Maine Community Banker 1Q 2011

MAINEbanker community

Serving All Maine Banks And Credit Unions

Help Wanted

Dodd-Frank Puts Spotlight On Maine Bank Compliance

Inside

Maine’s Housing Outlook A CU’s Food For Thought

First Quarter 2011

SOMETIMES

Everyone Could Use a Little Help

Reaching Their GOALS

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16 c o v e r

story

New Regs for Compliance The passage of Dodd-Frank puts compliance under the microscope, and third-party providers are seeing a need for regulatory advice.

President Barack Obama stands with Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass., after he signs the Dodd-Frank Wall Street Reform and Consumer Protection financial reform bill on Wednesday, July 21, 2010 (AP Photo/Charles Dharapak)

MAINEbanker

Contents features

community

The Well-Capitalized Bank ortgage Servicing Action M Plan for 2011 redit Risk Management Practices, C Under the Looking Glass

Maine Community Banker Magazine is published by

10 12 14

280 Summer Street Boston, MA 02210 (617) 428-5100

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

For advertising call (800) 356-8805.

Staff Chairman Timothy M. Warren CEO and Publisher Timothy M. Warren Jr. President David B. Lovins Group Publisher & Editor in Chief Vincent Michael Valvo

DEPART M ENTS

4

Finance & Administration

Editor's Note It’s About Community Banking

Director of Operations/ Controller

Jeffrey E. Lewis

Editorial

6 Maine Housing Report

Custom Publications Editor Associate Editor

7 Maine Bankers on the Move

Advertising & Circulation

9 Maine Earnings Round-Up

20 Products and Services

The Bank Branch is Changing: Are You (and Your Staff) Ready?

Christina P. O’Neill Cassidy Norton Murphy

Publishing Division Sales Manager George Chateauneuf Director of Events Sarah Cunningham Account Managers Richard Ofsthun

Cara Inocencio Advertising/Marketing/ Events Coordinator Emily Torres

Design & Production Creative Director John Bottini Senior Graphic Designer Scott Ellison Graphic Designer Ellie Aliabadi

First Quarter 2011 | Maine Community Banker

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3

Editor's Note

It’s About

Community Banking The last few years have seen a disproportionate amount of scorn heaped on bankers. The entire financial services community has been blamed for the actions of the investment banking community, money center banks and massive mortgage backed securities investors (and a reckless mortgage brokerage environment). It’s all left the public holding financiers in grave disregard.

But there’s a big difference between those kinds of institutions and the small institutions across Maine that serve the average consumer here. This state is driven by the kind of community lender that is fully a part of the towns they serve. The president is a member of the Rotary Club. The CFO serves on the local United Way board. The branch managers are people who went to high school with their customers.

This is a time when we should be celebrating a community banking focus, because we can’t have strong communities without strong local financial institutions. And that’s why, with this issue, Maine Community Banker magazine has branched out to now include all of Maine’s community financial institutions.

Despite some disagreement over competitive positioning, community banks and credit unions in this state share many common elements – and goals.

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Maine Community Banker | First Quarter 2011

Most community banks and credit unions are aiming at the same demographic. They’re both making home loans, car loans, small business loans. Both face regulatory zeal outsized to their culpability in the current fiscal mess. And both face the pressures of serving small, local populations with the right mix of personal and technology services that won’t, well, break the bank.

By bringing this magazine to all community financial institutions in Maine, we’ve more than doubled the distribution. After more than 15 years, we’re ready to address the issues of all the community bankers in Maine. Because when we put aside the topic of taxes, the concerns of the local community banker and the local credit union leader are very much the same.

Every institution, no matter their charter, is in competition with everyone else. That doesn’t mean we can’t, or shouldn’t, be learning from each other. That’s why a forum like Maine Community Banker is so important. It’s the only place where every community banking voice in the state can be heard. n

Vincent Michael Valvo Group Publisher & Editor-in-Chief

09FHL016_7.5x10_commitment_to_NE_r0:Layout 1

8/3/09

2:43 PM

Page 1

A commitment to New England The Federal Home Loan Bank of Boston is a trusted partner committed to the success of your financial institution and the communities you serve. As a reliable provider of liquidity and business solutions to financial institutions across New England, we’re here for the long term—committed to the region’s housing and community development needs. Make the most of your opportunities. Call 1-888-595-8733.

Federal Home Loan Bank of Boston 111Huntington Avenue • Boston, MA 02199 • www.fhlbboston.com

Ma ine Hou sin g R e p o rt

MAINE HOME SALES UP 10.74% IN JANUARY Sales of single-family existing homes in Maine increased during January.

According to the Maine Real Estate Information System, Inc. (MREIS), Realtors sold 536 homes last month, an increase of 10.74 percent when compared with January 2010. The median sales price (MSP) for those homes remained unchanged at $160,000 in that same time period. The MSP indicates that half of the homes were sold for more and half sold for less.

Nationally, sales rose 4.9 percent in the past 12 months. According to the National Association of Realtors (NAR), the national MSP for existing single-family homes dipped 2.7 percent to $159,400 in January. In the regional Northeast, NAR reported a 1.2 percent decrease in sales. The regional MSP of $236,500 represents a 4 percent decline.

Mike LePage, broker and owner of RE/ MAX Heritage in Yarmouth adds, “It’s encouraging to see signs, particularly in Maine, that prices have stabilized and the market is poised to grow from here. It bodes well for an improved spring market and into the rest of the year. This winter has hit hard in many ways, but Maine is a tough state. When the snow melts I think we’re going to be very busy.”

At right are two charts showing statistics for Maine and its 16 counties.

The first chart lists statistics for the month of January only, statewide. The second chart compares the number of existing, single-family homes sold (units) and volume (MSP) during the months of November (2009/2010), December (2009/2010) and January (2010/2011).

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Monthly Real Estate Statistics January 1-31, 2010 – January 1-31, 2011 County

STATEWIDE

#Units Sold 2010

#Units Sold 2011

Percent Change

Sale Price 2010

Sale Price 2011

Percent Change

484

536

10.74%

$160,000

$160,000

0.00%

Rolling Quarter Chart: From Nov. 1, 2009 – Jan. 31, 2011 and Nov. 1, 2010 – Jan. 31, 2011 County

#Units Sold 20092010

#Units Sold 20102011

Percent Change

Sale Price 20092010

Sale Price 20102011

Percent Change

STATEWIDE

2361

2078

-11.99%

$165,000

$168,000

1.82%

Androscoggin

168

132

-21.43%

$130,500

$120,000

-8.05%

73

71

-2.74%

$75,000

$90,000

20.00%

540

509

-5.74%

$220,000

$225,000

2.27%

51

57

11.76%

$119,500

$130,000

8.79%

Hancock

89

101

13.48%

$189,000

$195,000

3.17%

Kennebec

229

176

-23.14%

$128,000

$135,000

5.47%

Knox

82

81

-1.22%

$167,500

$207,500

23.88%

Lincoln

63

70

11.11%

$185,000

$218,250

17.97%

Oxford

135

97

-28.15%

$125,000

$120,500

-3.60%

Penobscot

255

199

-21.96%

$119,900

$116,500

-2.84%

Piscataquis

34

33

-2.94%

$75,000

$70,000

-6.67%

Sagadahoc

71

64

-9.86%

$155,000

$182,500

17.74%

Somerset

73

58

-20.55%

$96,000

$77,000

-19.79%

Waldo

64

63

-1.56%

$147,500

$150,000

1.69%

Washington

11

14

27.27%

$105,000

$110,000

4.76%

423

353

-16.55%

$199,500

$215,000

7.77%

Aroostook Cumberland Franklin

York

Source: Maine Real Estate Information System, Inc. Note: MREIS, a subsidiary of the Maine Association of REALTORS, is a statewide Multiple Listing Service with over 4,600 licensees inputting active and sold property listing data. Statistics reflect properties reported as sold in the System within the time periods indicated.

Contacts: Maine Association of REALTORS President Mike LePage (RE/MAX Heritage, Yarmouth) - 846-4300 - mlepage@rheritage. com; REALTOR Marc Chadbourne (Century 21 Nason Realty, Winslow) - 873-2119 - Marc@C21Nason.com. For more names: Cindy@MaineRealtors.com.

Maine Community Banker | First Quarter 2011

Ma ine on t he M ove

Are your employees on the move? Email submissions to Cassidy Murphy at cnortonmurphy@thewarrengroup.com.

TD Bank

Tammy Watt

Tammy A. Watt has been named store manager of TD Bank’s Scarborough Shaw’s store. An assistant vice president, she is responsible for new business development, consumer and business lending, and managing personnel and day-to-day operations at the store serving customers throughout the area. Watt has three years of banking experience. Prior to joining TD Bank, she served in accounting and IT manager at Penobscot McCrum LLC, and before that, as branch manager at Damariscotta Bank & Trust Co., both in Belfast, Maine.

A resident of Saco, Maine, Watt is a 1997 graduate of the University of Maine at Presque Isle, and a 1993 graduate of Central Aroostook High School in Mars Hill, Maine.

Katahdin Trust Company

Fred Brown

Fred A. Brown has joined the bank as vice president and commercial services officer in Katahdin’s Commercial Loan Office at 12 Stillwater Ave. Brown began his banking career with MBNA America, serving in operations support and later as section manager of the customer service division. In 1999, he joined Merrill Bank as a commercial credit analyst and the following year was promoted to vice president of commercial lending. In 2007, he was promoted to senior vice president of commercial lending, with responsibilities for managing the commercial lending unit of the bank, the position he held prior to joining Katahdin Trust Company. Brown is an honors graduate of Husson University, where he earned his bachelor’s degree. He is involved in a number of civic and charitable organizations in the Bangor area. n

First Quarter 2011 | Maine Community Banker

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Opening the Door to Success

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To reserve adverTising space call 1.800.356.8805 exT.344 or email cusTompubs@Thewarrengroup.com

Visit www.thewarrengroup.com for additional products and serVices

Maine Earnings round-up

The First Bancorp Bar Harbor Bankshares/Bar Harbor Bank & Trust

At the close of 2010, Bar Harbor Bank & Trust, based in Bar Harbor, reported total assets of $1.1 billion, up $45.6 million, or 4.2 percent, over the same period the year before.

Net income available to shareholders for the final quarter of 2010 was $2 million, an increase of $437,000, or 27.4 percent. The diluted earnings per share increased 3.9 percent, or 2 cents, to $0.53.

For the year ending Dec. 31, the company reported record net income of $10 million, an increase of 7.4 percent or $693,000.

Total loans ended the year at $700.7 million, up 4.7 percent, or $31.2 million, year-over-year. Loan growth came primarily from commercial loans, which ended the year at $397.6, up $28.3 million or 7.7 percent.

Damariscotta-based The First Bancorp reported yearly net income of $12.1 million, down 7.1 percent or $926,000. Earnings per share were down 9.8 percent, or 12 cents, to $1.10.

For the quarter ending Dec. 31, net income was up $415,00 or 15.6 percent, to $3.1 million, compared to the same quarter in 2009.

Kennebec Savings Bank

Kennebec Savings Bank, based in Augusta, reported total assets of $776.8 million, up $56 million compared to year-end 2009. Net income was up $2.08 million, to $4.61 million.

Also in 2010, the bank was named the best place to work in Maine in the small-medium business category by the Society for Human Resources Management and Maine State Council.

Northeast Bancorp/Northeast Bank Camden National Corporation/ Camden National Bank

Camden National Corporation, based in Camden, reported an increase in net income of $2 million, or 9 percent, to $24.8 million, compared to the same period the year prior.

Compared to the final quarter of 2009, net income was up $1.2 million, or 23 percent, to $6.4 million.

Earnings per share increased 16 cents, up to $0.84.

Non-performing assets decreased to 1.08 percent of total assets, or $24.8 million, compared to 1.13 percent of total assets, or $25.1 million.

Lewiston-based Northeast Bank completed a merger with FHB Formation LLC on Dec. 29, 2010.

The merger contributed $16.2 million of new capital to the company.

Total assets as of Dec. 31, 2010, were $644.8 million, an increase of approximately 3.6 percent, or $22.2 million, year-over-year.

Compared to the same period last year, the company reported a 19.4 percent increase, or $589,000, in non-interest income, and a $241,000, or 5.4 percent, decrease in net interest income. Nonperforming loans declined 11.3 percent, to $8.7 million.

To submit your bank’s financial news, email Cassidy Murphy at cnortonmurphy@thewarrengroup.com.

First Quarter 2011 | Maine Community Banker

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9

t i p a C l l The We

A

s a result of the Dodd-Frank Act (DFA), there is no longer a cut-and-dried definition of a well-capitalized bank. The term may mean one thing to a seasoned banker, while a regulator’s definition may be quite different. Standard capital ratios no longer mean what they did in pre-DFA days.

FDIC Chairman Sheila Bair has stated that excess leverage and thin capital cushions were primary

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

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Maine Community Banker | First Quarter 2011

drivers of the financial crisis. The Dodd-Frank Act now requires regulators to review current capital regulations and make sure the amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with the safety and soundness of the company.

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

k n a B d alize

By Megan L. Desso

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

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

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

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

It is anticipated, as dictated in the Dodd-Frank Act, that trends will be more towards capital requirements based on risk profiles. This is a move from the old industry standards, which were specified by regulation, to a more individual or dynamic approach. For example, banks with significant credit concentrations or deteriorating asset quality will be expected to hold higher capital levels than peers with the same level of assets but lower risks. As a result, the guidelines are not precise and are subject to interpretation.

However, there appears to be some good news. It seems that the regulatory bodies are attempting to manage this change on a bank-by-bank basis, instead of raising the minimums across the board. There is still hope that community banks will be treated in accordance with their characteristically lower risk profiles. If that’s the case, the largest banks will bear the burden of the majority of the increased mandates.

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

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

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

3

Steps TO

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

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

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

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

Anything less is playing with fire. n

HIGH QUALITY

Bank Compensation Governance

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

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

Arthur Warren, Esq.

Compensation and Benefits Advisor

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

First Quarter 2011 | Maine Community Banker

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11

Mortgage Servicing Action Plan for

2011

By Gene Collett

W

ith the December 2010 issuance of a new Making Home Affordable handbook and regulatory changes throughout the past year, the start of 2011 is an excellent time for Maine compliance officers to assess their loan servicing operations.

Background The current mortgage loan servicing environment is one of unprecedented change, complexity and oversight. Changes over the past two years include: • The Making Home Affordable programs • Many additions to Fair Credit Reporting Act requirements (e.g., address discrepancy notifications, servicers required to respond to credit reporting disputes from customers) • Tenant protections during the foreclosure process enacted at the federal and state levels • The Truth in Lending notice of loan transfer requirements

Gene Collett, CRCM, is an assistant director for ICS Compliance.

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Maine Community Banker | First Quarter 2011

In addition to regulatory changes, unprecedented loan default levels have strained servicing processes.

Many paying customers are calling with inquiries or complaints, creating an even greater need for coordination between compliance officers and the senior managers responsible for daily operations.

New Requirements Recently mandated regulatory requirements worthy of focus now include: Providing adequate notice to tenants residing in foreclosed properties; responding

to direct customer inquiries related to credit bureau reporting; and responding to notices of address discrepancy from consumer reporting agencies The Protecting Tenants at Foreclosure Act (PTFA) of 2009 imposes requirements to provide bona fide tenants with a 90-day notice prior to eviction and allow them to reside in the home until the end of a valid lease.

Does your institution offer incentives to tenants who are willing to move early from a foreclosed property? An early departure document does not constitute a 90-day eviction notice unless it contains explicit information. Do your real estate owned (REO) management processes, and agreements with eviction attorneys, address these requirements? Bank practices should include accurate notifications, recording of notifications and anticipated vacancy dates, and consideration of all relevant state requirements. Your attorneys should be well-versed in federal and state tenant protections. Consider conducting a roundtable discussion with REO manager(s) to discuss the PTFA and related state requirements.

Changes to the Fair Credit Reporting Act (FCRA), effective July 1, 2010, require furnishers of consumer information to respond to consumers’ direct disputes about such information. Consumers were previously referred to the relevant consumer reporting agency to dispute information. Some financial institutions provided forms to help consumers provide all necessary information to the bureaus. While Regulation V Sections 223.43 (c) and (d) allow servicers to require precise information to be provided at a specific address, the responsibility to initiate investigation of the dispute now resides with the furnisher (i.e., the bank) in such instances.

Creating further complexity, a direct dispute of mortgage loan information on a credit report is subject to FCRA timing requirements, and not the less stringent deadlines for qualified written requests (QWRs) prescribed by the Real Estate Settlement Procedures Act (RESPA). FCRA requires a furnisher to complete a reasonable investigation before the end of the 30-day period, beginning on the date it receives the dispute from the consumer. The 30-day period can be extended by 15 days if the consumer provides information relevant to the investigation within that 30-day period.

In your processes for responding to credit disputes, ensure that your procedures have a distinct sub-section that addresses direct disputes of consumer information.

Revise management reports if they do not track these disputes separately from QWRs. Conduct questionand- answer sessions with customer correspondence and telephone customer service managers and agents, emphasizing the differences between direct-from

customer and from-credit-bureau disputes received at your institution.

If your financial institution uses credit reports at any point during the loan modification process, you are subject to the Regulation V Section 222.82(d) requirement to respond to credit bureau address discrepancy notifications. While the requirement only applies to consumers with whom you establish a continuing relationship, in a modification, your institution already has a relationship with the borrower.

Hold a discussion with your modification credit analysts

The Protecting Tenants at Foreclosure Act (PTFA) of 2009 imposes requirements to provide bona fide tenants with a 90-day notice prior to eviction and allow them to reside in the home until the end of a valid lease. and lenders to inform them of what these notifications mean and where to find them on a credit report.

Do you have a process in place to route the new address information internally? Do you know which internal team is responsible for communicating address information to the credit bureaus? Discuss processes with information technology and operations, because there are multiple ways to get the information transmitted to credit bureaus. Implement reports to management related to these notifications so that key people at your institution understand the frequency and urgency of responding to them.

Views on the ‘Old’ Requirements Existing servicing requirements that have become

more complex in the current consumer and regulatory environment include flood-insurance-related escrow accounting, credit bureau reporting, and responding to customer complaints.

If your institution has any higher-priced mortgage loans (HPMLs) in your loan servicing portfolio, you are responsible for new escrow requirements,

continued on page 22

First Quarter 2011 | Maine Community Banker

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Maine Credit Risk Management Practices

Under the Lo

T

By Jeffrey Marcotte

he Dodd-Frank reform law has been signed, and the specific details are expected to be worked out by regulators over the next 12 to 24 months. However, the pressing issues raised in the legislation – risk management, accountability, transparency and uniformity – give us some insight into what examiners are going to be focusing on moving ahead.

While the law will have the greatest direct impact on commercial lending institutions with assets of $10 billion and above, there will be a trickledown effect that will impact smaller institutions in Maine.

Examiners will be using Dodd-Frank as a guideline for best practices which will apply to banks of any size.

Credit risk management will definitely be placed under the looking glass. In the meantime, lenders have an excellent opportunity to get ahead of the game.

First Trickledown from Dodd-Frank In an early example of the trickledown effect, on Nov. 9, 2010 the FDIC issued a proposed rule for the Federal Deposit Insurance Fund (DIF). In an effort to rebuild the fund to adequately cover future losses, it will begin charging heftier insurance premiums for banks in higher risk categories. These premiums are impacted by two key factors: a bank’s CAMELS rating and its capitalization. If a bank’s CAMELS rating improves and its capitalization is high, it will be placed in a low risk category and will pay lower insurance premiums.

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Maine Community Banker | First Quarter 2011

This is significant for commercial lenders because asset quality (and whether we like it or not, good loans) plays a large part in the CAMELS rating equation.

Effective credit risk management practices help banks strengthen asset quality by putting good loans on the books that generate positive returns. This in turn, improves institutions’ CAMELS ratings – and they can realize big savings in deposit insurance premiums.

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

Establish Uniform Processes Maine commercial lenders have some time before they will be forced to specifically address the issues that fall out of the reform legislation. If they establish best practices today for complex credit analysis and portfolio risk management, they will be able to address those issues and examiners’ expectations head-on. Technology is essential to that effort. Innovation is coming to the rescue to help lenders effectively assess and mitigate complex credit risk (i.e. commercial real-estate, commercial & industrial, small business, construction and agriculture loans) in ways not possible before.

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

ooking Glass Standardization. It will be crucial moving forward that banks standardize their lending processes across all commercial loan disciplines. Technology has evolved that aggregates data into one system of record for the lending area, similar to what the core processors provide. Lenders can now obtain, for the first time, a clear view into the risk that lies across all loan disciplines, and down to the individual loan level.

Examiners will be specifically looking to see that banks are breaking down data silos and taking advantage of technology to put a repeatable process in place for identifying risk and uniformly managing all of their loans, from origination through payoff.

Visibility. Examiners will expect banks to have greater visibility into each loan so that they can take a more proactive approach to each borrower relationship.

The only way to really evaluate risk is to get a complete picture of customers at macro and micro levels; some may no longer fit the bank’s risk profile and actions need to be taken to make them a better fit. Lenders also need to be able to see the overall risk make up of their portfolios in order to identify where they should focus on attracting new borrower relationships. Utilizing advanced reporting and analysis tools, banks can gain the visibility – all the way up to the board of directors – that’s crucial to making sound, profitable loan decisions that will improve the bank’s overall performance. And, it instills confidence in the examiners that the bank truly has a handle on its credit risk.

Stress Testing. To really be proactive, banks will need to be stress testing loans at individual and portfolio levels. One of the most compelling advances

in lending technology is the predictive power offered by new risk management tools that provide modeling and pre- and post-approval stress testing capabilities that allow you to avoid potential credit problems well before they become problem loans. If commercial lenders can readily identify problematic loans early on, they have a much better chance of maintaining a healthy asset.

Examiners are going to place heightened emphasis on stress testing loans and putting risk rating systems in place that will allow for thorough portfolio analysis.

The latest technology innovations enable lenders to look at loan risk overviews by interest rate and risk rating, evaluate risk concentrations and run sensitivity analyses – to actively manage borrowers’ risk.

Take Action Now With the passing of the reform law, we can see where regulators are going to be focusing their attention moving forward, and even though all the details are still being ironed out, commercial lenders have enough ammunition to be able to launch a beneficial preemptive strike. By embracing automation and applying best practices now to some key areas, institutions will not only be able to meet future regulatory requirements for credit risk management with confidence, but also drive more profitable loan businesses. n

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

First Quarter 2011 | Maine Community Banker

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15

Compliance

Help Wanted:

Dodd-Frank Puts Maine Bank, CU Compliance in Spotlight

By Christina P. O’Neill

M

aine's financial institution sector is currently in a quiet space between the Dodd-Frank Act’s passage and the writing and implementation of the regulations that will actually make it work. Critical to the success of reform are compliance staffers and/or the services of third-party providers of regulatory assistance.

Because hiring and staffing decisions will have to wait until the direction of the final regulations is clear – for instance, determining if hiring needs fall more to compliance or loan-quality personnel – thirdparty compliance providers are seeing an increase in demand for regulatory advice.

Jay Friedland, principal of M&M Consulting, founded his company 10 years ago in Maine. It now serves all of New England. Providing guidance on

16 |

Maine Community Banker | First Quarter 2011

regulatory matters a decade ago was only “incidental” to M&M’s business, he says.

Regulatory questions would be asked – and answered – in passing. Today, regulatoryadvice business is up across the board, with both new and existing customers seeking additional assistance. M&M Jay Friedland has added a full-time staffer to provide answers to regulatory questions five days a week, and over the last two years, has added four new staffers to its compliance unit, bringing the total headcount in that department to 15.

M&M’s clients have also hired more staff or

providing training to existing staff over the past two years. Friedland predicts that there will be a lull in compliance hiring until 2012 when the new Consumer Finance Protection Bureau starts issuing regulations.

Stephen King, director of regulatory compliance services for Wolf and Co., concurs. The company has several large-bank clients in Maine and has 219 clients total throughout the Northeast. Across its client universe, King notes a shift in perception of the roles of Steve King compliance officers and risk officers. Previously, institutions would utilize both internal auditors and compliance officers to perform testing roles within their specific departments operating in a quasi-silo approach. Vendors would be employed in a co-source or outsource role to assist with the transactional testing. The recent trend is for institutions to hire risk officers and develop risk management committees to evaluate the performance and results of these two departments as they effect the institution from a global perspective.

The result is that the perception of compliance has transgressed from “an expense” to a valuable tool in the institution’s strategic planning process.

“Compliance used to be viewed as those who said ‘no,’” King says. Now, the compliance role is seen as a way to develop a process to move the institution forward in a safe and sound manner. “In the old days, banks just worried about Regulation Z and RESPA,” King says. “Now, they’re concerned about how the changes brought about by those laws affect the loan products they offer.”

Changes in the regulatory climate now include the imposition of civil money penalties on institutions of smaller and smaller size, which carries a reputational risk. Additionally, in this economy, every good foreclosure lawyer is going to review loan documents to find the one error that could rescind a loan worth hundreds of thousands of dollars, he notes.

Maine is unique in that it also carries a host of state-specific requirements, mostly in the areas of privacy and data security. In the past, these may have been viewed as an IT silo or a compliance silo.

But now, that family of regulations carries a global impact on the financial institution, King says. Thus, the risk officer concept has come to the fore.

Gearing up to offer more help New York-based ICS Compliance, which provides compliance help to clients nationwide on a contract basis, said it expects new business to pick up this year.

As it stands now, many large banks have extensive in-house compliance staff, while community banks have a few dedicated compliance employees or go to contract help as needed. However, despite the promise of lots of Dodd-Frank related work, bankers can’t just go out and start hiring more compliance staff, said ICS President John Soffronoff.

Deciphering and applying new regulations is still a temporary task, and likely doesn’t warrant creating a permanent position, he says. And although the scarcity and importance of in-house compliance experts might indicate they’d be able to command bigger salaries, Soffronoff said many banks are dealing with budget issues that are keeping their expenses – including salaries – in check.

As a third-party company that helps banks with

Compliance used to be viewed as those who said "no." Now, the compliance role is seen as a way to develop a process to move the institution forward in a safe and sound manner. compliance and auditing, ICS consistently works with 30 community banks nationwide with up to $5 billion in assets, and has helped dozens more institutions, large and small, that hire the company on a temporary project basis. For 2011, ICS is allocating a 50 percent increase in its new business budget, in the expectation that more banks will turn to the company for help.

Bill Driscoll, district president for job recruiter Robert Half New England, noted that in his company’s 2011 Salary Guide, financial institutions’ compliance employee salaries are up a full percentage point over most other jobs in accounting and finance.

The average salary is expected to rise 3.1 percent for new hires in 2011 over their 2010 counterparts, he said, but compliance workers can expect a healthier 4 percent to 4.5 percent bump. Most compliance officers got their education in finance or accounting, and have worked their way into compliance positions over time, Driscoll said.

Bankers themselves aren’t entirely sure what to expect from Dodd-Frank, but acknowledge that

continued on page 18

First Quarter 2011 | Maine Community Banker

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Help Wanted continued from page 17

compliance hires aren’t easy to make. Most can’t afford recruiters like Robert Half, and have to look around on their own.

Choosing for skill as well as experience M&M’s Friedland says compliance experience levels vary widely. It’s hard to get experienced, qualified people to change jobs, particularly if they have to relocate, because of uncertainty about the economy and the housing market. Some institutions bring in people with related skills, but not necessarily bank compliance skills. Lawyers are an example – what they lack in compliance expertise, they make up for in their ability to interpret regulations.

Additionally, in different institutions, regulations are interpreted differently due to the approach of examiners, and to differences between state and federal charters. “It’s generally been the federal regulator’s position that federally chartered institutions are exempt from a number of state requirements,” he says. “The reform act really challenges that and says that [such an] exemption won’t be automatic, and there is a debate out there as to what will apply and what won’t.” The ultimate answer, he says, will likely be determined by the courts.

Financial institutions of sufficient size have compliance officers who coordinate compliance through line managers, and the rest is taken care of by third-party compliance consultants, says Donald Groves, deputy superintendent of the Maine Bureau of Financial Institutions.

While large institutions have more resources, the jobs of compliance staff are often more narrowlyfocused than the jobs of their counterparts in smaller institutions. “That holds true throughout New England,” Friedland says. “Some [compliance personnel] from large institutions struggle because they are used to a certain system where certain reports are generated. At a community bank, you have to design those reports.”

Sangeeta Norton is director of internal audit and compliance at Maine State Credit Union. At $310 million in assets it’s the largest credit union in the state with 70 employees and three branches (the credit union participates in shared branching). “I know 2011 is going to be a very heavy compliance

Christina P. O’Neill is editor of Maine Community Banker.

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Maine Community Banker | First Quarter 2011

year,” she says. However, Maine State Credit Union is state-chartered, and Maine’s state regulations mostly mirror federal regulations, so Norton says she does not expect a significant amount of change in the nature of her compliance duties.

While she is responsible for compliance, making it happen is a collaborative effort within the credit union, with each manager responsible for compliance in his or her respective department, whether that is lending, operations, deposits or collections – as well as vendors.

In many smaller credit unions, an operations person usually takes on the compliance functions.

Regulators have historically “pushed a little less” to separate internal audits from compliance activities for smaller financial institutions, says Friedland, but he expects that separation of these activities will become the industry norm in the future.

Training programs Meanwhile, national trade associations such as the American Bankers Association and the Credit Union National Association (CUNA) offer intensive weeklong training programs for financial-institution personnel which can be taken either online or in person, followed up by phone briefings and webcasts.

The ABA holds an annual compliance conference that brings in 1,200 bankers annually.

Norton, who holds an undergraduate degree in business and an MBA, attended the CUNA compliance school to get certified as a credit union compliance executive (CUCE) when she took on compliance responsibilities. She commends the program, which requires recertification every three years.

M&M Consulting offered a three-day regulatory training session in Marlboro, Mass., last year, which brought 120 attendees from all over New England.

Friedland says the endeavor, a first for the company, was successful. Once the CFPB is up and running, he envisions a four-day offering. Four single-day workshops have attracted a total of 170 to 180 people.

The compliance crunch affects Maine’s financial institutions the same way it does in other parts of the country. “It’s been a tough year and a half because of the velocity at which changes have been coming at people,” says Friedland. “But they don’t have to do it all themselves.” n

Maine State Credit Union

Raises $44k for Local Food Pantries

M

aine State Credit Union has donated $44,096 to 32 food pantries and shelters in Kennebec and Somerset counties as part of the credit union’s annual antihunger campaign. Among the recipients are: Augusta Food Bank, Apostolic Food Pantry, Augusta Rotary/Feed the Kids, Belgrade-Rome Special Needs Food Pantry,

2011 20 2 011 01 0 11 1 1

Boys and Girls Club of Greater Gardiner, Bread of Life Ministries, China Community Food Pantry and the Salvation Army.

Since 1999, Maine State members, employees and friends have raised over $200,000 for the credit union’s Campaign for Ending Hunger. Not only do the food banks and shelters in Kennebec and Somerset counties receive 100 percent of

all funds raised, they also get 12 times the buying power per dollar, which means total purchasing power of $2.4 million in the last 11 years. Maine State Credit Union’s largest annual fundraisers include its Walk to Stop Hunger, held in the spring, and the Spaghetti Dinner and Auction, held in the fall. These efforts are supplemented by grill raffles, candle sales and barbecues. n

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First Quarter 2011 | Maine Community Banker

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Products& Services

The Bank Branch is Changing Are You (and Your Staff) Ready?

By Jackie Hudson

A

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

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

This further reinforces that a growing number of consumers are turning to their banks for financial advice, viewing them more as trusted advisors.

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

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

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Maine Community Banker | First Quarter 2011

Until recently, there has been no easy, automated way to monitor or track branch staff and customer interactions. This is where a workforce optimization (WFO) strategy and supporting technology enter the picture. Comprised of staff forecasting and scheduling, strategic planning, process and application analysis, performance management scorecards, learning and reporting, WFO technology designed expressly for retail financial service organizations helps banks better manage and respond to these “new branch” challenges.

Leveraging Technology to Automate the Branch Traditionally, WFO in the branch has focused on forecasting and scheduling resources to meet customer demand, and ensuring the right people with the most appropriate skills are being leveraged at the most optimal times. The latest generation of branch WFO tools, however, extends well beyond these capabilities. It provides management with critical insight into how employees are actually spending their time, how effectively they’re interacting with customers and how their performance compares to goals.

One component of the WFO solution tracks employee desktop activity, enabling managers to understand the applications employees are using the most, how each individual employee navigates those applications and the time it takes to complete important transactions. Desktop activity monitoring also enables managers to gauge whether staff perform the right steps in a process, access the proper information and/or capture customer data correctly to yield optimal results. These tools can even provide guidance, with reminders to assist newly-trained employees in following the correct processing steps.

In addition, banks can leverage WFO to measure employee performance against rolespecific goals and key performance indicators

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

WFO helps banks manage and maximize their branch staff with the high level of flexibility required to be competitive in today’s changing environment. It addresses the need to effectively schedule to meet customer demand and enables banks to address the effectiveness of their employees – a concept that is critical to driving success as banks move to having more multiskilled staff. With WFO technology as an asset, banks can now gain valuable insight into how these associates are performing their work, how well customer interactions are being handled, where additional training may be required, how to gather and share best practice examples with employees across the branch network, and ways to improve processes and the ultimate customer experience.

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

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

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First Quarter 2011 | Maine Community Banker

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Mortgage Servicing

continued from page 13

effective in 2010. HPMLs require escrow accounts; and any escrow accounts for HPML properties within flood zones require escrowing for flood insurance premiums. Add a review for flood insurance escrow to your final loan documentation checklist for loan package requirements, with additional annotation(s) for HPMLs. Also, consider performing a review in early 2011 of all HPMLs to ensure that the loan file contains a Standard Flood Hazard Determination Form (SFHDF), and that for all loans with a “Yes� noted in Section D (the flood zone determination section) on the form, escrow documentation includes provisions for flood insurance premiums.

Credit bureau reporting requires close coordination among compliance, loan servicing and information technology. If your credit dispute volume has increased significantly, flawed processes can now cause dozens or even hundreds more problems. You should have documented processes for both indirect (i.e., from credit bureaus) and direct-from-consumer credit disputes. All updated data sent to credit bureaus should also be updated in your customer files, on a real-time basis. If this does not occur, you could be sending corrected information to the credit bureaus during one month, then providing old, erroneous data within your monthly file transmission to the bureaus.

Servicing departments are being swamped by customer complaints. Are the inquiries more demanding? Are some customer letters worded vaguely? Consumers are overwhelmed in the media by people who state they can help them with mortgage loan issues. Consumers are often advised to write their lenders and/or servicers, but may not ask precise questions or identify specific issues. Customer mail and email messages with two or more requests are increasing, though issues cannot always be clearly distinguished.

If your correspondence teams are trained to identify one issue and quickly craft a response, secondary issues within correspondence may go unaddressed. Examiners reviewing correspondence look to ensure that your institutuion has acknowleged and resolved all issues.

Review customer correspondence training materials to ensure that specialists are trained to identify all issues within a letter. Consider holding work sessions with correspondence managers and experienced specialists, to discuss vaguely-worded mail or emails and effective response strategies. Training material revisions and/or a compliance update may be helpful to correspondence team managers and specialists and may help you explain to examiners how you adapted.

Action Plan We strongly suggest that, in the next few months, you perform a proactive loan servicing checkup for new and existing compliance requirements including, but not limited to, the following items:

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Maine Community Banker | First Quarter 2011

Review your provisions for tenant protections related to REO properties. Discuss the management of eviction attorneys with legal staff and REO management. Review templates for tenant notifications and correspondence.

Ensure that they address the 90-day PTFA notification requirement, tenant leases, and relevant state requirements. Ensure that your property management systems and practices have provisions for tracking key dates, such as the dates that documents were provided to tenants. Create and/or update documentation, and inform/train staff as required.

Evaluate your processes for responding to, and resolving, direct-from-consumer credit reporting disputes. Ensure that your institution is: conducting investigations in a timely manner; responding to the customer/consumer on time; providing stipulations/ requirements to consumers (e.g., mailing location, dispute content) as applicable; updating information at credit bureau(s); tracking volumes and status, and reporting to management; and creating and/or updating documentation, and training staff as required.

Evaluate applicable requirements for address discrepancy notifications.Determine if your institution uses credit reports in any phase of loan servicing (e.g., modifications); assess processes for responding to the address notifications; implement management reporting; create and/or update documentation, and inform/train staff as required.

Review all processes related to indirect (i.e., from credit bureaus) and direct-from-consumer credit disputes, such as: updating information at the bureaus; updating information in your customer accounts; creating data files, from your account information, that is sent monthly to the bureaus; and creating and/or updating documentation, and training staff as required.

Evaluate the HPML segment of your servicing portfolio. Confirm that each HPML has an escrow account established; ensure that each file contains a flood zone determination, documented on an SFHDF; for HPMLs on properties within a flood zone, check whether escrow accounts include provisions for flood insurance; and update escrow accounts, as required.

Evaluate customer correspondence documentation and representative sample responses: ensure that customer letters containing multiple requests are addressed in training courses and written procedures; assess actual responses to multi-request letters, to ensure that all issues within each letter are currently being addressed by correspondence team(s); create and/or update documentation, and inform/train staff as required.

The examiners know this is a period of unprecedented challenge for loan servicers, but they are not expected to cut anyone any slack. The action steps above should prove helpful in simultaneously cutting through the regulatory complexity and customer servicing issues. n

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