Maine Community Banker 1Q 2012

MAINEBANKER COMMUNITY

SERVING ALL MAINE BANKS AND CREDIT UNIONS FIRST QUARTER 2012

Small Business is Their Business

SBA Lending Grows in Maine

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.

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12 C O V E R

TO OUR READERS:

STORY

MAINE BANKS STRIVE TO MAKE THE MOST OF

SBA LENDING

This will be the last issue of Maine Community Banker. We wish Maine’s banks and credit unions and their communities the best of luck in 2012, and thank all of you for your interest and support.

■ CHRISTINA P. O’NEILL

Custom Publications Editor The Warren Group

MAINEBANKER

CONTENTS

COMMUNITY

FEATURES

MAINE COMMUNITY BANKER MAGAZINE IS PUBLISHED BY

Eight Steps to Short Sales Success for Realtors

4

Protect Your Data or Suffer Customer Loss

6

Twenty Questions (and Counting) for Risk Managers

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Androscoggin Bank Remodel is a Conversational Ice-Breaker The Digital Risk and Investigative Landscape

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WWW.THEWARRENGROUP.COM Maine Community Banker © 2012 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.

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STAFF

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Chairman CEO and Publisher President

Timothy M. Warren Timothy M. Warren Jr. David B. Lovins

FINANCE & ADMINISTRATION

16

Director of Operations/ Controller

Jeffrey E. Lewis

EDITORIAL

Volcker Rule Requirements for Community Banks D EPARTM ENTS

20 Maine Bank News 21 Maine Bankers on the Move 22 Maine Housing Report

18

Custom Publications Editor Associate Editor

Christina P. O’Neill Cassidy Norton Murphy

ADVERTISING & CIRCULATION Publishing Division Sales Manager Account Managers

Advertising Coordinator

George Chateauneuf Richard Ofsthun Cara Feldman Megan Braga

DESIGN & PRODUCTION Creative Director Senior Graphic Designer Graphic Designer Design Intern

John Bottini Scott Ellison Ellie Aliabadi Alyssa Sullivan

FIRST QUARTER 2012 | MAINE COMMUNITY BANKER

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3

EIGHT STEPS TO SHORT SALES SUCCESS FOR REALTORS

C

assie Fitz, senior vice president at Bank of America, offers eight steps to help real estate professionals achieve success with a proactive short sale:

STEP 3 – The bank assesses the home-

STEP 1 – Evaluate how much is owed

STEP 4 – The property is appraised by a

STEP 2 – Initiate the short sale. Third-

STEP 5 – The bank and the homeowner

on the property compared to its current market value.

party authorization – a borrower-signed form indicating that the agent can act on behalf of homeowner – should be uploaded in the processing system (such as www. equator.com).

Influence the Influencers

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

owner’s situation to determine which short sale program (such as HAFA or CoOp) best meets the homeowner’s needs. bank-appointed appraiser to determine fair market value and list price. enter into the short sale agreement and market the property for up to 120 days.

STEP 6 – The bank works with the home-

owner to negotiate the release of other liens.

STEP 7 – Once an offer is received, it

should be reviewed quickly, because valuation and marketing steps were completed earlier in the process.

STEP 8 – Upon approval, an approval

letter is issued and the process moves to closing.

■

Reach more than 110,000 banking executives, CEOs and key decision makers in more than 900 banks, from the smallest de novo and community banks to the largest commercial and investment banks in the world. Attract new customers through leading industry magazines with the combined force of the most reputable banking associations across the Northeast.

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VISIT WWW.THEWARRENGROUP.COM FOR ADDITIONAL PRODUCTS AND SERVICES

FIRST QUARTER 2012 | MAINE COMMUNITY BANKER

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5

PROTECT YOUR DATA OR SUFFER CUSTOMER LOSS

BY MICHELLE DROLET

O

n Jan. 5, federal law enforcement seized several automobiles worth about $100,000 in value. They belonged to the former president of the Massachusetts Bank and Trust Company and were taken as restitution for his defrauding the bank in 1997.

Last year in May, Bank of America sustained a $10 million loss when an insider sold the bank’s customer data to organized criminals who then committed fraud against the bank’s customers. Thanks to a former associate, the scammers obtained

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

names, addresses, Social Security numbers, phone numbers, bank account numbers, driver’s license numbers, birth dates, email addresses, mothers’ maiden names, PINs and account balances.

It seems that not a day goes by without news of banking-related fraud, money laundering, or a report of a privacy violation.

All organizations depend on information. Confidential information – sales leads, customer accounts, trade secrets, intellectual property – gives you the competitive edge. If that information is stolen or misused, however, your competitive edge can evaporate and your reputation and balance sheet can take a major and potentially fatal hit.

Regulated information – such credit cards, personal and financial information – is frequently the target of attacks. Theoretically this data is protected by U.S. state and federal regulations that require strong security controls. The reality is that many businesses are not fully compliant with these regulations. Or they may believe they are – they might have all the right policies in place, but lax or no monitoring or enforcement.

It doesn’t matter how regulated data is lost: whether a hacker steals customer data, or a well-meaning employee loses a laptop or other portable device containing sensitive data. Whatever the cause, the loss of regulated information amounts to a reportable data breach.

Recently enacted state and federal regulations mandate security breach reporting if it involves customer or

employee personally identifiable information. But the increase in breaches can’t be accounted for by increased reporting alone.

We’ve all seen it: critical information is backed up on USB drives that dangle at the end of key chains. Employees increasingly depend on devices that IT has little or no control over, such as smartphones, tablets and MP3 players.

Users often back up sensitive data to these gadgets – and often fail to encrypt it, compounding the impact of its loss.

Tangible losses are those for which we can calculate a cost. But intangible losses – particularly the loss of trust – can’t be fully measured. Trust takes time to build. And it can be wiped out in an instant when a trusted organization loses or misuses the personal information that has been entrusted to it. This is particularly true for customer information loss.

The loss of any information – whether internal confidential communications, customer and employee information protected by regulations, trade secrets or intellectual property – is costly in tangible and intangible ways.

Even if your organization doesn’t outsource, you’re still at risk for a more common type of insider attack: customer information theft. When employees leave for jobs at other companies, they often believe that they own their relationships with customers.

Bank of America, JPMorgan Chase, UBS AG, Wells Fargo and General Electric publicly acknowledged that former employees engaged in illegal activity. The companies have paid a combined $743 million in restitution and penalties.

Unlike piracy or patent infringement, customer information theft exists in a legal gray area.

In many states, non-compete and non-solicitation agreements favor the organization. But in some

states, non-compete clauses are not enforceable. The employee can retain the relationship so long as it doesn’t involve any solicitation. These terms and conditions are nearly impossible to enforce.

When departing employees take sensitive organizational data with them as they leave, the potential for negative consequences is enormous. You may be left to deal with a costly, reportable security breach, and a mass exodus of customers who have lost trust in your organization, or who follow your former employees to their new companies.

Even if you suspect an employee

has improperly taken customer information, you need a strong forensic process and tools in place, as well as policies that prevent, for instance, the re-issuing of computers the moment someone leaves. Otherwise you’ll be hard-pressed to prove any wrongdoing.

One way of minimizing insiders’ opportunity to steal sensitive data is through vulnerability scanning and penetration testing. These can help your organization find weaknesses in access controls, the technical implementation of administrative policies, and other vulnerabilities that enable insider attacks.

■

MICHELLE DROLET is founder and CEO of Towerwall, an IT security services provider in Framingham, Mass.

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FIRST QUARTER 2012 | MAINE COMMUNITY BANKER

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7

RISK MANAGEMENT

TWENTY QUESTIONS (AND COUNTING) FOR RISK MANAGERS

BY DAVID SIDON

A

re you old enough to remember the game Twenty Questions?

Wikipedia’s description: “Twenty Questions is a spoken parlor game which encourages deductive reasoning and creativity.”

If you have just been named as your institution’s risk manager or chief risk officer (CRO) you probably have at least 20 questions, as do the executives who appointed you. And like the game, the questions are fairly standard from bank to bank.

The first question is: “What is the CRO’s job description?” The CRO’s job description is perhaps stated as: “oversight of the institution’s enterprise risk management process and its myriad disparate risk silos.” But the day-today requirements call for questioning everything.

Consider this. You have just been made CRO for the frat or sorority house at the state university. What is your role on Saturday night? Checking IDs at the front door or looking for people sneaking in the back door? Checking what goes into the punch? Bed check?

Out on the front lawn keeping an eye out for the campus police? You’re responsible for all that and more. Pretty much a lose-lose position. Do your job and you’re seen as the conservative campus curmudgeon. And if something goes wrong, you’re to blame.

This bring us to question 2, as Ford

has famously framed it: “What is job 1?”

Job 1 is probably asking these questions and implementing structure and process to build the accountability, responsibility and clout that gives you, as the CRO, both a seat and a voice at the executive table.

The consideration of your executive role, or at least your interaction with the executive team, spawns questions 3 through 5: “What does the CRO do that the CEO does not do? What is your authority day to day? What is your responsibility as whistle-blower?”

For small institutions, the CEO is the CRO. Period. All major decisions emanate from the corner office. The CRO is generally out of that picture, transforming many risk positions into mere compliance administration. So, is your authority characterized as proactive day-to-day, or reactive as whistleblower? It’s a mix of both.

Questions 6 and 7 dovetail: “Can you be effective if you are home-grown?

What if you already know these people and this business model?”

This is an important and often overlooked issue. Many institutions have created the risk position around the individual seemingly best suited to the role. This could be the COO, the audit manager, the compliance manager, the CIO, or perhaps a soon-to-retire individual who can be moved aside to make way for a new strategic hire.

DAVID B SIDON, CPA, is principal of The Navis Group, a risk management consulting firm based in Gloucester, Mass., specializing in enterprise risk management and business continuity planning.

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

The concept of risk manager has been likened to police internal affairs: once you take on that internal policing role, you are required to sever all previous friendships. I think that’s too severe, but how do you jump up the organizational chart to a position that needs to ask critical questions of lending or finance?

Aren’t the respective managers the experts? The risk manager’s autonomy, however, is similar to that of a traditional internal audit department.

Questions 8, 9, 10 and 11: “How strong a voice must CRO have? How senior? With a seat at the executive table? How wide should the risk manager’s responsibilities and authorities range?”

My answers to the first three: a very strong voice as a senior manager, with a key seat at the executive (and perhaps board) table. These three qualifications set the tone for establishing the range of responsibilities and authorities.

As for question 11, if the role of the CRO is based on an enterprise-wide risk management philosophy, doesn’t this set of questions answer itself? Global reach, and the awareness and ability to delve into each area of the institution are important. Perhaps most important is the ability to see how all the functional areas mesh. In this capacity, the CRO is perhaps the keeper of the business and process flow integration blueprint.

Here’s an example of responsibility, role and reach. Credit concentrations are a hot topic. The OCC just published new guidance in December and policies, procedures and reports attendant to the issue of concentrations of credit are being re-examined and reconsidered.

Who’s responsible? The senior lender.

For what? Policy, procedure and metrics.

What is our CRO’s role here? If the CRO merely monitors that the lending group is aware of the new guidelines, has reviewed policies and procedures in light of the new guidance, and has created and presented reports with properly calculated concentration metrics, then we have taken on the compliance admin moniker we are being careful to avoid.

This is where the CRO can start asking questions: What does this analysis tell us? Are the metrics consistent with our strategies? With our budget?

With our incentives? Do we need to be worried? Do we need to change our approach? Which concentrations should give us pause? In short, did we merely conduct the analysis for regulatory appeasance, or have we reached a moment of affirmation? Or, conversely, have we reached a “so now what” moment? If the CRO has a strong voice, speaking from a senior position at the executive table, this questioning should be expected and respected.

Question 12: “To whom do you report?” This is a functionally-reporting versus administratively reporting moment. The key factor, however, is independence, and we should look to traditional structures for internal audit managers as guidance.

Question 13: “If no real internal auditor is designated, who is it? You?” Smaller institutions in which the internal audit function is completely outsourced struggle with this question, and the appointment of a risk manager may help with this dynamic. The risk manager is not an auditor, but his/her role very naturally may assume the audit liaison role; with internal, external and regulatory audits. The risk manager can logically take over the audit issues tracking function, reporting typically to the audit committee (or audit and risk committee, as some banks have reenergized and re-chartered).

Question 14: “What is the risk manager’s relationship with the Audit Committee?” Direct report, for starters.

And similar to the leadership and choreography role played by audit managers, the risk manager may

“shepherd” the meetings; scheduling, planning and report distribution.

Questions 15 and 16 come from audience participation during a presentation on this topic, and are for you to consider: “Would you change the audit/risk committee dynamic or charter? How?” Question 17: “When assessing risk, what does high-moderate-low mean in your world?”

Risk appetite is defined as the amount of risk an entity is willing to accept in pursuit of value. How is this assessed?

Risk is in the eye of the beholder, and the question of consistency always arises. Who ultimately referees?

Somebody has to. Each functional area views risk through its own functionality lens, making enterprise-wide assessment complicated. High-moderate-low is subjective, judgmental and fickle.

What’s the measuring stick or key metric? In March 2011, the OTS issued a CEO memorandum addressing capital management. It turns out to be a terrific risk management publication, in my opinion. In addressing capital management and suggesting that banks establish their own capital targets (the presumption being that the targets be “tougher” than regulatory rules), a list of enterprise risks is delineated, with capital ratios as key metrics – our measuring stick. All risk managers should have this memorandum in their toolkit.

The risk exercise is often clouded by traditional biases and “over-weighting”.

Reputation and compliance risk are both terrific examples of over-weighting.

Relatively small risks that might result in a handful of disgruntled or lost customers and, similarly, small risks that are easy targets for examiners (HMDA and flood insurance compliance come immediately to mind) get lots of ERM attention and weight. Meanwhile, unmonitored problems may lurk. What about an institution that has poor employee performance review files coupled with sloppy and ill defined termination procedures? Wrongful termination lawsuit lurking? More impactful than HMDA violations? Any of the audit budget directed to this

subject? Why not?

Question 18: “How do you guide your bank, staff, auditors for a consistent approach to risk definitions?” This is difficult to define within an individual bank, and equally difficult for the entire fleet of risk consultants, risk system providers, external audit firms, internal audit firms and regulatory examinations privy to the institutions’ risk environment. Careful definitions that capture relativity should provide a working model from which thoughtful risk discussions may spring. Because, in the end, the risk designation is a collaborative metric, serving as the starting point, and then memorializing the risk analysis/discussion with an end result – or, at least as much of one as a dynamic risk assessment might provide.

Question 19: “How does the risk committee or audit committee weigh in on risk appetite?” Ideally, the members of these committees set the parameters.

Risk appetite and risk rating definitions at the ERM level may provide interesting board retreat subject matter. And if the board has set the definitions, the risk manager need only interpret and enforce.

Question 20: “What if risk management becomes merely compliance administration?” This is the pitfall facing and confounding risk managers and CROs. Institutions are establishing top level risk positions, only to pile on so much risk minutiae as to blur the vision. How does the risk manager push back? The answer is now often found in shifts in organizational architecture. Meet the Risk Department!

Compliance, BSA and other risk areas may now report into a CRO as an overall consolidator, a clearing house for all things risk.

To end where we began, our Wikipedia description describes a game that “encourages deductive reasoning and creativity.” Thinking of the CRO role, I might change that to deductive questioning and creative re-focus on the results of risk assessments; not the “doing” or forensics of risk assessments, but rather the informative gathering of the implications of what the risk assessment discovered or uncovered. ■

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TE C H NOL OG Y

ANDROSCOGGIN BANK REMODEL IS A CONVERSATIONAL ICE-BREAKER

BY CHRISTINA P. O’NEILL

PHOTOS COURTESY OF ANDROSCOGGIN BANK

Androscoggin Bank’s fluid new Portland branch layout and bold color scheme contrast sharply with the subdued hues and barrier-like orientation it had before (see photos facing page).

A

ndroscoggin Bank is transforming the role of the teller and the technology found in its branches in a major way.

The 140-year-old bank has completely renovated its Portland branch, adopting an open layout that encourages interaction with free-standing customer service “pods” and floating financial services representatives, giving it the feel of an Apple store instead of a stuffy traditional bank branch. Customers can quickly make deposits and conduct business, while also

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having a meaningful conversation with someone who’s there to help.

The bank strives for more conversations with customers, building better relationships and learning more about their life needs and events. The renovation includes a cash recycler, to improve efficiency and reduce cash handling, giving tellers more time to interact with customers.

Chief Customer Officer Christine Conrad says the cash recycler allows for the elimination of many cash drawers, replac-

MAINE COMMUNITY BANKER | FIRST QUARTER 2012

ing them with the equivalent of an ATM for tellers. The system improves security, and works with the teller’s computer. It allows for deposit or withdrawals of cash, check deposit and also serves as a locked vault – and cuts down on teller lines.

Diane Field, a vice president and the bank’s director of retail banking, says the cash recycler cuts the typical four-minute transaction time in half. The time savings mount up, for a saving of 10 to 15 minutes per person per day and an hour a day in proving time. “Customers who [handle]

a lot of cash really like it because it saves them time,” says Conrad.

“It’s a great use of technology in terms of customer privacy,” says Field. The floor layout and the pod system allows staff to be more flexible in the functionality they provide. “Instead of having their head down counting cash, they can have a conversation. It gives them a sense of accomplishment, to be able to deal with the

sensors know when they enter and depart the room. Record keeping/signature cards will all be electronic.

• Incorporating space for internal use: meetings, training, and client gatherings as well as public usage of the space.

The impact of the Portland remodeling has already been tremendous. Instead of walking in to find a row of windows with partitions separating customers from tellers, customers can walk in and up to a “bar” with a small computer on it, and the cash recycler right next to it. The renovation of the Auburn branch marks the second transformation of the 13 branches throughout the state, with a goal of transforming all branches within the next one to three years.

■ CHRISTINA P. O’NEIL is editor of Maine Community Banker.

customer instead of dealing with cash.”

The Portland branch has sit-down space for longer conversations, an option available on a regular basis. “One of our goals is to give clients choices on how to do their banking and where, and make sure we try to meet those goals,” says Conrad.

Beginning in February 2012, the Minot Avenue branch in Auburn is set for a similar remodeling. It will include features such as: • Two cash recyclers.

• Electronic safe deposit entry

system allowing the customer to enter their safe deposit box unassisted. The customer submits a hand-scan, inputs a pin code and the door will open.

Customers will only need one key to access their box. The motion

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

MAINE BANKS STRIVE TO MAKE THE MOST OF

SBA LENDING

BY ZACK ANCHORS

W

hen Bob Jacobs’ window restoration company, Jacob’s Glass, was offered a contract for a project at the Ginoux Federal courthouse in Portland, he recognized a rare opportunity to grow his business. But Jacobs, who employs four workers, could only take the job if he could find additional working capital. “We had a lot of administrative and mobilization costs up front,” he says. “And we knew it would be a ways down the road before we would actually get paid.” Jacobs’ bank, Northeast Bank, was able to offer $150,000 to support the project, but only if the loan was backed, like 393 other small business loans in Maine during 2011, by the Small Business Administration (SBA).

“It was pretty seamless,” says Jacobs. “The loan enabled us to hire four more employees to work on the project and we may hire more throughout the year.”

Jacobs’ story provides a perfect example of how the SBA’s lending programs are intended to work: A small business is provided the capital it needs to expand but could otherwise not access and the region benefits from the creation of jobs and economic growth.

But that process only works if banks are on board. And there’s no doubt that SBAbacked loans require more paperwork on the part of the lender, often take longer to process and impose limitations on banks. Here in Maine, however, with SBA-lending peaking in 2010 and 2011, many community banks – especially those with strong and sustained relationships with the SBA – report that the costs of SBA lending are well worth the benefits for the banks as well as for the region. “There are a lot of loans at our bank, and many banks, that would not go through if not for the SBA,” says Jerry Jarrell, vicepresident of commercial lending at Machias Savings Bank, which approved 28 SBA-backed loans in 2011. “And there are a lot of people who would not be working if not for those loans and a lot of revenues that would not be coming in to the state.”

HOW SBA LENDING WORKS The SBA usually enters the lending process when a small business asks a bank for a loan but falls short of the bank’s lending requirements. “Whenever we receive a request for capital from a business we filter it through a series of underwriting criteria,” says John Edwards, banking officer and executive vice president at Bangor Savings Bank, which

ZACK ANCHORS is a freelance writer.

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lent almost $15 million to 68 small Maine businesses last year, making it the state’s top SBA lender. “In many cases, we find that small businesses – and sometimes large ones – have challenges meeting these criteria, often because they are just still too young or because there is a risk to their business model or a problem with their projected growth.”

When a business does fall short of the lending requirements, SBA’s backing ensures that the lender will not be fully left on the hook in the event that the borrower defaults; instead, the government will reimburse to the lender up to the guaranteed amount, which is typically 75 percent to 85 percent for the SBA’s primary lending program. “The SBA provides a great way for us to mitigate the risks to bank in the form of insurance against loss to the institution,” says Edwards. “That allows us to be more creative and flexible.”

Lenders considering leveraging an SBA guaranty have several SBA programs from which to choose. Each of the programs involves the SBA backing a portion of a loan, but the programs vary in terms of the amount of the guaranty, the fees involved, how the borrower can use the funds, the loan’s maturity and maximum amount, and the documentation required.

The SBA lending program that banks use most commonly is the Section 7(a) Loan Guaranty program, which is designed to guarantee loans given to small businesses and start-ups.

Within the 7(a) program there are several lending options. Jacob’s Glass, for example, received its loan through the CAPLines program, which is specifically designed to give small businesses the working capital needed to accept contracts, subcontracts and purchase orders for which they compete and win. Without his contract to restore the federal building, Northeast Bank couldn’t have considered Bob Jones for the CAPLines program.

Jones already had a relationship with Northeast Bank when he realized he needed additional capital. Business owners who don’t have a relationship with an experienced SBA lender often learn about SBA-lending programs through one of the SBA’s Small Business Development Centers (SBDCs) or by contacting Maine’s SBA district office. “The process works best when a small business borrower already

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has a relationship with an SBA lender and that lender can determine whether the loan is eligible for SBA guaranty,” says Bill Card, lender relations specialist at the district office. “But we hear directly from small business owners too. We try to direct them in an appropriate fashion, but we don’t pick favorites among lenders.”

THE BENEFITS FOR BANKS The main benefit of SBA lending for banks is the opportunity to service more loans without taking on excessive risk. The SBA’s guaranty allows banks to calculate much more accurately the dollar amount it could lose in the event of a default. “By ensuring that there are limits on potential losses, the SBA enables banks to quantify the risk of a loan,” says Edwards. “That gives banks flexibility to offer loans about which there would otherwise be too many questions and uncertainties.”

Maine bankers say that the SBA’s programs allows many loans to go through that would otherwise be rejected. But Edwards also insist that these programs don’t lead banks to make faulty and illadvised loans, leaving taxpayers on the hook for a large share of the losses. “Is there a higher likelihood that an SBA loan will have a payment default? Overall, I’d have to say yes,” says Edwards. “But if a business is not successful, the bank cannot be successful. Banks have a strong incentive to prudently underwrite loans, make borrowers understand their obligations, and use their expertise to

MAINE COMMUNITY BANKER | FIRST QUARTER 2012

make sure loans perform very well.”

And because a loan’s success is ultimately a result of a business’s success, many bankers are appreciative of the programs the SBA funds to support businesses beyond lending. The dozens of SBDCs across the state, for instance, provide support for business owners that make it more likely they’ll receive a loan and fully pay it back.

THE COSTS OF SBA LENDING The benefits of an SBA-backed loan do come at a cost to both the bank and the borrower. Banks are charged a guaranty fee on the guaranteed portion of the loan, and they pass a portion of this cost on to the borrower in the form of a fee. For 7(a) loans, the SBA’s guaranty fee ranges from 0.25 percent to 3.75 percent, depending on the loan’s maturity and size.

The most significant hurdle for many banks interested in SBA-lending, however, may be the extra effort involved in processing loans. Many banks are part of the SBA’s preferred lender program, which allows them to greatly expedite the process. But for those banks without preferred lender status, SBA loans can be onerous.

“When you’re dealing with taxpayer funds, they have to be additional requirements for eligibility and processing,” says Card. “We try to make sure it is as minimal as possible, but there are extra steps and paperwork involved.”

Jerry Jarrell, who has processed

SBA loans for 20 years, first at Merrill Merchants bank and now at Machias Savings Bank, is well familiar with the potential burden of SBA loan processing.

“When I first started out at Merrill, it was a very arduous and cumbersome process with mountains of paperwork,” he says.

Eventually, after years of experience working with the SBA, Jarrell was able to earn Merrill Merchants preferred lender status. “Being a preferred lender provides a bank many advantages,” he says. “We submit a loan application online, and as long as there are no eligibility issues, we’re automatically approved. Once we close a loan, if we want to change the interest rate or extend the maturity date, we can just do it without needing SBA approval.”

JOINING THE PREFERRED LENDER PROGRAM It’s typically not easy for banks to participate in the preferred lender program. When Jarrell moved to Machias Savings Bank in 2008, he was disappointed to learn that he would no longer be able to take advantage of the program, even though he was primarily responsible for his former bank’s participation. Eventually, however, Jarrell persuaded the SBA that the experience he brought to his new bank was enough, and Machias Savings Bank has since gained preferred lender status.

For most banks, participating in the preferred lender program takes years of experience working with the SBA and a history of successful SBA-backed loans.

“It takes a lot of hard work proving to SBA that you are underwriting loans correctly,” says Jarrell.

Peter St. John, senior vice-president of commercial services at Katahdin Trust Company, says his bank hopes to soon achieve preferred lender status. “Now that we have some seasoned loans, and in higher volume of loans, we’re going to apply,” he says. “We haven’t found that a slower process is too much of a burden, but we do think being a preferred lender would benefit us and our borrowers.”

Katahdin Trust approved 21 SBA-backed loans in 2011.

Many of Katahdin Trust’s recent SBAbacked loans were approved under the SBAExpress program, which offers another way for lenders to streamline

loan procedures. Express loans offer a lower guarantee of just 50 percent, but they often take just a few days to process.

“Even with the lower guaranty, the fact that it’s so much easier makes it very appealing,” says St. John.

University Credit Union (UCU), which approved six SBA-backed loans in 2011, also aspires to join the preferred lender program, but Jay Fortier, assistant vicepresident of member business services, admits that the low volume of SBAbacked loans the credit union processes leaves that goal far off. “We’re not quite as big as other lenders out there and we just haven’t reached the volume of loans needed, says Fortier.

Like Katahdin Trust, UCU takes advantage of the Express program frequently. “It’s quick and easy, with just a couple more pages of documents for applicant and loan officers to fill out,” says Fortier.

Currently there are seven Maine lenders approved to participate in the preferred lender program, but Card expects that number to increase soon.

“We’ve recently been hearing from a number of lenders who want us to come out and train them to become preferred lenders,” he says.

JUMPSTARTING THE ECONOMY Much of the increase in SBA lending during 2010 and 2011 was due to a series

of temporary incentives the government provided to boost small business lending.

The enormous economic stimulus legislation that passed in 2007 directed $375 million to support the SBA’s lending programs, enabling the SBA to temporarily waive guaranty fees and increase the maximum amount of loans guaranteed to 90 percent. Maine bankers say the changes made a difference. “I don’t think there was much of an issue here in Maine with borrowers who were worthy of getting creditworthy not receiving credit,” says Edwards. “Nevertheless, we benefited from the SBA stepping up its commitment, and as a result the amount of SBA loan guarantees went up.”

St. John says the increased SBA support has led to increased lending at his bank too. “The increased guaranty helped, and the reduced fees helped,” he says. “Those changes made us to think about the SBA much more when we’re considering options for small business lending.”

And Jarrell notes that the temporary incentives should underscore that the ultimate purpose of the SBA’s lending programs is to help banks fulfill their obligation to serve their community.

“Banks have a responsibility to support economic activity within the area they operate,” says Jarrell. “The SBA’s lending programs have made it easier for banks to get money into hands of people on Main Street, which is critical to getting our economy back on track.”

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FIRST QUARTER 2012 | MAINE COMMUNITY BANKER

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THE DIGITAL RISK AND INVESTIGATIVE LANDSCAPE 2012 PERSPECTIVE

BY EDWARD M. STROZ, CPA, CITP, AND ERIC M. FRIEDBERG

B

usinesses are showing a growing understanding that cyber attacks are not a matter of if, but when, and that the best defense is a good offense. More than ever, they need to think proactively about protecting customer information, and in turn their own corporate reputations, by treating cyber security as a process rather than a one-time product.

Here are the trends we have observed over the course of the last two years, which we expect to continue in 2012: Sophistication of cyber attacks. Most organizations’ digital assets are threatened not by individual rogue hackers, but sophisticated teams of experts with relevant specialties operating with military precision to carry out an attack. Many organizations still rely on the individual “jack-of-alltrades” defense strategy, and are thus dangerously exposed to sophisticated, team cyber attacks. Today, organizations can only counter cyber threats with their own team of skilled and seasoned experts.

Rising audacity of hackers: Response to cyber attacks is now a board-level issue requiring mitigation plans as well as crisis plans. This has been vividly proven by attacks on companies such as Sony, Lockheed Martin and RSA, which raised the specter of just how secure any form of digital security can be for anyone, and it has had a profound impact on corporate reputation.

The spring 20011 attack on Epsilon Data Management, the world’s largest permission-based email marketing provider, exposed email addresses at about 2 percent of Epsilon’s customers in several different

industries. One of the victims, a major pharmaceutical customer, disclosed that the breach exposed information about prescription and nonprescription drugs and products used by consumers registered on its websites. Further, following the initial attack, hackers created a phony website targeting the consumer victims of the breach victims through installing malware on their PCs. Whether a cyber threat involves hacktivism, state-sponsored data theft, zeroday malware (exploiting a security hole in an application before the vendor discovers it) or other technique, businesses must treat cyber security as a process rather than a product, by doing the following: • In advance of an incident: establish a data breach response plan and a response team with an up-to-date notification plan. Preparations should include necessary steps to take in the first 72 hours after an attack, and having a crisis communications plan in place.

• In the event of an attack: respond by changing all passwords, including administrative passwords immediately; leave all computers powered on but disconnect from the internet if possible; isolate and preserve all compromised systems and data using forensic methods.

• After the incident: conduct a postmortem to learn from mistakes.

Assess gaps in your response plan and train staff based on the event; stay current on changing threats and laws, and update all plans and training.

EDWARD M. STROZ, CPA, CITP, and ERIC M. FRIEDBERG are co-presidents of Stroz Friedberg, a global digital risk management and investigations firm specializing in digital forensics, data breach and cybercrime response, electronic discovery, and business intelligence and investigations.

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

CLOUD COMPUTING AND CORPORATE GOVERNANCE The adoption of cloud computing – in which public and private providers host computer applications and data in different physical locations, accessed via a web browser – has caused much concern over perceived security shortcomings.

However, much less attention has been paid to the more subtle implications of cloud computing on a company’s governance, risk management and compliance. These implications can significantly increase legal exposure for a company victimized by a data breach, as not every cloud vendor is structured to quickly determine where the servers housing the breached data are located, delaying the ability to investigate and appropriately respond. Legal teams shouldn’t wake up to these risks when there’s an incident, but become aware of such risks ahead of time so they can be prepared to respond. For example, in selecting a provider, a business should secure contractual rights to image entire servers, take backup tapes out of circulation or turn off auto-delete functions in the event of a data breach.

THE CYBER THREAT OF “BAD LEAVERS” Corporate downsizing due to economic challenges, and sudden changes in the workplace (such as mergers and takeovers) can trigger the kind of discontent which can transform otherwise happy and productive employees into potential “bad leavers,” a 21st century phenomenon.

Good workers can go bad when employees feel devalued, left out of a financial windfall or otherwise disenfranchised.

When a network administrator for the city of San Francisco became disenchanted in 2008 after being disciplined for poor job performance, and was unhappy with the management of his department, he “engineered a tracing system to monitor

what other administrators were saying and doing related to his personnel case,” according to an article in the SFGate. com, and set network devices that could erase vital configuration data with a single command. When it was time to let him go, for almost two weeks he held the network hostage until finally, after being arrested, he turned the passwords over – illustrating the massive damage that one employee can cause.

Bad leavers can destroy or alter critical evidence or even plant forged documents on a server, or walk out with proprietary documents and trade secrets on a small external terabyte storage device. However, while technology has certainly empowered bad leavers, technology can also contribute exponentially to their downfall. To combat this epidemic requires a thoughtful and deliberate game plan, designed to preempt, counteract and remediate bad leaver situations. One of the innovative new methodologies Stroz Friedberg sees gaining favor is a behavioral sciences approach that provides a psycholinguistic analysis of a subject’s emotional state, personal and risk, while tracking changes over time.

NEW SEC GUIDELINES FOR PUBLIC COMPANY DISCLOSURE OF CYBER ATTACKS AND FUTURE CYBER THREATS In October, the U.S. Securities and Exchange Commission released its firstever staff guidance pertaining exclusively to the cyber security-related disclosure obligations of public companies. In 2012 this development will prompt many, if not all, of the several hundred largest companies to start opening up about what they have lost and what they stand to lose. We have come to believe that handling disclosure obligations related to a cyber attack is a far cry from the usual triggering events that prompt reporting obligations of today’s public companies.

Assessing and solving any cybercrime can necessitate a significant level of expertise that many public corporations simply might not have. Yet the SEC’s guidance has a strong message, in clear and uncertain terms. Its guidance also dovetails with the recent whistleblower provisions within the DoddFrank Wall Street Reform and Consumer Protection Act, which reward informants who provide certain types of information leading to successful securities actions, including failure to disclose actions, with between 10 and 30 percent of any recovery over $1 million. The result: public companies that may have previously believed they were not at risk for cyber attacks are now running a higher risk than ever before. For a public company to effectively respond to a data breach, its technical incident response team should take five separate actions: prepare a full response plan; preserve any evidence of the breach while swapping in clean machines; execute an immediate digital forensic assessment; identify key compromised data; and notify and report to multiple parties, not just the SEC – including contracting parties, victims, credit reporting agencies, government agencies (e.g., HHS, AG offices, even the media.

NEW TECHNOLOGIES FOR ELECTRONIC DISCOVERY For legal counsel, facing an explosion of data and growing complexity in cases, saving time and money in the discovery process is essential to success. Known as predictive coding, this process takes a random sampling of a large quantity of data for review; then software codes the subset and applies it to the entire collection of data. This algorithmic process provides the opportunity to make judgments without reviewing the entire data set. This result can be explained and verified in court but is not considered a black box technology. In 2011 Stroz Friedberg launched First Glance, a suite of early case assessment

tools with cutting-edge text analytics that enables legal counsel to understand case evidence much earlier in the process than with traditional document review. The wellknown Pension Fund case, which found that data was not properly preserved, is an example of a case where our analytics would have been beneficial in determining who was involved and who was missing. This directly points to risk reduction and what data needs to be preserved.

“BYOD” – BRING YOUR OWN DEVICE The “consumerization of IT” – the desire of consumers that the simple, easy-to-use devices, software and services they use in their personal life to be part of the business enterprise’s communications and computing platform – is now one of the top three drivers of cyber security, resulting in new challenges for IT in securing these endpoints as well as the corporate enterprise. Companies often are required to search their data for relevant documents as part of the discovery process in litigation. With BYOD policies, identifying the relevant data may not be as straightforward. For example, in addition to documents stored on computers, email, and file servers, employees may have notes stored on their iPads or other tablet devices. It may be necessary to use specialized software or employ assistance from digital forensic consultants to preserve data from mobile phones or tablet devices, particularly if employees choose sophisticated smartphones.

While documents stored on a computer hard drive may be secured by encryption and security software, it is possible that copies of some documents stored on a mobile phone may only be protected by a simple four-digit combination or not at all. With the growing adoption of BYOD policies, vendors are starting to offer solutions for securing mobile devices or creating protected areas on the devices where company data will be stored. ■

FIRST QUARTER 2012 | MAINE COMMUNITY BANKER

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VOLCKER RULE REQUIREMENTS FOR COMMUNITY BANKS

BY ROBERT TAYLOR

L

ast November, the federal bank regulatory agencies, together with the Securities and Exchange Commission, issued proposed regulations implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That section contains prohibitions and restrictions affecting the ability of banks and other financial companies to engage in proprietary trading. These prohibitions and restrictions of the Dodd-Frank Act commonly are referred to as the “Volcker Rule.”

Because community banks generally are not engaged in propriety trading, they can ignore most of

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

the voluminous and controversial regulations implementing the Volcker Rule. However, the Volcker Rule regulations will require some action by all community banks. Specifically, the proposed regulations require that

by July 21, 2012, every bank have in place policies and procedures designed to prevent it from commencing such activities without first establishing a compliance program.

The Volcker Rule restricts proprietary trading by insured depository institutions and their holding companies. “Proprietary trading” is defined as “engaging in the purchase or sale of one or more covered financial positions as principal for the trading account of a bank.” A “covered financial position” includes any position in a security. Therefore, any security investment made by a bank will be considered a covered financial position.

These investments are restricted, however, only if the investment is made for a trading account of the bank.

A “trading account” is defined as “any account used for acquiring or taking positions in securities principally for the purpose of selling in the near term or otherwise with the intent to resell in order to profit from short-term price movements.” If a bank’s investment account does not meet the definition of a trading account, investments in that account will not be restricted by the Volcker Rule.

While community banks may have accounts that might fall within the definition of a trading account, these accounts typically invest only in government securities, and the proposed regulations exempt from the proprietary

trading restrictions purchases and sales of U.S. government, state and municipal securities.

The proposed regulations require banks that are engaged in proprietary trading to establish detailed compliance programs for monitoring compliance with the Volcker Rule. The proposed regulations further provide that any bank that is not engaged in proprietary trading must still have in place policies and procedures that will prevent the bank from commencing such activities without first developing

a compliance program. Accordingly, a community bank that engages in no proprietary trading will still need to adopt policies and procedures to restrict the bank from commencing such activities without first developing a compliance program.

Public comments on the proposed regulations were due by Feb. 13, 2012.

While these requirements may change somewhat with the issuance of the final regulations, the Volcker Rule requirements are scheduled to become effective on July 21, 2012. Community banks will need to review the final regulations and make sure they have adopted any necessary policies and procedures by the effective date. ■

ROBERT TAYLOR is a partner at Day Pitney, a Hartford, Conn.-based law firm with offices throughout the Northeast.

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FIRST QUARTER 2012 | MAINE COMMUNITY BANKER

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19

M A INE B A NK N E WS

KENNEBUNK SAVINGS CONTRIBUTES $5,000 TO AREA FOOD PANTRIES As part of its Community Promise, Kennebunk Savings announced that it has made $5,000 in contributions to area nonprofit food pantries.

“It’s very gratifying to be able to contribute to organizations that will have an immediate impact in reducing the burden families are facing. It is our mission to help strengthen our communities; putting food on tables, especially during the holiday season, is just one way we can contribute,” said Bradford C. Paige, president and CEO. The bank made $1,000 donations to York County Food Rescue, York County Shelters Programs Inc., York Community Food Pantry, the Kennebunk Community Food Pantry and the Seacoast Family Food Pantry in Portsmouth.

Joan Sylvester, community relations director and volunteer coordinator for York County Shelters Programs, Inc., said, “The need is even greater this year. Compared to last year we gave out an additional 200 food boxes around Thanksgiving, totaling 1,652 boxes. These boxes helped feed 4,956 individuals in York County. We are so grateful for the donation from Kennebunk Savings. The funds helped us replenish our pantry, which recently fed 147 families in one day.”

Kennebunk Savings commits 10 percent of its earnings to nonprofit organizations each year. Since 1994 that has resulted in donations of more than $7.5 million to local nonprofits.

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CAMDEN NATIONAL BANK EXPANDING INTO AUGUSTA MARKET

Gregory A. Dufour, president and CEO of Camden National Bank, has announced plans for the bank to expand into the Augusta market. “We have many strong relationships with Augusta-area businesses, government agencies and people, which makes this a natural expansion of our franchise,” said Dufour.

Camden National Bank purchased the building located at 22 Western Ave. in Augusta on Dec. 29.

The property will undergo significant renovations during 2012. The branch, which will be the 39th Camden National Bank location in Maine, will be a full-service bank, featuring a two-lane drive-up and a 24-hour ATM. Camden National will bring its full suite of products and services to the Augusta

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MAINE COMMUNITY BANKER | FIRST QUARTER 2012

market, including fee-free debit cards and free ATMs worldwide, online and mobile banking, checking and savings accounts and a variety of loan products.

“Our plan is to create a modern, full-service branch to serve individuals, businesses and government agencies,” said June B. Parent, Camden National’s executive vice president of retail banking.

“In addition to incorporating the latest technology in our ATM, we’ll start with four new staff members who will provide first-class customer service to the Augusta market.”

Camden National Bank’s expansion into the Augusta market is part of the bank’s ongoing commitment to helping Maine people and businesses succeed. The bank plans to open the Augusta branch by late spring of this year.

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M A INE O N T HE M O VE KATAHDIN TRUST COMPANY Andrew S. Denton has been appointed vice president of commercial services officer at Katahdin Trust Company. His responsibilities will be business lending and development in the Presqu Isle and Caribou areas.

ANDREW S. DENTON

A New Hampshire native, Denton received his bachelor’s degree from the University of New Hampshire. He has extensive experience in the financial services industry, starting in 1982 and serving in a variety of positions, most recently as director of commercial lines for Granite Group Benefits in Manchester, N.H., and Dallas and Houston, Texas. He resides in Winterville with his wife, Nancy, and has two grown children.

KENNEBUNK SAVINGS Steve Lycette has joined Kennebunk Savings’ insurance subsidiary, Kennebunk Savings Insurance, as vice president and account executive, with additional responsibilities for managing the commercial lines operations for the agency. Prior to joining Kennebunk Savings, Lycette was a marketing representative with the Philadelphia Group of Insurance Companies, where he assisted insurance agents and business clients with the company’s diversified product lines throughout northern New England.

STEVE LYCETTE

SARAH OLNEY

JESSICA BOLLOTTA

Kennebunk Savings also announced that Sarah Olney has joined the residential and consumer loan area. Olney’s role will include management responsibilities, as well as assisting customers who are having difficulty making their regular loan payments. Olney previously worked for Residential Mortgage Services in South Portland as a compliance assistant and post closing coordinator. She also worked for TD Bank in Falmouth, Maine, as a loss mitigation specialist and supervisor in the Consumer Collections area. A graduate of University of Southern Maine with a degree in economics, Olney volunteers and serves as treasurer on the board of the Port Veritas nonprofit performing arts organization in Portland.

Jessica Bollotta has been promoted to vice presiden and customer care manager. Her responsibilities include managing the call center team and handling customer inquiries and online banking requests by phone and email. Bollotta joined Kennebunk Savings in 2006 as the manager of its office located on Woodbridge Road in York. Prior to that, she worked for a bank in South Portland as the assistant branch manager. A Center for Financial Training (CFT) instructor for Kennebunk Savings since 2010, Bollotta also holds a number of CFT certificates of her own. In addition to her work in banking, Bollotta volunteers for Waban, Relay for Life, March of Dimes, Toys for Tots, West Biddeford Little League and St. Jude’s Children’s Hospital.

Chris Cluff has been promoted to bank officer and sales performance analyst. A 2011 graduate of the University of Southern Maine, Cluff has worked for Kennebunk Savings in the information systems department since 2005, most recently as business systems analyst.

In his new role, he will focus on the integration of the bank’s new customer relationship management software and improving the sales process across all three business lines.

CHRIS CLUFF

Adam Mumm has been promoted to e-Services Business Analyst. A 2007 graduate of Bentley College, Mumm joined Kennebunk Savings as a web delivery analyst, and later held the position of business systems analyst. In his new role he will be involved in the facilitation, implementation and ongoing maintenance of all electronic delivery services. Mumm is a past and current volunteer for Relay for Life, Big Brothers Big Sisters and has served on the United Way campaign team for Kennebunk Savings.

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MA INE HOU SIN G R E P O RT

MAINE REAL ESTATE SALES UP MORE THAN 4 PERCENT IN DECEMBER Sales of Maine’s single-family existing homes increased 4.34 percent in the month of December, according to statistics released by the Maine Real Estate Information System, Inc. (MREIS). This marks the sixth consecutive month that Maine home sales remained in positive territory. The statewide median sales price (MSP) eased 6.98 percent over the past 12 months to $160,000. The MSP indicates that half of the homes were sold for more and half sold for less.

The National Association of Realtors (NAR) reports a national single-family existing homes sales hike of 4.3 percent in December, compared to December 2010.

The National MSP dipped 2.5 percent to $165,100. In the regional Northeast, sales increased 3.3 percent, while the regional MSP decreased 2.7 percent to $231,300 over the past 12 months.

Tina Lucas of Lucas Real Estate in Portland said, “Consumers feel more secure in making decisions regarding homeownership when they feel more confident about the stability of the real estate market; these statistics serve to demonstrate a more confident consumer outlook.” Lucas, who serves as the president of the Maine Association of Realtors, adds, “Realtors are educating buyers as to the real opportunity attractive property values and historic low interest rates have to offer them. For many buyers, owning a home is less expensive than renting, and buyers are recognizing it’s a smart choice to make the move now and reap the financial rewards.”

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

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

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MONTHLY REAL ESTATE STATISTICS December 1-31, 2010 – December 1-31, 2011 County

STATEWIDE

#Units Sold 2010

761

#Units Sold 2011

794

Percent Change

4.34%

Sale Price 2010

$172,000

Sale Price 2011

$160,000

Percent Change

-6.98%

ROLLING QUARTER CHART: FROM OCTOBER 1, 2010 – DECEMBER 31, 2010 AND OCTOBER 1, 2011 – DECEMBER 31, 2011 County

#Units Sold 2010

#Units Sold 2011

Percent Change

Sale Price 2010

Sale Price 2011

Percent Change

STATEWIDE

2427

2595

6.92%

$170,000

$165,000

-2.94%

Androscoggin

165

177

7.27%

$129,900

$128,000

-1.46%

Aroostook

82

98

19.51%

$87,500

$81,375

-7.00%

Cumberland

593

609

2.70%

$226,000

$217,000

-3.98%

Franklin

65

72

10.77%

$130,000

$117,750

-9.42%

Hancock

130

152

16.92%

$180,050

$185,500

3.03%

Kennebec

195

220

12.82%

$135,000

$126,250

-6.48%

Knox

87

79

-9.20%

$180,000

$195,000

8.33%

Lincoln

90

89

-1.11%

$182,000

$180,000

-1.10%

Oxford

106

123

16.04%

$125,500

$140,000

11.55%

Penobscot

228

223

-2.19%

$116,944

$125,000

6.89%

Piscataquis

35

42

20.00%

$74,000

$76,500

3.38%

Sagadahoc

73

64

-12.33%

$180,000

$150,000

-16.67%

Somerset

71

92

29.58%

$92,000

$114,900

24.89%

Waldo

67

78

16.42%

$150,000

$140,000

-6.67%

Washington

19

35

84.21%

$110,000

$78,500

-28.64%

York

421

442

4.99%

$220,000

$213,750

-2.84%

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 4,100 licensees inputting active and sold property listing data. Statistics reflect properties reported as sold in the system within the time periods indicated.

MAINE COMMUNITY BANKER | FIRST QUARTER 2012

NEFMA. It’s where you belong.

“I have been very impressed with the quality of speakers and relevancy of the topics at NEFMA conferences. I believe weaving in their positive energy with your passion to implement creative ideas and see them through will be critical to your bank’s success and career.

I greatly value what they offer marketing professionals.”

Gregory R. Shook President & CEO Essex Savings Bank

Join us at the Spring Conference, May 10-11, at Stowe Mountain Resort, Stowe, VT. To learn more about NEFMA, become a member and register for the conference, please visit us at www.nefma.org or call 617.926.1370

www.nefma.org