Less Burn More Return

how core vendor contracts impact
community bank and credit union value

Full Report | May 2013
Research data provided by:

© Copyright BPI Network. All Rights Reserved. 2013
Less Burn More Return
table of contents
3 Key Findings
4 About the Study
5 Introduction
8 Most Institutions Overpay for Core Services
14 Increasing M&A Value Through Contract Restructuring
16 Survey Findings
25 Executive Interviews
34 About BPI Network
35 Affiliate Partners
36 About Paladin fs, LLC
Why Read This Report?

• Learn why institutions overpay for core services, and by how much (Page 8)
• Discover which core service categories provide the biggest savings (Page 10)
• Find out why vendors want you to wait until the last year of your contract to begin
negotiations (Page 13)
• Learn how restructuring contracts can increase shareholder value in M&A deals
(Page 14)
• Get the latest survey data on top concerns and priorities for community banks and
credit unions (Page 16)
• Hear from top CEOs, CFOs, investors and advisors on the state of community
institutions and the need for greater market efficiency in core services (Page 25)
© Copyright BPI Network. All Rights Reserved. 2013 2

key findings
key findings
Cost of Core Processing and Related Services
• On average, community financial institutions pay 24 percent above fair market value for their
core processing and related IT services.
• Among institutions recently utilizing national “Blue Book” pricing to renegotiate core service
contracts, annual savings ranged from 11.5 percent to 43.4 percent
• Banks and credit unions with $500 million to $1 billion in assets appear to have the greatest
opportunity to reduce costs, with an average cost reduction of 29 percent, or approximately $1
million over a five-year contract.
• To generate the equivalent of $1 million in savings over a 5-year period, the average community
bank would need to originate – on day one – approximately $5.6 million in new loans.
Survey at a Glance
• Tight net interest margins and regulatory compliance are the most frequently cited challenges to
profitability for community financial institutions, followed by slow economic growth.
• Growing loans and interest income is far and away the most frequently cited (82 percent)
business priority, followed by improving operational efficiency and cutting costs (63 percent)
and managing regulatory compliance (50 percent).
• Nearly two-thirds of respondents point to reducing non-interest expense as a “high priority”; 56

percent say that increasing non-interest income is a “high priority”.
• About one-third of respondents (34 percent) say that adding new technologies and processing
capabilities is a top strategic priority.
• Seventy-four percent of respondents plan to add new core processing products and IT services
over the next three years; 80 percent of those respondents say they will add mobile banking.
• Sixty-eight percent of respondents expect a significant increase in mergers and acquisitions

among community financial institutions in the next two years.
• Forty-two percent of respondents say they will likely be a buyer of another institution; 18 percent
say they will be either a buyer or a seller depending on the opportunity; just 3 percent say they
are a likely seller.

key findings
about this study

Less Burn. More Return is a new study by the Business Performance Innovation (BPI) Network
that looks at the issues and priorities facing today’s community financial institutions during a period
of prolonged low interest margins, increased regulatory pressure, and sluggish economic growth.
This so-called “new normal” following the worst economic downturn and banking crisis since the
Great Depression is challenging community banks and credit unions to become both more rigorous
in managing costs and more creative in defining new revenue sources and business models.
Our study looks closely at one key area of non-interest expense — spending on core bank
processing and related IT outsourcing services — and uncovers a major opportunity for improved
efficiency ratios. In fact, community financial institutions tracked in this study reduced their costs
for core and IT services by an average of 24 percent by bringing them in line with fair market "Blue
Book" pricing.
The BPI Network conducted this study in cooperation with Paladin fs. Paladin is the only firm that
provides market research on core and IT service costs for community financial institutions. Our
study data includes the results of a survey on the challenges and priorities of community bank and
credit union executives, as well as their experiences with core processing and related IT services.
Study findings on fair market values and potential cost savings for core services contracts are based
on national data developed by Paladin.
We would also like to thank Financial Information Systems, LLC, a leading financial services
industry data analytics and financial performance tracking firm. FIS supplied us with comprehensive
data on the financial performance of community banks and credit unions over the past four years.
We also want to thank Christopher Marinac managing principal and director of research for
FIG Partners, a leading research, market making, investment banking and fixed income services
provider to community banks, and Gerald Gagne, CPA and CISA, of Wolf & Company, a 100-year-
old certified public accounting firm with offices in Boston and Springfield, Massachusetts, and
Albany, New York. Wolf & Company and FIG Partners, assisted in gaining participation in our
survey.
In addition to survey and analytical data, the BPI Network had conversations with industry experts,
consultants and executives who share their perceptions and insights for the study. Some of those
interviews can be found at the back of this report.

introduction
For executives and board members of community financial institutions, it’s easy to feel that the
deck is stacked against you these days. Your core business — net interest margin on small business
commercial and real estate lending — is under pressure on multiple fronts. A prolonged period of
low interest rates is progressively squeezing spreads. Regulatory pressures and compliance costs
are making it more difficult and expensive to do business. Competition from larger institutions is
intensifying in business areas that were traditionally the domain of community institutions. And
problem assets, while markedly improved, continue to be a drag on many institutions that also lack
access to new capital afforded to larger financial services companies.
Experts agree there are no easy answers. But what is clear is that community banks need to explore
new creative approaches and business models, while they also maintain a laser focus on improving
efficiency through the effective management of non-interest expense. As Gary Findley, a long-
time attorney and consultant to West Coast community banking institutions, puts it: “We tell our
clients that there’s no one bullet. You have to look at the fundamentals across the board and make
small gains in a variety of areas that can add up to something significant.”
Findley and other experts interviewed for this report say those "Community banks need to
fundamentals include increasing loan to deposit ratios with quality explore new creative approaches
loans, finding new sources of non-interest income, and holding and maintain a laser focus on
down costs wherever possible. Expanding loan portfolios and
improving efficiency."
controlling non-interest expense are, in fact, two of the top priorities
for institutions we surveyed for this report. Yet, with compliance
costs and competition for new business escalating, reducing expenses
can be a real challenge.
Saving on Core Services
One of the chief findings of this report focuses on a critical area of non-interest expense—core
processing and related IT services. Our data shows that community financial institutions are
substantially overpaying for these services. In fact, community banks and credit unions save an
average of 24 percent on their contracts for these services when bringing them into line with
national fair market pricing (See details on page 8). These outsourced services frequently represent
the second highest non-interest expense, after personnel costs, for community institutions.

The need to bring down the cost of core processing and other critical services is made all the more acute
by the fact that community banks and credit unions are playing catch-up when it comes to technology.
"Community
institutions save According to our survey of bank and credit union executives, integrating
an average
of 24 percent by new technologies and outsourced bank processes is one of the top
bringing
core service contracts strategic priorities for community financial institutions in the next 18
months (along with increased lending, greater expense control, and
in line with fair market pricing."
effective management of new regulatory requirements). As they
seek to add new services, like mobile banking, online account opening and fraud detection systems,
community financial institutions would be wise to consider renegotiating their contracts with core
processing vendors to effectively pay for these new products without increasing expenses.
While there is great potential for savings here,

executives do not always recognize the opportunity. Defining Core &
While 39 percent of our survey respondents believe
they are paying over fair market for core and related IT Services
IT services, another 35 percent think they are being For the purpose of this study, we define
fairly charged. The remaining respondents say they “Core & IT Services” as outsourced
don’t know. processing and IT services such as
Account/Data Processing, Item
Those who think they are paying a fair market Processing, Internet Banking, Mobile
price should probably take a closer look. In fact,
Banking, Bill Payment, ATM/EFT,
the vast majority of institutions do not have
Network Monitoring, and other critical
sufficient information to know whether they are
outsourced managed services.
or are not overpaying (72% of survey respondents
agreed, page 24). Most rely on an onerous Major vendors in this space include Fiserv,
competitive RFP bidding process that is becoming Fidelity Information Services, Jack Henry
less effective as vendor consolidation continues. & Associates, CSI, Harland Financial,
Once they go through this difficult process, few Intuit, S1, Q2ebanking, Data Center Inc.
banks or credit unions revisit those contracts until
and others.
the agreements are about to expire, leaving on the
table a major opportunity for improved efficiency.
"Financial
Institutions don’t Community financial institutions can and should revisit their costs
have enough information to
in core systems, says Shami Patel, a highly successful business

know whether their contracts leader in the financial services and investment industry who

are overpriced." served as managing director for Cohen & Co., one of the nation’s largest
providers of trust preferred or subordinated debt to community banks.
“But it’s a tendency that when you sign a contract for five years that you don’t start thinking about it
until after four years. As it turns out, that’s a mistake.”
The time to begin renegotiating or restructuring a contract with your core service vendor is not
six or even 12 months before the contract expires. According to Paladin, community financial
institutions should actually begin restructuring with 18-30 months remaining. This is when
banks and credit unions have the greatest leverage with their existing vendor and enough time to
negotiate a new contract with another vendor if that becomes necessary.

As you will read elsewhere in this report, the results of renegotiating with your current vendor can have a
significant impact on profitability and efficiency. It can also make a significant difference to the shareholder
value and profitability of newly combined community financial institutions in a merger or acquisition.
Third-party advisors and community financial executives interviewed for

this report also agree that getting expert advice and professional "You're going up against
negotiators on your side is a must. As Mark Ingalls, the CFO of Dedham professional negotiators...
Savings puts it: “Nobody likes to negotiate these contracts, particularly You can't possibly know
from the bank side…. You’re going up against professional negotiators, some of their tricks or ploys."
and if you only do this every eight years, you can’t possibly know some of
the negotiating tricks or ploys they may be playing on you. So I think
hiring a third party who’s experienced in this makes an awful lot of sense.”
Slow Improvement
Community institutions have made modest performance improvements since the darkest days of the
financial crisis and ensuing recession.
For the average bank with less than $6 billion in assets:
• Adjusted non-performing assets were 2.11 percent of total assets at the end of 2012, an
improvement from 2.68 percent at the end of 2011 and 3.10 percent at the end of 2010, and 2.83
percent at the end of 2011.
• Return on average equity rose to 8.24 percent in 2012, compared with 6.05 percent in 2011, 2.89
percent in 2010 and -0.14 percent at the end of 2009.
• The Efficiency ratio (non-interest expense as a percent of revenue) improved to 67.44 percent in
2012, compared to 68.29 percent in 2011, 68.75 percent in 2010 and 71.08 percent in 2009
• Non-interest expense as a percent of average assets has not changed signigicantly during this
period. It was 3.30 percent in 2012, versus 3.28 percent in 2011, 3.31 percent in 2010 and 3.30
in 2009.
For the average credit union:
• Delinquent loans as a percent of total loans were 1.16 percent at year-end 2012, an improvement
from 1.59 percent at the end of 2011, 1.73 percent at the end of 2010, and 1.80 percent at the end
of 2009.
• Return on average equity was 8.32 percent in 2012, compared to just 6.83 percent in 2011, 5.26
percent in 2010 and 2.12 percent in 2009.
• The efficiency ratio improved to 73.08 percent in 2012, compared to 73.58 percent in 2011,
71.81 percent in 2010 and 69.49 percent in 2009.
• Total noninterest expense as a percentage of average assets was 4.42 percent in both 2012
and 2011. It was 4.29 percent in 2009.
Financial institutions have made these modest improvements despite continued net interest margin
pressure. For the average bank with fewer than $6 billion in assets, for example, the net interest
margin declined during 2012. It was 3.83 percent in the fourth quarter of 2012, compared to 3.89
percent in the fourth quarter of 2011.

most institutions overpay

for core services
• Institutions that renegotiated services contracts based on national fair market pricing data saved
between 11.5 percent and 43.4 percent.
• Savings ranged from approximately $167,000 to $3.5 million over the life of a contract.
• Banks and credit unions with $500 million to $1 billion in assets appear to have the greatest
opportunity to reduce costs, with an average savings of 29.1 percent, or approximately $1 million
over a five-year contract.
• To generate the equivalent of $1 million in savings over a 5-year period, a community bank
would need to originate – on day one –approximately $5.6 million in new loans.
• Contract terms and conditions covering implementation fees, change costs, termination
expenses and other hidden costs can greatly impact financial institutions over time.
Above are some of the latest findings from Paladin, a leading research and consulting firm specializing
in outsourced core processing services pricing and contract negotiations. Paladin has built a unique
national database on pricing for core processing and IT services for community banks and credit
unions. This “Blue Book” database is used by Paladin and its clients to determine fair market pricing and
renegotiate vendor contracts.
Savings by asset class
Total Net Net Savings Average %

Asset Class Count Savings w/ Growth Original Restructured Decreased
%
Sub $500M 16 $9,313,873 $9,779,567 $44,238,095 $34,924,222 22.00%
$500 - 1B 5 $6,744,450 $7,081,673 $24,025,400 $17,280,950 29.09%
$1B+ 6 $8,383,819 $8,803,010 $39,134,686 $30,750,867 24.87%
Grand Total 27 $24,442,142 $25,664,250 $107,398,181 $82,956,039 23.95%
The average community financial institution tracked in this study saved approximately 24 percent after its contract was restruc-
tured based on national "Blue Book" pricing. Net Savings with growth represents the total savings during the life of a contract
assuming a growth rate of 5 percent per annum in transactional volume.
Most community financial institutions significantly overpay for their core processing and related IT
services, and many can save well over a $1 million dollars over the life of a contract by renegotiating
based on national fair market pricing. The impact of $200,000 in savings per year from a $1 million
reduction in a five-year contract is equivalent to the net interest income generated from approximately
$5.6 million in new loans. This is based on today’s average net interest margin of 3.6 percent for banks
with fewer than $6 billion in assets. Of course, this does not consider the capital reserve requirements,
customer acquisition costs, loan risks and regulatory issues associated with maintaining such loans.
A review of recent contract renegotiations by banks and credit unions participating in this program shows
that community institutions are overpaying an average of 23.9 percent, or $905,265 over the life of a contract.
Twenty-seven banks and credit unions tracked in this study saved between 11.5 percent and 43.4 percent through
renegotiations, for a total savings of $24.4 million. Assuming a growth rate of 5 percent annually in transaction
volume, the savings would be $25.7 million. The average life of a new contract was 66 months.

Mid-sized community institutions save the most
Asset Class Minimum Maximum Average

Decrease Decrease Decrease
Sub $500M 15.7% 39.2% 22.0%
$500 - 1B 22.9% 43.2% 29.1%
$1B+ 11.5% 43.4% 24.9%
Among banks and credit unions tracked in the study, mid-sized institutions between $500 million and $1 billion in assets saved
the highest average percentage through renegotiations. Large institutions with more than $1 billion in assets experienced the
greatest range in savings, from 11.5 percent to 43.4 percent.
Savings by Size of Institution

Community financial institutions between $500 million and $1 billion in assets appear to be paying
the most above fair market pricing. Institutions of that size averaged a savings of 29.1 percent when
renegotiating contracts based on "Blue Book" pricing. By comparison, the study found that institutions
with assets of less than $500 million saved an average of 22 percent, and those with assets of more
than $1 billion saved an average of 24.9 percent.
This may be explained by the fact that these institutions are older and have completed two, three or
more contract renewals and have added a significant amount of new products and services by the
time they have grown to $500 million in assets. The impact of automatic annual increases and weak
professional vendor contract management may also be factors.
Savings by Dollar Value
Minimum Net Maximum Net

Asset Class Savings Savings
Sub $500M $166,886 $1,256,170
$500 - 1B $972,589 $2,309,835
$1B+ $248,028 $3,540,161
Savings ranged widely among the 27 institutions tracked, from $166,866 to more than $3.5 million. In all cases, those savings
depended on item-by-item restructuring that brought costs in line with optimal Blue Book pricing.

Savings by Services Category

Account Processing and Internet Banking represent the biggest areas of potential total savings
for banks and credit unions participating in this study. Looking at a larger group of 54 financial
institutions that renegotiated pricing based on national Blue Book data, some 60 percent of the
total savings of $68.7 million came from those two categories. The average savings for these
institutions was $1.2 million, and $1.3 million assuming a transactional growth rate of 5 percent.
“Account Processing is the primary and most complex core service – it’s the heart of the system.
It’s also probably the most detailed and complicated category of billing simply based on number of
lines on the invoice. As a result, many institutions find it more difficult to understand how exactly
to affect pricing,” says Aaron Silva, President and CEO of Paladin. “Internet banking has been the
second highest area of savings. That’s because Internet Banking is a relatively new technology,
but also one that is now widely adopted. Community institutions have paid, and still are paying, a
greater premium for this technology.”
Savings by core services category
5% Account Processing
Item Processing
23% Bill Payment

37%
Electronic Funds Transfer
14% Internet Banking

13%
8% Other
The above pie chart shows a breakdwon of total savings across 54 financial institutions by core services category. Account
processing and internet banking were the two largest areas of total savings.
A Major Cost — Cutting Opportunity

Community financial institutions are paying closer attention to their efficiency ratio than at any other
time in recent memory, according to many of the executives who were interviewed for this study. The
efficiency ratio is defined as total non-interest expense as a percent of total income. Its importance
underscores a sharp focus on expense control at a time when revenue has become scarce.
Core bank processing and related IT services are one of the two or three largest areas of non-interest
expenses for community banks and credit unions. It is arguably also the best place to start when
seeking to reduce costs. Closing branches and reducing personnel can negatively impact revenues and
lead to significant one-time costs, whereas renegotiating processing vendor contracts can lower cost
without negative impacts.

“The world is getting complicated. You can’t just simply cut 10 percent of your "The average community bank
workforce,” explains Mark Ingalls, CFO with Dedham Institute for Savings in would have to make $5.6
Massachusetts. “Often times you need specialized people to deal with the
million in new loans to generate
increased regulatory burdens, so many banks are adding people there.
They’re competing aggressively for loans to stave off some of the margin the equivalent of $1 million in
compression that’s taking place. And those personnel don’t come cheap.” savings over a 5-year contract."
Ingalls says Dedham Savings, which has slightly more than $1 billion in assets, worked with Paladin
to renegotiate its Fidelity core processing contract and saved more than $2 million over the next 64
months without changing vendors. “Even for us, that’s a lot of money,” Ingalls says.
Tamara Gurney, CEO of Mission Valley Bank in Sun Valley, California, says her community bank,
with assets of about $250 million, will reduce vendor payments to Fiserv by approximately $2.2
million over the seven-year life of their contract. “That’s a lot,” she says.
Square 1 Bank, a $1.8 billion asset bank which specializes in providing financial services to
entrepreneurs and venture capitalists, will save approximately $1.4 million over the next five years
on core processing contracts with Fiserv and Fidelity, according to CIO Jim Baxley. “Every institution
needs to constantly be looking for ways to reduce expenses. This is a no-brainer,” he says.
Reducing immediate expenses cannot, of course, be the only focus of a negotiation; business terms,
conditions and service levels also have to be considered. There are potentially many costs embedded
in vendor contracts that are not disclosed or highlighted by the service provider during renewal.
These costs can greatly impact the franchise and shareholders when an institution adds new
products and services, experiences growth or contraction in account volume, or switches ancillary
service providers. For example, changing your Internet Banking service from the core vendor to a
more feature-rich option from a different vendor can result in prohibitive integration and interface
fees imposed by the core vendor and potentially affect your long-term strategy and flexibility.
Contract maturity
In our survey, most respondents (58 percent) say they last negotiated a primary core services
contract between three and five years ago. In addition, some 61 percent say they have three years
remaining on their contracts. For many executives, three years remaining on a contract would mean
they wouldn’t even take a look at that contract for at least two years or more. Yet, the optimal time
to seek a contract renegotiation with your existing outsourced vendor is actually between 18 and 30
months before the contract expires. This represents the best window of opportunity. There is enough
time to attempt to renegotiate current contracts with incumbent vendors and still have time to select
an alternative vendor and convert systems if negotiations fail. If you wait to renegotiate your renewal
until there is less than 18 months remaining, the vendor knows you’ve compromised your ability to
change vendors and your ‘switching leverage’ erodes precipitously. Most vendors will not proactively
approach an institution for renewal until 12 months prior to contract expiration for this reason.

savings by institution
Assets Net Savings

Region Services Restructured Baseline Replacement from Processing
(in millions) %
West $188.0 AP, IP, BP $2,99,745 $1,937,714 $362,031
West $115.0 AP, IP, BP, EFT/ATM $1,355,459 $1,123,384 $232,075
Northeast $1,141.7 AP, IP, EFT/ATM, IB, BP, TELCO $11,862,222 $9,570,653 $2,291,569
Southeast $1,801.2 AP, IP, EFT/ATM, IT $8,498,363 $7,373,014 $1,125,349
West $889.5 AP, IP, EFT/ATM, IT $7,990,534 $6,798,545 $1,191,988
South $180.8 AP, IP, EFT/ATM, TELCO $3,074,323 $2,132,926 $941,397
West $532.0 AP, IP, EFT/ATM $4,099,641 $2,836,848 $1,262,792
Midwest $230.0 AP $3,668,445 $3,020,313 $648,133
West $503.0 AP, EFT/ATM, IT, TELCO $4,333,136 $3,350,055 $983,081
Northeast $250.6 AP, IP, EFT/ATM, IT, TELCO $5,961,563 $4,705,393 $1,256,170
Southeast $169.7 AP, IP, EFT/ATM $3,938,619 $2,770,088 $1,168,531
South $257.7 AP, IP, BP, EFT/ATM $2,307,285 $1,857,895 $449,391
West $210.3 AP, IP $890,890 $724,004 $166,886
Midwest $99.5 AP, IP, EFT/ATM $1,822,183 $1,509,482 $312,701
West $385.0 AP, IP, BP, EFT/ATM, IT, TELCO $2,895,003 $1,814,322 $1,080,681
South $136.2 AP, EFT/ATM $1,015,993 $799,905 $216,088
West $137.3 AP, IP, EFT/ATM $3,152,032 $2,578,399 $573,633
Midwest $1,800.0 AP, BP $8,306,524 $7,396,302 $910,222
Northeast $218.0 AP, IP, EFT/ATM $1,469,076 $1,239,924 $229,152
West $240.7 AP, IP, EFT/ATM $5,610,531 $3,300,696 $2,309,835
Midwest $1,114.8 IB, BP $1,160,711 $912,683 $248,028
West $3,184.5 IP, BP $8,558,737 $5,018,576 $3,540,161
West $1,169.3 IP $748,130 $479,640 $268,491
Southeast $168.8 AP, IP, EFT/ATM, IT $1,262,657 $1,020,278 $242,380
West $329.3 AP, IP, IB, BP, EFT/ATM $1,134,289 $891,652 $242,637
Southeast $613.0 AP, IP, IB, BP, EFT/ATM, TELCO $5,567,530 $4,351,378 $1,216,152
South $519.0 IP,BP, EFT/ATM $4,414,563 $3,441,973 $972,589
$16,584.8 $107,398,181 $82,956,039 $24,442,142
The table above lists savings achieved by each of the 27 banks and credit unions tracked in this study. The findings demonstrate
that, while averages exist, the potential for cost reduction varies wildly among institutions of all sizes and from all regions of the country.
Code for Outsourced Services
AP = Account Processing BP = Bill Payment
IP = Item Processing IT = Infor Tech / Managed Services
IB = Internet Banking Telco = WAN / Branch Telecomm

A Better Approach to Contract Restructuring

Most banks and credit union executives don’t spend much time looking at their core services
contracts until the agreements are close to expiring. That can be a costly and painful mistake.
Community financial institutions cited in this study reduced the cost of their contracts by an average
of 24 percent, and by as much as 43.4 percent, by renegotiating their contracts with their existing
vendors as much as two and a half years before their original contract expired.
Waiting until a contract is about to expire removes much of an institution’s bargaining power,
according to Aaron Silva, President and CEO of Paladin. The vendor knows that the bank or credit
union will have insufficient time for a conversion if it wants to change vendors. By talking to a vendor
much sooner, you will have far more flexibility and time for negotiation.
The secret is to structure a contract by creating a win-win for both the vendor and the financial
institution. The bank or credit union can agree to a contract extension and, in exchange, significantly
reduce services costs based on objective data on contract pricing nationwide. Getting the optimal
price will require an understanding of fair market value on a line-by-line basis across the services
contract, rather than simply on asking for an overall price break.
the window of opportunity for contract restructuring

Optimal Timing
24 18 Favoring the Vendor
months months
100%
75%
Percent of
50%
Blue Book
Achieved
25%
0%
36 30 24 18 12 1
Months Remaining on Contract
The best time to begin contract renegotiations with an existing core services vendor is between 18 and 24 months in advance of
expiration. Negotiations during that timeframe garner the best results in comparison to national Blue Book pricing data tracked
by Paladin. During that period, the vendor has a great deal to gain from a renegotiation, while the financial institution has maxi-
mum leverage in terms of having time to find a new vendor should negotiations fall through.
Institutions can also add new services at better locked-in pricing, allowing the bank or credit union to
budget more effectively and accurately for the next two to three years without the need for a time-con-
suming vendor product bid/quote process. The institution can also add and revise business terms and le-
gal conditions that can make a huge difference in protecting franchise and shareholder value in the case
of a merger or acquisition. (see Restructuring Contracts for Mergers & Acquisitions on page 14).

increasing m&a value

through contract restructuring
Approximately two-thirds of executives who responded to our survey say they believe mergers
and acquisitions will significantly increase over the next couple of years. Those who think they will
participate, either as buyers or sellers, should seriously consider renegotiating their core services
contracts far in advance of beginning to dance with potential suitors.
There is a common misconception that it’s better not to renew, extend or change a core services
agreement if you’re considering a future merger. Yet, frequently a renegotiated contract will have a
significant positive impact on shareholder value. Reducing service costs and making other changes to
terms and conditions can improve immediate and future financial performance and profitability. The
result can be a higher sales price for the seller and greater value for the newly combined institution.
"Community institutions save For example, Jim Cooper, the former CEO of Inland Community Bank,
an average of 24 percent by a $280-million asset bank in Southern California, estimates that Inland
added almost 7 percent to the purchase value of the bank prior to selling
bringing core service contracts to AmericanWest by reducing core service expenses by $1.2 million and
in line with fair market pricing." making other improvements to a new seven-year contract with Fiserv.
Other changes included adding new products and contractually mitigating
nearly $700,000 in termination expenses.
As discussed below, there are a numerous M&A related terms and "Jim Cooper said his bank added
conditions that can be modified or added that ultimately have a significant
almost 7 percent to its acquisition
impact on the sales price, purchase power, and long-term profitability of a
merged institution. The tolerance of vendors in accepting these changes price by restructuring its core
varies and is impacted by a wide range of factors, such as an institution’s servicer contract first."
value to the vendor and length of relationship. Financial institutions should
consider whether they expect to be a buyer or seller, or ready for both, in restructuring a contract
and beginning the process of assessing the merger readiness of their current agreements before they
formally begin merger discussions with another institution and certainly before vendors are notified.
Vendors do not publish or freely offer terms that are favorable to either buyers or sellers in an M&A deal.
Bankers, therefore, must bring that knowledge to negotiations.
Restructuring to Be an Acquirer
A likely buyer should restructure a contract to reward rapid growth in accounts and transactional volume
so that the merger deal is more accretive, faster. A new contract, for example, can employ either a tiered
or melded structure, to reduce per account pricing once the acquiring institution reaches a certain number
of accounts. The result is a more profitable acquisition and higher shareholder value. In addition, the new
contract should contain terms that will reduce the cost or even provide “free services” when integrating the
data and accounts of the acquired bank.
It’s difficult to predict whether your bank will buy another institution with the same or a different processor.
For that reason, ‘buyer incentives’ and pre-defined conversion, de-conversion and change costs should be
proactively established so that the actual purchase price of the target institution can be calculated during
due diligence more easily and become a factor in the negotiation. The days of 2x and 3x book value are long
gone and so in a “new normal” M&A world, where the purchase price might only be a fraction of tangible
book value, maximizing profits by lowering expenses and then offsetting contract change costs is a must.

Active Sellers
Likely sellers should renegotiate contracts to bring as much profit to the bottom line as possible, while
minimizing the expenses associated with de-conversion and termination expenses so that shareholders
are protected. It is also advisable to add new products and services, at the right price, in order to make
the franchise more valuable to any acquirer. While many executives believe extending a core services
contract is ill-advised prior to selling, the truth is that the right contract can dramatically improve sales
value, as in the case of Inland Community Bank.
It’s difficult to predict who might buy a franchise and when. In at least a third of all mergers, the core
processor owned and operated by the seller survives the acquisition and displaces the acquiring banks’
systems. To prepare for such a possibility, incentives should be embedded into the contract and triggered
during a merger to improve the likelihood of survival by that vendor and their ancillary services.
Banks that are open to either buying or selling should typically take a balanced approach in reducing
costs and adding clauses and business terms into their restructured agreement that are favorable to
either situation.
Do you expect there to be a significant increase in mergers and acquisitions among

community banks over the next 24 months?
Yes
16% No
I don't know
16% 68%
Two-thirds of all respondents to the BPI Network survey on the cost of core processing and related services say they expect a
significant increase in M&A activity.

survey findings
survey findings
tight interest spreads & REgulations are top concerns
The BPI Network surveyed community banks and credit unions throughout the United States to understand
their thoughts on current critical issues and imperatives. Below is a summary of their responses.
Top Concerns in the New Normal

Tight net interest margins and increasing government regulations are the top two challenges impeding
growth and profitability for community financial institutions, according to our survey respondents.
Sluggish economic growth and increased competition from larger banks ranked third and fourth.
Slim net interest margins are becoming an increasingly difficult problem in a prolonged period of low
interest rates. Early in the cycle, low interest rates were an advantage for institutions that were able to
reduce rates on deposits faster than borrowers were refinancing and paying down loans. But spreads
are getting increasingly tighter. Indeed, the average net interest margin for U.S. banks with fewer than
$6 billion in assets progressively declined throughout 2012 from 3.81 percent for year-end 2011 to
3.60 for year-end 2012, according to data supplied by Financial Information Systems, LLC.
The increasing cost of compliance is particularly difficult for smaller institutions because it represents
such a disproportionate hit to earnings. Whereas some new regulatory requirements will impact
only larger institutions, there are no significant differences between the requirements facing a small
community institution of $100 million or $200 million and those of a $1 billion-plus bank, says Tamara
Gurney, CEO of Mission Valley Bank in Sun Valley, California. As a result, she says, many smaller
banks have to be thinking about size.
What are the biggest challenges to your company's profitability and/or growth?
79% Tight net interest margins / margin compression
72% Regulatory compliance requirements
54% Sluggish economic growth
33% Increased competition from larger banks
28% Underperforming assets
28% Rising non-interest expenses
26% Delivering new competitive service offerings
23% Lack of creditworthy borrowers
15% Staying on top of emerging technologies
13% Capital access
5% Increased taxes
0% Other

survey findings
Strategic Business Priorities

By far, executives say growing their loan portfolio is the top priority for the next 12 to 18 months. Facing the
challenges of low interest spreads and increased competition, some 82 percent of survey respondents say
increasing the size of their loan portfolio is one of their top four priorities. Reducing non-interest expense
is the second most mentioned priority, followed by managing new compliance requirements, improving
net interest margins, and adding new technologies and banking processes.
What are your top company initiatives for the coming 12-18 months?
82% Growing loan portfolio / increasing interest income

Improving operational efficiency / reducing non-interest
63% expense
Managing new requirements of the regulatory
50% environment
37% Improving net interest margins
34% Adding new technologies and banking processes
29% Increasing non-interest income with new fee-based

products and services
26% Reducing non-performing loans
21% Finding the right talent
18% Accessing new capital
16% Growing deposits
13% Reviewing merger / acquisition opportunities

5% Expanding locations
0% Other

survey findings
It’s been difficult for community banks to increase loans in recent years. Both the sluggish economy
and the sentiment of regulators have conspired to make commercial and real estate lending difficult.
These forces, along with the need to clean up loan portfolios, have forced many institutions to reduce
their percentage of loans to deposits. Still, Gary Findley says, many community financial institutions
are now in a position to increase that ratio.
“Institutions who are at 60 to 65 percent in loan-to-deposit ratio should be bringing that up to 75-80
percent,” says Findley. “That will add something – a nice assist to return on average equity and their
net income numbers – as long as they keep the quality of their portfolio the way it needs to be.”
Improving operational efficiency and reducing expenses is clearly a major priority for respondents.
Nearly two-thirds of respondents identify it as a high priority.
Interviews with experts and executives confirm that cost reduction must be top of mind in the current
operating environment. “The bank CEOs I know are talking about efficiency ratios and expense control
more aggressively than in the past,” says one executive. “With all the challenges we have on the
revenue and compliance side, there’s really no choice.”
To what degree has reducing / controlling non-interest expense become a more important
business objective?
High priority
Medium priority
Low priority
37%
63% Not a priority
Not sure

survey findings
Interestingly, only 29 percent of respondents identified increasing non-interest income as one of their
top four priorities, and just 58 percent saw it as a high priority when they were asked directly. Yet,
many experts believe community financial institutions must find new fee-based sources of income to
improve performance. It may be that many of the respondents simply believe they will not be able to
make an appreciable gain in this area in the short term.
To what degree has increasing non-interest income become a more imprtant business
objective?
High priority
5%
Medium priority
Low priority
37%
58% Not sure

survey findings
Expectations for Mergers

Most respondents believe the industry is about to begin a period of increased mergers and
acquisitions, and a large majority of executives say the cost of regulatory compliance and access to
cost efficiencies will be the driving forces behind this consolidation. Yet, perhaps ironically, very few
were willing to say they are definitely ready to sell.
Some two-thirds of all respondents say they expect a significant increase in M&A activity. When
asked how they would likely participate, 42 percent indicate they expect to be a buyer. Another 18
percent say they will be either a buyer or seller depending on the opportunity. However, only 3 percent
admit they expect to be a seller. The very low number of pure sellers might be viewed as “wishful
thinking” by some.
How would your company most likely be involved in a merger or acquisition over the next
24 months?
As a buyer
11% As a seller
Either buyer or seller, if the opportunity presents itself
26% 42% Not considering any plans for M&A activity
Unsure / Don't know
18%
3%

survey findings
What are the major drivers for mergers and acquisitions for community banks?
70% Cost regulatory compliance
70% Access to cost efficiencies
59% Survival
35% Access to new geographic markets
35% Access to new customers
30% Access to capital
16% Personnel costs
0% Other
A reticence to sell may be a major stumbling block to greater M&A activity. The current operating
environment is making it increasingly difficult for community banks to compete at the smaller end of the
spectrum. Economies of scale are crucial at a time of compressed margins and increased compliance
costs, most bankers and experts agree. But these same challenges have caused valuations to fall, leaving
many executive teams and boards hoping to wait out the storm and hope for better prices.
“Some board members think that if they just hang around for a couple of more winters somehow
multiples are going to expand,” says one expert. “But there are other frictions, as well. It is very
painful to buy an underperforming bank and clean up asset issues. It takes a lot of time. There are
also regulatory components. Regulators are more suspicious of putting two under-performing banks
together, in contrast to allowing a high-performing franchise to start consolidating.”
Core services contracts can actually play a significant role in M&A valuations and even in the ability to
make a deal at all. (See Page 14)

survey findings
Adding New Technologies & Processes

As this study shows, there is a significant opportunity to control costs associated with core processing
and related IT services. This is particularly important because, as indicated above, executives say
two of their top priorities are controlling costs and adding new technologies and processing services.
Institutions can often satisfy both priorities by paying for new services with savings from contract
renegotiations.
Ninety percent of respondents say they’ve added to their core bank processing and related IT services
in the past three years. Seventy-four percent expect to make additions in the next three years,
compared to only 9 percent who say they will not.
Have you added new products or services at any time in the past three years to your core
data processing relationship?
2%
Yes
7% No
Not sure
90%
Are you considering adding new services in the next three years?
Yes
16% No
Maybe
9%
Not sure
74%

survey findings
Vendor Satisfaction Levels and Value Perception

Half of respondents say they are satisfied with day-to-day service levels and account management
from core service vendors. In addition, 43 percent say they are satisfied with the “value” associated
with core vendor products and services.
Some 37 percent believe they are currently paying above fair market value for these services,
compared with 34 percent who think they are being charged fairly. The market is clearly confused
on this point. Third-party national data from Paladin shows nine out of 10 community financial
institutions assessed are, in fact, paying significantly above fair market value.
Are you satisfied with the "value" associated with the current core vendor products and
services (cost + service)?
3%
Yes, services appear to be equal to cost
No, not receiving commensurate value for expense
23% Maybe
43%
Not sure
31%
Do you believe you're paying too much for core and complementary IT services?
Yes, I believe I am paying more than fair market value
29% No, I think I am being fairly charged for these services
I do not have enough information to be sure either way

37%
34%

survey findings
The problem is that most executives do not really know what they should be paying because
they have no national data for comparison. In fact, some 42 percent of respondents say financial
institutions lack enough information to understand what constitutes fair value.
Do you think community financial institutions have enough information about cores
services and IT contracts to understand fair pricing and how to best structure their
contracts?
Yes
No
29% 29% Not sure
43%

Executive interviews
Gary Findley, Esq.
Director
The Findley Companies
The name Findley has been synonymous with community banking in California and the Western United States for
nearly 60 years. Gary Findley is an attorney and management consultant practicing in the community banking
sector for some 33 years. His father, Gerry Findley, began consulting to banks back in the 1950s. Gary is president
of the law firm, Gary Steven Findley & Associates. He is also Director of The Findley Group, which consults
with boards of directors and senior management teams at community banks in the Western United States
and provides investment banking services. He is also President and Editor of The Findley Reports, a well-known
newsletter evaluating the condition of community banks for more than 30 years.
Back in the late 1970s and early 1980s, when Findley was beginning his career, there were some 450
community banking institutions in California. Despite a significant upturn in banking starts in the 1990s
and early 2000s, that number has otherwise steadily dwindled. Today, there are fewer than 200, and
Findley projects that the number will come down further to about 150. Nationwide there are over 7,000
banks, and Findley says his company expects that number to decline to 4,000 because of challenges
facing the banking industry, especially community banks, and the inherent advantages of scale.
“We’re now in a position where we think the contraction is actually going to be permanent,” he says.
“We’re not anticipating many de novo charters being granted over the next five to ten years.”
A tough regulatory environment, combined with tight net interest margins and increased competition,
has made it extremely difficult for small community banks to achieve an acceptable return on
investment, says Findley. Most banks will have little choice but to find ways to increase their size in
order to achieve acceptable returns.
“Community institutions are very net interest margin dependent. But with margin compression and
increased competition for business, the performance numbers of these institutions are going down.
They’re being forced to seek more mass as a mechanism to get an acceptable return on investment.”
The cost of compliance is rising for all financial institutions. “Unfortunately, for smaller institutions,
the cost of compliance has a much greater negative impact on return on assets and return on average
equity…so, again, this is forcing community institutions to increase their mass.”
Beyond the need for scale, Findley says community banks are now looking for new sources of revenue,
beyond interest income, “such as SBA loans or service charges and fees, or certain boutique types of
income sources.”
Findley says that many banks are very capable of making money, but what represents “a good return”
has changed. A return on investment, or return on average equity, of six to ten percent “are very good
numbers,” he says, whereas prior to the collapse, a good return was 15 to 20 percent.
“That’s what the compression in net interest margin and the additional cost of compliance has done,
along with the fact that a lot of these institutions were running very high loan-to-deposit ratios. They’re no
longer running 90-to-100 percent loan-to-deposit ratios; they’re running 70-to-80 percent ratios.”

executive interviews
Findley cites three key areas of focus among community banks:
1. Improving the quality of their loan portfolio while increasing the ratio of loans to deposits
– “Institutions who are at 60 to 65 percent in loan-to-deposit ratio should be bringing that
up to 75-80 percent.”
2. Increasing “off-balance sheet” business through SBA lending and the generation of other
types of loans that can be sold in secondary markets.
3. Improving efficiency ratios by rigorously controlling non-interest expenses.
“We keep telling our clients that there’s no one bullet. You have to look at the fundamentals across the
board and make small gains in a variety of areas that can add up to something significant.”
Findley says renegotiating core processing and related IT services contracts is one key area where
banks can make improvement.
“Anytime you can reduce your expenses and do it in a smart way, the better off you are,” Findley
says. “We’re all renegotiating how we do business. Vendors want to keep their relationships... We
encourage boards and managements to look at all their vendor contracts.”

Jim Baxley
Chief Information Officer
Square 1
Jim Baxley is the Chief Information Officer for Square 1 Bank based in Durham, North Carolina. Square 1 is one of
only a few institutions in the country that specialize in providing financial services to entrepreneurs and venture
capitalists. Founded in 2005, the bank helps growing companies and their investors navigate financial obstacles
by providing access to funds and expertise. Its customized product offerings and banking specialists provide a
banking experience designed exclusively for this purpose.
Square 1 is a new breed of technology-enabled financial institution. It’s a full service commercial
bank dedicated exclusively to serving the financial needs of the venture capital community and
entrepreneurs. It offers tailored products and solutions to these businesses aided by the latest in
technological innovations. Square 1 has sales offices in Austin, Boston, Denver, Durham, Los Angeles,
New York, San Diego, Seattle, Silicon Valley and Washington, DC. However, it does not operate a
branch system, per se. Instead, it relies heavily on the online channel for its transactions with clients.
“We do have significant personal interaction with our clients, but our online channel is really the way
they do business with us.”
Although Square 1 is certainly not a traditional community financial institution, like community banks,
it does outsource most of its technology. “We enjoy the fact that we’re not entrenched with a bunch
of legacy technology,” says CIO Jim Baxley. While institutions that reach a certain scale and maturity
may find it cost effective to own and run their own technology stack, they are, by definition, less able
to take advantage of some of the newest advances in core processing and online banking, he says.
“But you have to pick the right vendors and manage them well,” cautions Baxley. “You have to pay close
attention to how well you’re getting things done; how expensive it is to make changes; how responsive
the vendor is when there are problems; and how much they are investing in their own technology.
Outsourcing can be a problem if you pick the wrong horse and don’t know how to get off of it.”
Baxley says that the “consumerization of technology is impacting all areas of banking. “People deal
with Amazon.com in their daily lives, and they come to expect that same experience whether it’s on
the consumer side or the commercial side of financial services. But it’s just not there yet. Addressing
usability is critical.”
Baxley brought Paladin in shortly after joining Square 1 last year as part of an effort to optimize vendor
spend. “They took a look at our major vendor contracts and were nice enough to help us renegotiate
them,” he says. As result of both Paladin’s work, and a cross-functional effort with partners in
Operations and Product Management, the insititution will save approximately $1.4 million over five
years on core processing contracts with Fiserv and Fidelity. “Every institution needs to constantly be
looking for ways to reduce expenses. This is a no-brainer,” he says.

Shami Patel
Industry leader & Investor
Shami Patel is a highly accomplished business leader and investor in the financial services industry. He is the
former chief operating officer and chief investment officer of Alesco Financial (NYSE: AFN), a mortgage real
estate investment trust with over $15 billion in assets. He also served as managing director of Cohen & Co., one
of the largest providers of trust preferred or subordinated debt to community banks, and was also chief financial
officer of TRM Corp. (Nasdaq: TRMM). He is currently on the board of Duke University Law School and is an
investor and board vice chairman of Golden Pacific Bank, a community bank in Sacramento, Calif.
Community financial institutions are challenged today to find new and creative solutions as they continue
to work through troubled assets from the real estate crisis while operating in a period of tightening net
interest margins and limited access to capital, says Shami Patel.
“You've had a slow and arduous sort of deleveraging that's had to happen within the sector, and the
deleveraging has been somewhat painful and unnatural given the lack of access to capital markets, and
public or private equity for that matter, for the majority of community banks,” he says.
“In addition, the traditional business model for community banks is based on getting a majority of income
from the spread business, and that has also shifted because of the protracted flatness in the short to mid
ends of the yield curve. And so you've had profitability erode, forcing banks into more fee-centric models,”
says Patel. “That’s why, for example, you have everyone rushing to do SBA loans because they’re very rich
on the fee side.”
Community banks lack the scale to make significant money on the retail fee side. Therefore, he says, they
need to think creatively about new revenue streams and business models. At the same time, many smaller
banks need to think about mergers and acquisitions as major point of leverage.
“I think the biggest arbitrage in terms of multiple expansion is in increasing earnings growth and size. Board
members have to be cognizant that they need some level of critical mass. If you took identical banks in
terms of business model, ROE, ROA, asset mix and asset quality, but one was $150 million and one was $1
billion, you would see an increase in multiple of at least 20 to 40 percent, just by virtue of size,” he says.
Cost efficiency is also top of mind for community banks, he says. “It’s basic economics. To improve net
income, you can either continue to increase revenue or decrease costs. Given the challenges banks are
facing in the spread business, improved cost efficiency needs to be part of the answer.”
Patel believes that core processing is a fertile area for cost improvement. However, he says, because
core services are so fundamental, many banks have been reticent to push for cost savings with their core
services vendors. In addition, they have traditionally viewed contract negotiation as a painful process that
only occurs once every five years or more.
Community financial institutions can and should revisit their costs in core systems, says Patel. “But it’s a
tendency that when you sign a contract for five years that you don’t start thinking about until after four years.”
“ As it turns out, that’s a mistake. You have a lot more leverage before the contract expires than if you wait.”
Patel points to Paladin’s data on savings achieved by renegotiating with existing vendors as proof that
community banks can gain meaningful value through contract renegotiation.
Despite its challenges, the community financial sector continues to play an essential role in the U.S.
economy, Patel says. “As cynical as I am, I still believe that a community bank adds a tremendous amount of
value in providing liquidity to small businesses in a way that larger institutions can't because they choose not
to, or because they just lose touch with the community that they're serving.”

Tamara Gurney
Chief Executive Officer
Mission Valley Bank
Tamara Gurney is the CEO of Mission Valley Bank, a community bank founded in 2001 and headquartered Sun
Valley, California. The bank also operates two branches in nearby Santa Clarita Valley.
For Gurney and most community bank CEOs she knows, the operating environment these days
sometimes seems downright hostile toward community banks as compared to larger institutions.
Capital remains scarce for smaller banks compared to larger institutions. The new “hyper-regulatory
environment” arising from the crisis of 2008 and 2009 is also putting increased pressure on smaller
institutions. Community financial institutions like Mission Valley have traditionally been more reliant
on interest income from loans, but net interest margins continue to compress and credit worthy
borrowers are harder to find. Meanwhile, larger institutions are competing more fiercely for business
that was once the domain of community institutions.
“I think, at least in our urban environment, you probably need to be at least $500 million in assets,
and some people are saying the number is north of $5 billion. I’m not sure what the number is, but I do
know that the regulatory burden is just as substantial for a $100 million bank as it is for a $10 billion
institution. The regulatory environment is just not friendly to smaller banks.”
Community banks need to be more creative and more focused than ever if they’re going to be
successful, Gurney says. “The old community bank model was pretty much cookie cutter. If you build
it, they will come. It really doesn’t work that way any more.”
She compares successful community banks to smaller stores who are able to compete in the face of
mega-retailers. “There are plenty of small businesses that don’t just exist, but thrive in the world of Home
Depot and Wal-Mart,” she says. That’s what community banks need to do. They need to figure out what
makes them relevant to their clients, what makes their clients choose them over Wal-Mart.”
The community banking industry needs to find new sources of revenue on the fee side, says Gurney.
SBA loans that are originated and sold in the secondary market are currently delivering excellent
premiums, although Gurney expects those out-sized premiums to be short-lived. She says smaller
banks will need to look into other opportunities, depending on their expertise, from merchant
settlement and processing to niche wholesale services.
Community banks must improve their efficiency ratios, says Gurney. “That used to be the realm of the
larger banks. They operated much more efficiently just because of the economies of scale, but community
banks are going to have to evolve and deploy technology more efficiently to drive down cost.”
Community banks typically succeed because of personal service and the personalized relationships
they build. “That’s still there, but technology is changing how people do their banking. My clients
still like that personalized interaction, but they’re also technology savvy, and they’re using electronic
delivery channels more frequently. We have to evolve and be able to deploy technology more
efficiently to drive down our costs.”
With their economies of scale, larger banks are getting ahead in new channels of banking, such as
mobile banking. “When you look at the unit cost of delivering services through a cell phone or an iPad
to having customers come into a branch, it’s huge,” she says.

Cutting expenses is challenging for many community banks, Gurney says. Shutting down a branch
can result as in a huge one-time hit that can severely deplete much needed capital, while larger
institutions have found it much easier to shut down branches.
Mission Valley recently was able to significantly reduce non-interest expense in one key area,
outsourced core bank services. They were considering switching vendors because they felt some of
the services they were using were too expensive and better suited to larger institutions. Instead, with
18 months remaining on their contract, they worked with Paladin to negotiate a new core processing
systems contract. They converted core processing to a different system, but left item processing the
same, to minimize customer impact. They were also able to upgrade their Internet Banking systems.
The new seven-year contract will save Mission Valley some $2.2 million over its lifetime.

Bradley Leimer
Vice President, Online and Mobile Strategy
Mechanics Bank
Bradley Leimer leads digital channel strategy for Mechanics Bank, a $3.2 billion financial institution providing
personal banking, business banking, trust and estate services, brokerage and wealth management services
through 33 offices across Northern California. His focus is on developing and integrating technology applications
and partnerships geared toward improving the client experience and profitability of digital channels.
Successful community and regional financial institutions need to innovate and invest around
technology and technology relationships to compete and thrive in today’s market, says Bradley Leimer.
“If you’re trying to be seen as innovative and responsive to the customer, then I think technology
probably is going to be one of the areas of deeper spend, in terms of the delta, the increase. People
are capping marketing spend. They may be capping personnel spend and perhaps they’re not really
focused on physical expansion. But I think they will be increasing their spend on technology, either
through their own initiatives or through partners.”
Indeed, Mechanics is investing significantly in its online channel and in security. “I would say that, like
a lot of banks, a great deal of technology spend has been around ancillary systems, how we interface
with our customers — from consumers, to small businesses to corporate customers.”
Leimer believes today’s focus on customer experience should mean that banks move away from the idea
of their core banking platform as the “end all and be all.” Instead, he sees banks over the coming years
moving to a more “flexible core” that will make it easier for ancillary systems and non-core partners to
tap into the data architecture and deliver cost-effective and differentiated client-facing experiences.
Smaller vendors with more innovative, state-of-the-art solutions and development capabilities can
help community and regional banks compete. “Everything needs control, everything needs due
diligence. But compared to a core provider offering their services, there’s a huge opportunity here
for reduction in spend and, I think, more interesting applications, even if you go about it through an
association of other bankers or other technologists.”
Leimer bemoans the heavy premiums, for example, institutions are paying for mobile banking
applications. “There’s some temporary price gouging going on amongst some of the vendors, which I
think is going to end as banks decouple solutions…There’s no reason that a bank should be paying 25
to 50 cents to $1.00 per user on an online solution and, all of a sudden, be charged a $1.50 to $2.50
on a mobile solution.”
Mechanics Bank recently significantly reduced its costs with one major vendor by working with Paladin.
The process included an evaluation of a variety of vendors and then a negotiated cost reduction that Leimer
says was “quite significant.” Online, business online and mobile banking were all part of the negotiation.
Bringing down costs for these services is critical, says Leimer, especially for a bank that wants to do
more with its technology investments.

Gerald Gagne
CPA, CISA
Wolf & Company
Jerry Gagne is a certified public accountant and certified information systems auditor with Wolf & Company,
a 100-year-old CPA firm based in Boston that provides audit, tax, compliance and internal audit services
to community banks and credit unions in New England, New York and New Jersey. His specialty is in risk
management and technology audit.
In today’s challenging operating environment, community banks need to fully leverage technology to
stay competitive and improve efficiencies, says Gagne. “Banks are trying to increase their efficiency
and cut down on operational costs. For example, we’ve seen quite a few banks turn to technology,
as opposed to hiring a new person to help out in monitoring BSA (Bank Secrecy Act) compliance.
They’ve been investing in remote access technologies to become more effective, certainly mobile
technologies to allow people to access systems at different times of the day.”
Cloud-based solutions have been a boon to community institutions because they remove the need for
large capital investments in technology, as well as much of the “care and feeding” of these systems.
“Now, of course, the bank has responsibilities on their end, but the responsibilities are changing a
bit. It changes from one of direct hands-on management to more vendor management and security
management of those systems. But it is much less onerous for them.”
As community financial institutions continue to add new cloud-based technologies, they should
think about revisiting their core services contracts by working with a research and consulting firm like
Paladin to maximize their core processing and technology spend.
Banks need help “understanding the ins and outs of a contract. A banker could get there, but they
can’t get there as quickly as Paladin.”
Perhaps the biggest opportunity for these institutions is not cutting the overall spend on core and IT
services, Gagne says. “The other major value proposition – and I think banks need to think about this
– is getting more services out of their current provider. So not necessarily beating them up over costs,
but for the same monthly charge increasing the types of products that you are utilizing, so that you
can improve your efficiency and offer new products to your customers.”
Community institutions have traditionally gone through a lengthy and complex RFP process just
before their contracts expire as a means of getting better pricing, Gagne says. “But the number
of options are shrinking so fast (due to vendor consolidation), that the RFP process is no longer
necessarily the way to go. I mean if you’re happy with your current provider, it’s about getting more
cost out, increased services or both, but you need to know where to look to get that done.”

Mark Ingalls
Chief Financial Officer
Dedham Institute for Savings
Mark Ingalls is the Chief Financial Officer of Dedham Savings, a 180-year-old financial institution headquartered
in Dedham, Mass. With assets of more than $1 billion, Dedham has transitioned in recent years from mostly
traditional thrift lending to an increased focus on commercial banking and lending. In addition to its main office,
Dedham operates eight branches.
In today’s world, community financial institutions have no choice but to focus more sharply on
expense control because of the challenges they face on the revenue side, says Mark Ingalls, CFO of
Dedham Savings.
Community banks traditionally have relied on net interest margins for 80 percent or more of gross
income, unlike larger institutions that often get 40 or 50 percent of income from non-interest sources.
Now net interest margins are progressively tightening the longer interest rates stay low, he says.
“For the last couple of years, there’s been a lag, and banks have partially benefitted. We’ve been able
to cut savings rates, while it’s taken longer for borrowers to refinance their loans and pay their old
loans down. But that relationship does not stay in perpetuity. The spread is getting tighter, and there’s
no reason to believe that spreads will start to widen any time soon.”
There is increasing pressure on banks to come up with new sources of non-interest income, Ingalls
says. “But fee income is under attack, particularly on the regulatory level … with legislation like Dodd
Frank and so forth, and the creation of the Consumer Financial Protection Bureau.”
Cutting expenses though is no simple proposition. ““The world is getting complicated. You can’t just
simply cut 10 percent of your workforce. Often times you need specialized people to deal with the
increased regulatory burdens, so many banks are adding people there. They’re competing aggressively
for loans to stave off some of the margin compression that’s taking place. And those personnel
don’t come cheap…There are things you can do on the premises front, but you can’t close all your
branches.”
Ingalls has made a point of improving efficiencies at Dedham since joining the bank by reducing
expenses wherever it is advisable. Core bank processing and related services represent a significant
opportunity, he says, as long a financial institution gets the kind of professional help needed to
structure the right contract.
“Nobody likes to negotiate these contracts, particularly from the bank side….You’re going up against
professional negotiators, and if you only do this every eight years, you can’t possibly know some
of the negotiating tricks or ploys they may be playing on you. So I think hiring a third party who’s
experienced in this makes an awful lot of sense.”
Ingalls says Dedham Savings worked with Paladin to renegotiate its core processing contract and will
save more than $2 million over next 64 months. “Even for us, that’s a lot of money,” Ingalls says.
“As long as rates stay low, folks have to concentrate on efficiencies, and if that means consolidating
locations and making sure that people are in the right position or, as with core processing contracts,
bringing more things to fewer vendors to get some pricing power, than I think were going to see more
of that,” says Ingalls.

about bpi network

The Business Performance Innovation (BPI) Network is a peer-driven thought leadership
and professional networking organization dedicated to advancing the emerging
roles of innovation within today's enterprise. The BPI Network brings together global
executives who are champions of change within their organizations through ongoing
research, authoritative content and peer-to-peer conversations. We are advocates for
Innovation as a fundamental discipline and function within 21st Century organizations
and seek to demonstrate where and how new inventive solutions and approaches can
advance business value, gratify customers, ensure sustainability and create competitive
advantage for companies worldwide.

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and a bunch of Scott’s MBA students. It was our research clients who pushed us to open up the
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about paladin fs, llc

Founded in 2007, Paladin fs is the leader in bringing greater cost efficiency
to the core services and IT investments of community financial institutions.
Paladin improves the profitability and shareholder value of community
banks and credit unions by renegotiating and restructuring outsourced core
services and IT contracts, which today represent the second or third highest
noninterest expense for most institutions. On average, Paladin saves its
clients more than $900,000 during the life of a contract.
Paladin takes a unique data-driven approach to contract negotiations. It

is the only firm with a continually evolving database, or The Paladin Blue
Book, on the outsourcing costs for all national and regional vendors and
service agreements with institutions ranging from de novo banks to those
with assets of up to $5 billion. Paladin brings vendors to the negotiating
table before contracts have expired, so its clients realize major efficiencies
immediately, not years from now. Through renegotiation, the company
dramatically reduces costs, limits restrictive terms and conditions, and more
affordably brings on essential new banking services and IT solutions. The
savings achieved through a Paladin renegotiation often pays for the rising
cost of compliance or funds new revenue-producing programs and services.
Run by seasoned executives from vendor companies, Paladin is focused

solely on negotiating better contracts for community financial institutions. It
works with every client to understand immediate and long-term needs and
requirements—from new core services needs to future M&A plans—to be
sure the new contract address each bank’s current and future requirements.
Paladin allows community financial institutions to improve current
profitability and long-term prospects without risk. The company is only paid
based on the actual dollar value saved by their clients and so their services
are 100% budget-neutral.
If you’re interested in a simple, no-cost, no-obligation analysis of how your

financial institution’s core and IT services contracts compare to national
market pricing, call us at 877.746.4859, or email us at info@paladin-fs.com.
Paladin-fs.com
Paladinbluebook.com

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how core vendor contracts impact

community bank and credit union value

Research data provided by:

4 About the Study

8 Most Institutions Overpay for Core Services

14 Increasing M&A Value Through Contract Restructuring

34 About BPI Network

36 About Paladin fs, LLC

Why Read This Report?

© Copyright BPI Network. All Rights Reserved. 2013 2

• Nearly two-thirds of respondents point to reducing non-interest expense as a “high priority”; 56

• Sixty-eight percent of respondents expect a significant increase in mergers and acquisitions

© Copyright BPI Network. All Rights Reserved. 2013 3

about this study

© Copyright BPI Network. All Rights Reserved. 2013 4

Saving on Core Services

© Copyright BPI Network. All Rights Reserved. 2013 5

While there is great potential for savings here,

© Copyright BPI Network. All Rights Reserved. 2013 6

Third-party advisors and community financial executives interviewed for

For the average bank with less than $6 billion in assets:

For the average credit union:

© Copyright BPI Network. All Rights Reserved. 2013 7

most institutions overpay

Savings by asset class

Total Net Net Savings Average %

Sub $500M 16 $9,313,873 $9,779,567 $44,238,095 $34,924,222 22.00%

$500 - 1B 5 $6,744,450 $7,081,673 $24,025,400 $17,280,950 29.09%

$1B+ 6 $8,383,819 $8,803,010 $39,134,686 $30,750,867 24.87%

Grand Total 27 $24,442,142 $25,664,250 $107,398,181 $82,956,039 23.95%

© Copyright BPI Network. All Rights Reserved. 2013 8

Mid-sized community institutions save the most

Asset Class Minimum Maximum Average

Sub $500M 15.7% 39.2% 22.0%

$500 - 1B 22.9% 43.2% 29.1%

$1B+ 11.5% 43.4% 24.9%

Savings by Size of Institution

Savings by Dollar Value

Minimum Net Maximum Net

Sub $500M $166,886 $1,256,170

$500 - 1B $972,589 $2,309,835

$1B+ $248,028 $3,540,161

© Copyright BPI Network. All Rights Reserved. 2013 9

Savings by Services Category

Savings by core services category

23% Bill Payment

14% Internet Banking

A Major Cost — Cutting Opportunity

© Copyright BPI Network. All Rights Reserved. 2013 10

© Copyright BPI Network. All Rights Reserved. 2013 11

Assets Net Savings

West $188.0 AP, IP, BP $2,99,745 $1,937,714 $362,031

West $115.0 AP, IP, BP, EFT/ATM $1,355,459 $1,123,384 $232,075

Southeast $1,801.2 AP, IP, EFT/ATM, IT $8,498,363 $7,373,014 $1,125,349

West $889.5 AP, IP, EFT/ATM, IT $7,990,534 $6,798,545 $1,191,988

South $180.8 AP, IP, EFT/ATM, TELCO $3,074,323 $2,132,926 $941,397

West $532.0 AP, IP, EFT/ATM $4,099,641 $2,836,848 $1,262,792

Midwest $230.0 AP $3,668,445 $3,020,313 $648,133

West $503.0 AP, EFT/ATM, IT, TELCO $4,333,136 $3,350,055 $983,081

Southeast $169.7 AP, IP, EFT/ATM $3,938,619 $2,770,088 $1,168,531

South $257.7 AP, IP, BP, EFT/ATM $2,307,285 $1,857,895 $449,391

West $210.3 AP, IP $890,890 $724,004 $166,886

Midwest $99.5 AP, IP, EFT/ATM $1,822,183 $1,509,482 $312,701

South $136.2 AP, EFT/ATM $1,015,993 $799,905 $216,088