in Brooklyn Heights and Park Slope. They present
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an opportunity to cross-sell Sterling’s banking products. “It’s a significant add to our volume,” Bizenov said, “and Universal is a referral-based business.” Louis J. Cappelli, Sterling’s chairman and CEO, said the Universal buy is “a strong source of mortgage production,” and an asset that will “further enhance our significant level of non-interest income.” Bizenov said he and Universal principal Norman Calvo have known each other for years. Calvo and his partner Edward Ades have been closing mortgages in Brooklyn for more than 20 years, and now they and their staff will work for Sterling. Sterling has about 500 employees and holds about $1.6 billion in loans in its portfolio. Universal says its mortgage volume was more than $300 million over the last year, most of it in purchase loans. “Rents have been driven so high that people are saying now might be a good time to buy," Bizenof said. "We’re seeing multiple bids, and going higher than asking price. You have people coming out of rentals that have put off buying for a while.” Bizenov said they have a good number of options, from Brooklyn Heights and Park Slope's brownstones to multi-unit buildings, single-family townhomes, mid-rise condos and several gut-renovation projects and new construction. “Each neighborhood has its own personality. It’s a nice blend,” Bizenov said. “People think it’s all young families, but you see a lot of diversity.” Will Brooklyn welcome the bank from Manhattan? Calvo seems to think so. “We share a philosophy of exceptional customer service,” he said. ■
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This issue of Banking New York features a special section on human resources; an exploration of the LIBOR fallout; and an explanation of for...