Banker Issue 6 2021-2022 OVER A CENTURY: BUILDING BETTER BANKS — Helping Coloradans Realize Dreams Page 4 Getting the Most Value from Your Banking Compensation Survey
©2022 The Colorado Bankers Association is proud to present Colorado Banker as a benefit of membership in the association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertisements within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Colorado Banker or its publisher, The newsLINK Group, LLC. Any legal advice should be regarded as general information. It is strongly recommended that one contact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by The newsLINK Group, LLC. Jenifer Waller President & CEO Alison Morgan Director of State Government Relations Brandon Knudtson Director of Membership Lindsay Muniz Director of Education Rita Fish Communications & Office Manager Margie Mellenbruch Bookkeeper* Craig A. Umbaugh Counsel* Jim Cole Lobbyist* Melanie Layton Lobbyist* Garin Vorthmann Lobbyist* Andrew Wood Lobbyist* * Outsourced 140 East 19th Avenue, Suite 400 Denver, Colorado 80203 Office: 303.825.1575 Websites: coloradobankers.org smallbizlending.org financialinfo.org colorado-banker.thenewslinkgroup.org Contents Over a Century BUILDING BETTER BANKS— Helping Coloradans Realize Dreams 4 2 2 A Word from CBA Chairman Significant Regulatory Changes 4 Getting the Most Value from Your Banking Compensation Survey 7 Executive Order Sets Stage for More Crypto Adoption 8 Goodbye Old Payroll Processes; Hello Happy Employees 10 Washington Update House Considers Overdraft Program Fee Reform 12 Five Things Banks Can Do to Prepare for Interest Rate Hikes 14 Countdown to CECL: A Timeline for Community Banks 18 Five Strategies for Strengthening Your Bank’s Cybersecurity Posture 22 Why Commercial Lenders Should Invest in Automated Document Collection 26 66 . . . 6 Reasons Rule 66 Receiverships Are the Mark of Ingenuity 18 Colorado Bankers Association The May • June 2022 1
A Word From CBA By Mike Brown, Regional President Alpine Bank 2021-2022 CBA Chairman Feature Significant Regulatory Changes Federal regulators are zeroing in on a number of issues affecting our industry. And when it comes to two very different areas – fees and climate change – the Fed may want to change how we do business. Bank Fees In April, the Colorado Bakers Association joined the ABA and other banking associations in challenging the CFPB RFI regarding fees. The bureau appears to have already determined that many bank fees are anti-consumer. The RFI asked for “stories” about fees that “you believed were covered by the baseline price,” or “unexpected” or “seemed too high for the purported service,” and closed by asking how the bureau should “address the escalation of excessive fees.” CFPB clearly wants justification to take action. The market for consumer financial services is competitive, and fees are disclosed to consumers in multiple ways. The bureau’s testing and reports show that consumers understand these disclosures and appreciate the products and services provided even if they must pay fees for them. This comes on the heels of OCC Acting Director Michael Hsu calling for banks to pursue what he called “proconsumer” changes to their overdraft programs, noting that they should “resist limiting the extent of their reforms by taking a profit-oriented approach and reverse-engineering costs to meet predetermined revenue targets.” On March 31, the FDIC released the spring edition of the Consumer Compliance Supervisory Highlights. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Regulators are giving every indication that they expect the industry to make significant changes regarding overdrafts, www.coloradobankers.org 2
but it is unlikely they will be content with just changes to overdraft practices. Climate Change and Portfolio Risk The FDIC issued climate risk guidance and a request for comment on Statement of Principles for Climate-Related Financial Risk Management for large institutions (banks with more than $100 billion of assets). This is in line with the OCC guidance sent in December. The SEC also has a proposed rule (www.sec.gov/rules/proposed/2022/33-11042.pdf) regarding climate-related disclosures. The Securities and Exchange Commission proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climaterelated risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks. The proposal requires disclosure of a registrant’s direct GHG emissions (scope 1), indirect emissions from purchased energy (scope 2) and indirect emissions from activities upstream and downstream in a registrant’s “value chain,” if material (scope 3, which would include “financed emissions” in a bank’s lending portfolio). It will take some time for climate-related disclosures to come into effect, but it is clear the agencies are pursuing additional disclosure. While this disclosure may initially be aimed at the largest banks, it is not unreasonable to expect an impact on smaller banks also. Other Federal Issues: Bank Mergers and Cryptocurrency Bank mergers are also in the regulator’s crosshairs. FDIC is now requesting information and comments regarding bank mergers (www.fdic.gov/news/board-matters/2021/202112-06-notational-fr.pdf). This is in line with what we have seen from DOJ and OCC. There is an expressed interest in having the community weigh in on bank mergers. Not surprisingly, regulators are also following recent advances in cryptocurrency. As banks begin to explore what services they might offer customers wanting to engage in cryptocurrency transactions, the OCC and FDIC both made statements. Treasury Secretary Yellen said, “Our regulatory frameworks should be designed to support responsible innovation while managing risks – especially those that could disrupt the financial system and economy,” Yellen said. “As banks and other traditional financial firms become more involved in digital asset markets, regulatory frameworks will need to appropriately reflect the risks of these new activities. And, new types of intermediaries, such as digital asset exchanges and other digital native intermediaries, should be subject to appropriate forms of oversight.” Shortly after the remarks by Treasury Secretary Yellen, FDIC issued a letter asking that any institution considering engaging in crypto-related activities provide notification, as well as “all necessary information that would allow the FDIC to engage with the institution regarding related risks” – specifically those related to safety and soundness, financial stability, and consumer protection. Banks that are already engaged in crypto-related activities should notify the FDIC “promptly,” the letter said. As you can see, CBA is engaging in several complex issues on your behalf, and they stand ready to assist you, so please don’t hesitate to contact CBA directly if you have questions on these issues or any other banking issue you want to discuss. It will take some time for climaterelated disclosures to come into effect, but it is clear the agencies are pursuing additional disclosure. May • June 2022 3
Getting the Most Value from Your Banking Compensation Survey By Rhonda Snyder Pearl Meyer Over the last year, banks and financial institutions faced higher than normal turnover, and compensation decisions continue to be crucial. As the economy changes during these uncertain times, employers are dealing with continued pressure on compensation levels. This is where a banking compensation survey can be helpful: supplying recent data on current practices for pay at all levels in the organization. However, they are not all equal in terms of the value they provide to your HR team. There are several key items to look for to get the most from any survey participation and/or purchase. The best survey will be continually evolving, based on feedback from participants on evolving positions and trends in the industry. To get the maximum benefit from the data supplied, certain breakouts such as geography, asset size, and ownership model are important. Surveys developed with input from resources such as the Economic Research Institute (ERI) and the US Bureau of Labor Statistics will be more comprehensive. When it comes to using the data at your disposal, the most obvious application is hiring – and increasingly in retention and dealing with salary compression. Employees expect to be compensated at the “going market rate” for comparable positions, and employees themselves are savvier than ever regarding compensation as access to online salary data sources is becoming more common. However, there are additional pay issues at play in your institution where survey data can be helpful, particularly in informing the development of comprehensive compensation philosophy and strategy. HR and the compensation committee can work together on an approach that serves the organization over the long term, with data providing important context. Some important questions to work on together include: • What is our market pricing strategy? • Are our philosophy and strategy the same across all levels in the institution? • Is there an existing salary structure and/or incentive plan(s)? How are they set compared to the market? • Do we have differences in geographic markets? What positions in our institution are geographically sensitive – or sensitive to on-site versus remote work models? Then, your HR teams can use survey data for specific joblevel analysis at a more granular level. Benchmark jobs, which are common to the industry, have a standard and consistent set of responsibilities from one organization to another, and for which there is sufficient data to price in a www.coloradobankers.org 4
statistically reliable fashion, are the appropriate starting point. Never match your internal job to a survey job based on job titles alone. Job matching depends on the equivalency between the survey benchmark job description and your institution’s job description. As a best-practice guideline, if 75% of the core responsibilities reflected in the job descriptions match, then the two jobs can be considered a match, but keep in mind that the market is driven by the supply and demand of specific knowledge, skills, and abilities. Survey job descriptions are the industry’s best representation for collecting that value. After matching the benchmark positions to your internal positions, select the data points that best fit your organization’s compensation philosophy and strategy. Remember the objectives of a strategic and welldesigned compensation plan are: • To attract, retain, and motivate a sufficient number of people with the knowledge, skills, and abilities necessary to implement your unique strategy; • To balance the rewards to productive employees with returns to shareholders; • To provide employees with an opportunity to earn a living comparable to others in similar jobs at similar organizations in relevant market areas; • To pay people in a way that is internally fair, comparing the relative contribution made by each; • To allow for the planning and controlling of the cost of human assets as well as the development of high performers; and • To comply with legal and regulatory requirements. Compiling, selecting, and analyzing compensation benchmark job data requires a thorough process, competitive market data for relevant peer size, similar jobs, and appropriate geographic markets. This process is best undertaken in the context of an organization-wide pay strategy. A well-constructed salary survey is your best bet for achieving both. About Pearl Meyer’s Banking Compensation Surveys The Pearl Meyer banking compensation surveys provide detailed data on banking compensation and pay practices with metrics you need to create and maintain a well-designed compensation program. Pearl Meyer’s survey team and consulting staff work with numerous state and regional banking associations, including the Colorado Bankers Association, to develop a survey report, especially for association bank members. Our survey team listens to the association and member suggestions regarding evolving positions in the financial industry and our banking consultants’ perspectives from their client experiences. The Pearl Meyer banking surveys currently collect data for 275 benchmark banking positions. The data is reported by asset size, with several of our state banking surveys offering specially developed geographic markets. We establish geographic markets based on conversations with your association and data gathered from various resources such as the Economic Research Institute (ERI) and the U.S. Bureau of Labor statistics. To support an HR professional in the administration of pay programs, our comprehensive survey reports pay information and policies and practices data. The Pearl Meyer banking compensation survey reports encompass the many facets of compensation: base salaries, salary ranges, short-term and long-term incentives, total cash compensation, and total compensation. Our surveys also include an in-depth policies and practices report, including information on salary increases, merit increases, structure adjustments, outsourcing, turnover, and recruiting. To participate in the 2022 Colorado Bankers Association Compensation Survey, please contact us at survey@pearlmeyer.com. To learn more about Pearl Meyer’s banking compensation surveys, please visit www.pearlmeyer.com/advisory-services/ banking-salary-surveys. About the Author Rhonda Snyder is a survey account manager at Pearl Meyer. She joined Pearl Meyer in August 2019 and works as a liaison to the Southeast banking associations on banking salary surveys while also assisting many other state and national survey clients. Compiling, selecting, and analyzing compensation benchmark job data requires a thorough process, competitive market data for relevant peer size, similar jobs, and appropriate geographic markets. May • June 2022 5
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Executive Order Sets Stage for More Crypto Adoption By Larry Pruss Managing Director of Crypto Advisory Strategic Resource Management The Biden Administration recently issued an executive order to coordinate efforts among federal agencies to create a national policy for digital assets. The order shows that these assets, including cryptocurrency, are here, and they’re here to stay. The order aims to “ensure that safeguards are in place and [to] promote the responsible development of digital assets.” In other words, the directive was issued to build a framework so the U.S. can catch up to other countries – and make innovation a top priority while protecting consumers and businesses. The executive order isn’t the only positive sign that crypto is gaining traction at financial institutions. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have weighed in; each indicated that banks they oversee can pursue crypto projects, though both agencies want advance notice before a financial institution takes the plunge. The agencies make clear that these services need to be offered through third parties and that crypto assets are not insured. The letters should help institutions feel more comfortable dealing with digital assets. Also worth noting, the executive order encourages the Federal Reserve to examine the creation of a U.S. central bank digital currency (CBDC), including its impact on financial inclusion. Transitioning from hesitancy to adoption The various announcements from the Biden Administration and certain federal agencies have ultimately shined a spotlight on consumers’ interest in crypto. While many financial institutions are still dragging their feet due to unfamiliarity and regulatory concerns, these announcements show that the necessary compliance structures are in place. A wide variety of service providers – established names and new entrants – have solutions to support such products. Several core and digital banking providers have developed integrations with financial institutionfocused crypto firms, streamlining implementation. Banks still have many areas to consider before jumping in. Custodial services, rewards programs, trading services, mobile wallet integration, and lending services are all areas to consider – with varying levels of involvement. U.S. consumer cryptocurrency adoption is running at, or slightly ahead of, the pace set by the internet in the 1990s. That said, financial institutions need to get involved before it’s too late. The executive order and letters from federal agencies have affirmed a financial institution’s authority to offer digital asset services through third parties. The endorsement is there – now is the time to act. About the Author Larry Pruss is Managing Director of Crypto Advisory at Strategic Resource Management (SRM). He brings more than 25 years of experience in payments and financial services technology to the table. Recently, Larry developed and now leads the cryptocurrency practice at SRM, helping financial institutions develop strategies for the next phase of the digital revolution. May • June 2022 7
Goodbye Old Payroll Processes; Hello Happy Employees By Erica Brune President Lever1 Let’s face it: payroll is archaic. The current process for most W2 employees requires employees to work two weeks, wait an additional week for administrative tasks, and then finally get the money they earned almost a month ago. But what if payday came a little sooner? Perhaps even instantly? Forty-three percent of workers spend three or more hours per week thinking about financial stress. With daily access to their earned income, employees can close the gap between paychecks, pay bills on time, and avoid overdraft fees. Getting paid biweekly can now be a thing of the past. Living a modern life means getting paid with modern technology that allows you to access your pay as you rightfully earn it. Earned wage access enables organizations to deliver instant payment of earned wages to employees with the click of a button. While some banks offer access to ACH funds up to two days prior to payday, the benefit of earned wage access allows employees to make their own decisions and access their funds according to their schedule and necessity. Picture this: It is Monday morning, and you are on your way to work. Suddenly, you hit a pothole so intense you know it is bad news for your tire. You pull over to assess the damage and are hit with the overwhelming realization that you need a new tire, but it will be pricey. Payday isn’t for another five days, and you do not have enough money in your account to pay for your tire. Your options are either: a) do not fix the tire and miss out on a week of work, or b) use high-priced short-term lending options. Both options are undesirable and leave you with a sinking feeling in your stomach. However, if you had the option to access the wages you had already earned during the pay period, you would not have to select the lesser of two evils. You would be able to access the exact amount of money you need to replace your tire and carry on with your week. Earned wage access is not just a benefit for employees but can help employers struggling with recruitment. Studies show that early access to wages results in: • 72% decrease in turnover • 36% increase in employee retention • 86% improved job performance The future of the labor market continues to be uncertain, but one thing is for sure: employees are looking for what sets companies apart. Employers need to think outside www.coloradobankers.org 8
www.bell.bank Member FDIC 35344 Partner with Bell for: Participation loans Bank stock and ownership loans Holding company loans and lines of credit Reg. O loans to bank employees, insiders or directors Equipment financing Find the terms and flexibility you need on large or small loans at Bell, with faster turnaround from an experienced team dedicated to correspondent lending. Whatever Loan Amount You’re Looking For, We Can Help. Tom Ishaug Call me at 701.451.7516 – Based in Fargo, N.D. Serving North Dakota, South Dakota, Minnesota 35344AD Colorado Bankers Association 2022_Tom.indd 1 3/31/22 4:33 PM the box regarding recruitment strategies, and what better benefit is there than access to earned wages in real-time. In addition to enhancing your recruitment strategies, earned wage access can also benefit employers by: 1. Retaining top talent 2. Eliminating financial pressure on your employees 3. Increase workers’ productivity 4. Lead the path for a financially literate workforce 5. Enjoy all the indirect benefits of a financially happy employee In the United States, 78% of the population is described as living paycheck-to-paycheck and would rather not wait for their scheduled payday. In the current state of uncertainty, it is understandable for employees to desire consistent cash flow. When workers are not stressed about their financial struggles, they perform better and can focus easily. On-demand pay gives employees peace of mind over their finances and thus creates a healthier work environment. Although some managers are hesitant to promote ondemand pay, citing poor budgeting skills, its successful implementation at many leading organizations should alleviate those concerns. The ridesharing company Uber has been offering Instant Pay for its drivers for several years. With their program, drivers can cash out their earnings up to five times a day and receive those funds instantly. Many other jobs like bartenders and tipped workers are used to taking home their pay daily. Today’s job market needs an earned wage access solution like never before. A benefit that ensures your employees receive timely salaries is what sets you apart in a sea of open positions. Studies show that when employees do not have to stress about finances, they can perform better at work. For much of the workforce, the standard two-week payday cycle is not working anymore. It is time to rethink the payroll process and understand how it affects employees’ productivity and well-being. On-demand pay gives employees peace of mind over their finances and thus creates a healthier work environment. May • June 2022 9
By Cheryl Lawson JMFA EVP of Compliance Review Washington Update House Considers Overdraft Program Fee Reform On March 31, the U.S. House of Representatives Financial Services Subcommittee held a hearing on possible government intervention regarding the future of overdraft programs. The hearing comes after an initiative announced by the CFPB to reduce “exploitative junk fees” and the highly publicized steps taken by big banks to eliminate or reduce overdraft fees. Testimony from the hearing highlighted two very different perspectives on the role government should play in regulating overdraft fees. On the one hand, lawmakers argued that overdraft fees can have a disparate impact on some consumers, citing that “just 9% of consumers pay 80% of the reported $10B to $12B in overdraft and NSF fees in an average year.” On the other hand, several representatives raised concern over the unintended consequences that eliminating overdraft fees would pose in “reducing consumers’ ability to access short-term liquidity financial products.” In addition to their testimony, Representatives highlighted the results of a recent Morning Consult survey that found 90% of respondents valued overdraft protection, and 72% of respondents who paid a fee in the last year were glad their bank paid the overdraft. The survey also found that 62% of respondents think overdraft fees are reasonable, with only 21% indicating the fee was unreasonable. Input from industry trade groups expressed support for a fair, transparent and competitive market for consumer financial services. But it cautioned the committee that further regulation that could eliminate overdraft protection programs would likely negatively impact consumers and financial institutions. The hearing coincides with potential new legislation – issued in a discussion draft by committee chair Maxine Waters – that would require banks with more than $10B of assets to offer no overdraft accounts. In addition, the www.coloradobankers.org 10
Representatives highlighted the results of a recent Morning Consult survey that found 90% of respondents valued overdraft protection, and 72% of respondents who paid a fee in the last year were glad their bank paid the overdraft. Your Payments Partner Shouldn’t Cost Customers an Arm and a Leg If your institution is looking to create a merchant services program or change payment processors, Fitech by Deluxe can help you increase residual income while keeping limbs intact. Fitech provides payment solutions for almost every business vertical, including the modern technology needed to support each. From contactless payment solutions and system agnostic hardware to business solutions like HR/Payroll programs, the technology and resources your merchants need are readily available and can easily be integrated with your banking platform. After all, the banks that control how their small businesses get paid, control where the deposits go. Couple these solutions with customized programs for you and your merchants, and you’re both armed with the tools to get a leg up on the competition. Ready to grow your commercial portfolio? Contact us today. www.fitech.com Erin Jester, Director of Sales ejester@fitech.com 559.908.4010 Overdraft Protection Act was reintroduced for the ninth time last summer by Rep. Carolyn Maloney, and the CFPB has launched an inquiry into fees on consumer financial products. A fully transparent overdraft program + reasonable fees = a solution to the committee’s concerns – no legislation required. Every financial institution that has made any changes to its overdraft program is doing so as a well-intended practice. It’s also important to note that it’s a clear indicator that a one-size-fits-all solution doesn’t work. Moreover, a transparent, easy-to-understand and fully disclosed overdraft solution where consumers can make a choice makes the most sense. All community banks and credit unions should be evaluating the options they offer their consumers to address their cash flow needs and adapt accordingly. While legislators and regulators continue to debate the issues caused by undisclosed overdraft strategies, JMFA’s community bank and credit union clients continue to educate their account holders about how overdrafts are handled and the options available. Our recommendations support the effective use of overdraft services, and we continue to provide a 100% compliance guarantee against federal or state regulatory criticism. JMFA provides community banks and credit unions comprehensive overdraft consulting with consumer-focused recommendations, datadriven intelligence and a 100% compliance guarantee to address your evolving needs. To learn more, please visit www.JMFA.com or call 800 809-2307. May • June 2022 11
Five Things Banks Can Do to Prepare for Interest Rate Hikes By H.D. Barkett Senior Managing Director IntraFi Network With inflation running hot, the Federal Reserve Board has recently begun accelerating its tapering program. In addition, the latest dot plot for the median federal funds rate shows that short-term interest rates could increase three times in 2022. Bank leaders should be preparing for rising interest rates, a challenge that will be difficult given the extraordinary liquidity in today’s market. Below are five tips to help them do just that. 1. Evaluate pricing strategies Banks that haven’t adjusted their deposit rates to match current market rates, which are effectively zero, should think about doing so now. Given the relative yields of other cash alternatives, deposit rates could be higher than they should be. 2. Segment customers by rate sensitivity For the first time in recent memory, most banks don’t need – or even want – all their deposits. This presents a unique opportunity for banks to evaluate the rate sensitivity of their customers and consider adding rate-insensitive customers down the road. 3. Take a harder look at derivatives Many banks have been reluctant to embrace derivatives, but swaps can be a valuable tool for hedging against rising rates, as swapping a floating rate for a fixed rate will benefit banks once interest rates rise and funding costs increase. Also, tying funding to a swap that mirrors funding characteristics is an activity that can qualify for hedge accounting, which means the swap doesn’t need to be marked to market and doesn’t hit the income statement. 4. Shorten the duration of securities portfolios Many bankers are wrestling with how to deploy deposits in the absence of loan demand. Shorter-term loans and securities are currently yielding little to nothing, but longerdated assets could be underwater as soon as next year. It’s a tricky balance, but banks may wish to consider keeping the duration of their securities as short as possible while keeping their heads above water. Margins may suffer in the near term, but having large portfolios of longer-dated securities could be even more problematic. Tools such as reciprocal deposits, which are insured, could provide relief by reducing the amount of collateral banks need to hold. www.coloradobankers.org 12
5. Review wholesale funding strategies Wholesale funding also helps banks manage interest rate risk – more so than retail deposits. By borrowing amounts at terms more or less in line with those of a commercial loan, banks can effectively match funding to long-term, fixed-rate positions. And in an environment where rates are projected to rise, banks that lock in low rates today, or refinance higher-cost funding, can earn higher spreads once loan demand picks up. The challenges facing today’s banking industry are many, and interest rate risk is big. However, by proactively thinking about repricing deposits, segmenting customers, taking a closer look at derivatives, not overextending the securities portfolio, and reviewing wholesale funding strategies, bank leaders can position their institutions to ride out the uncertainty and succeed in the future. IntraFi Network is the number one provider of deposit products to U.S. financial institutions, a leading provider of overnight and term funding solutions, and one of the nation’s best places to work. Its members include most of the nation’s community banks, minority depository institutions, and community development financial institutions. For more information on IntraFi Network, please contact Bryan Harper, Managing Director, at 866 776-6426, bharper@intrafi.com, or www.IntraFi.com. Wholesale funding also helps banks manage interest rate risk – more so than retail deposits. May • June 2022 13
Countdown to CECL: A Timeline for Community Banks By Kate Stoneburner Content Marketing Manager Abrigo Preparing for 2023 Community banks have a 2023 deadline for CECL implementation, leaving limited time to refine their processes. This timeline will help plan the transition. “The time is now” for CECL implementation Large SEC filers have officially adopted the current expected credit loss standard, or CECL, for recognizing credit losses, and other financial institutions are eager to learn from their CECL implementation efforts. While community banks have until 2023 until they must comply with CECL, many institutions were caught up in “analysis paralysis” in their transition, delaying their preparations. Add a global pandemic to the mix, and CECL implementation has been on the back burner for many financial institutions. Experts and 2020 adopters have repeatedly stressed the importance of preparing early. “If you’ve kind of been dragging your feet on this, now is the time,” said Brandon Quinones, Director of Client Education at Abrigo. “The bottom line is, there are no benefits to starting early, because it is no longer early. The time is now to ensure you are ready for Jan. 1, 2023.” Preparing for CECL implementation During Abrigo’s CECL Kickstart webinar, Garver Moore, Managing Director of Abrigo Advisory Services, discussed strategies for financial institutions’ CECL implementation in 2023, including: • How to address the most common CECL implementation problems, such as lack of historical loss experience or unreliable historical data • How to use CECL models that are less reliant on historical, loan-level loss experience • How to implement a straightforward CECL qualitative framework • How to credibly identify peer institutions for the use of external information Community banks just starting their transition to CECL should consider possible partnerships and begin assessing data gaps and accuracy. Leveraging a third-party vendor to assist with CECL can be highly beneficial in the CECL transition, but finding the right vendor is paramount. “You want to avoid ‘black box’ solutions,” explained Quinones. “CECL is all about the data that you have available and the way that you If you’re eager to get planning, but struggling to set goals for CECL implementation, review FASB’s CECL Prep Kit and consider this timeline: www.coloradobankers.org 14
use that data. So, if you’re just putting it all into a ‘box’ that’s just spitting out an answer, and you can’t actually go in and identify where those numbers are coming from, then you put yourself in a difficult position to defend your calculations with examiners.” When completing vendor due diligence, ensure that the solution is transparent and can be easily communicated with examiners, including the need for user-driven changes and a simplified data integration process. Community banks will need to test and compare different methodologies to determine the right one for their loan portfolio, so it’s critical a third-party solution has the ability to run multiple scenarios concurrently, which is key for modeling decision-making. Once the community bank selects a vendor, it should ensure that clear timelines and action plans have been communicated and are in place. Determining whether their data is accurate and thorough enough to estimate future losses can be a struggle for some community banks. Thankfully, there are flexible options available depending on the type of data available to your institution. “The standard gives you a lot of options on how to estimate future credit losses,” said Moore. “And those different options have different data requirements, including the amount of data you need, how far back it goes, and what that data covers. Yet, even if you have data, that doesn’t mean that you have intelligence. If you have 15 years of granular data as a small commercial bank, there might not be a material loss in that entire dataset, which wouldn’t tell you anything meaningful.” If a community bank finds that it lacks data, has inaccurate data, or struggles with data gaps, it will likely need to make assumptions based on peer or industry data. For a successful CECL implementation and to satisfy examiners, assessing the community bank’s data situation is a critical first step. Methodology choice is vital in CECL implementation. Data availability should guide a community bank’s decision to leverage a particular methodology or methodologies. “It’s important to dispel the myth of, ‘I need to just try every option on every loan type,’ especially when it doesn’t map out to what the institution does,” advises Moore. While considering various scenarios is generally a good idea, there is no expectation to model every possible permutation. For example, some methodologies, like vintage analysis, can be ruled out quickly because the institution’s data is simply insufficient, and discounted cash flow or remaining life would be a better approach. Regardless of the community bank’s methodologies, documenting the decision is critical. Not every methodology will work for a financial institution’s unique circumstances, and there will likely be significant back and forth during CECL committee discussions before a community bank determines the direction it wants to go in. Examiners, however, will lack the context of the discussions and strategies unless these processes are well-documented. Community banks must ensure examiners understand why the institution ultimately decided on its chosen methodology. Testing, discussing, and deciding do not happen overnight. Community banks must devote enough time to each area for successful CECL implementation. CECL implementation stages for 2022 Based on the timeline graphic above, here are four stages of CECL implementation prep your institution can follow to stay on track before the 2023 deadline. 1. Data and Information Four weeks into Q2 of 2022, institutions should ideally have selected a consultant or solution, identified gaps in their data, and determined a need for peer or external information. The good news for 2023 CECL adopters is that no set amount of data is required to produce a meaningful projection of future losses. Different amounts of data are necessary for different CECL methodologies, and a certain amount of data, in an information sense, is required to estimate likely defaults or losses in different economic environments. Learn more about efficient data and information assessment in the first webinar in the CECL Streamlined series. 2. Model Development After data collating, your institution should be building candidate models, sensitizing to inputs, and testing against benchmark expectations. Many financial institutions adopting CECL decide that external information is required to construct a meaningful estimate for at least one material portfolio segment. However, peer selection without a way to determine likely measurement outcomes can lead to unpleasant surprises and do-overs, creating awkward decision trails to explain. Join a peer selection webinar to review best practices for identifying potential peer institutions for your estimation and discuss some “worst practices” to avoid during CECL implementation. Continued on page 16 May • June 2022 15
3. Qualitative Framework At this stage, your institution should address model weaknesses and incorporate model uncertainty. Weaknesses vary, so prepare your institution for calibrating the historical loss basis, whether peer-based or based on internal experience, to anticipated economic conditions and projecting those same conditions. 4. Operationalize Model In the final stage of this CECL implementation timeline, institutions should conduct retrospective parallel calculations and sensitivity tests in different environments. Financial institutions should understand how uncertainty about the future provides an important lever to calibrate allowance results and how that uncertainty can be used to establish a ‘baseline’ of allocation. As the 2023 deadline becomes less distant, community banks will need to devote a significant amount of time and resources to their CECL processes. But with organization, determination, and expert assistance, they can build a credible and efficient model, overcome roadblocks, and stay on time. Takeaway 1 “Analysis paralysis” and the pandemic put CECL implementation on the backburner for many CFIs. Takeaway 2 CFIs getting started with CECL should consider possible partnerships and assess their data. Takeaway 3 In 2022, consistency is key. Each quarter represents an opportunity to make progress on CECL implementation. bkd.com/fs • @BKDFS Handing you the keys to success. Your bank works hard to make customer dreams become reality. Our talented, supportive pros can help you stay compliant, manage risk, and grow strategically, so you can focus on building equity in your community. Everyone needs a trusted advisor. Who’s yours? Kate Stoneburner is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned her bachelor’s degree in strategic communication and professional writing from Miami University. Continued from page 15 www.coloradobankers.org 16
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Five Strategies for Strengthening Your Bank’s Cybersecurity Posture By Steve Sanders In its seventh annual survey, CSI asked banking executives from across the nation about their top strategies and priorities for 2022. The results were used to inform the 2022 Banking Priorities Executive Report, which details the challenges and opportunities in today’s financial landscape. When asked about the one issue that will most affect the financial industry in 2022, it’s no surprise that cybersecurity (26%) outranked the other two leading issues – recruiting/retaining employees (21%) and regulatory change (14%). What Did Bankers Identify as the Top Cybersecurity Threats for 2022? According to the 2022 results, an overwhelming majority of bankers view employee-targeted phishing (57%) as the top cybersecurity threat, with customer-targeted phishing (51%) following closely. Often the result of social engineering schemes, 48% of bankers worry about the threat of ransomware. As cybercriminals enhance their tactics to continue targeting data-rich institutions, this concern is well-founded. Ransomware is a type of malware that locks out the authorized user once installed and encrypts the available data to hold for ransom, posing an operational and reputational risk. Incidents of ransomware have risen, with the global attack volume skyrocketing by more than 150% for the first half of 2021 compared to the previous year. The current geopolitical climate, greater reliance on digital channels and increased turnover in a variety of industries have created an environment ripe for vulnerabilities. And cybercriminals are wasting no time exploiting the weaknesses and vulnerabilities of systems to launch sophisticated attacks. www.coloradobankers.org 18
The current geopolitical climate, greater reliance on digital channels and increased turnover in a variety of industries have created an environment ripe for vulnerabilities. And cybercriminals are wasting no time exploiting the weaknesses and vulnerabilities of systems to launch sophisticated attacks. Unfortunately, the availability and automated nature of modern ransomware allows an attack to be initiated with limited upfront costs and maintenance from criminals. Since ransomware attacks pose little risk to the hacker, provide a quick payout for criminals and are carried out relatively easily and anonymously, institutions should remain on high alert to identify and combat these threats. How to Strengthen Your Bank’s Cybersecurity Posture As incidents of ransomware and other attacks increase in frequency and sophistication, consider the following strategies to enhance your bank’s cybersecurity posture: 1. Prioritize Cybersecurity Training: With 41% of bankers emphasizing employee/board cybersecurity training, most understand that the “people factor” represents an institution’s biggest potential Continued on page 20 May • June 2022 19
weakness. To create a cybersecurity-focused culture, ensure employees are familiar with the latest threats and know how to identify the warning signs. If employees fail social engineering tests, revisit your strategy to provide real examples of phishing as well as incentives for employees to do their part. 2. Raise Customer Awareness: Only 18% of bankers identified customer cybersecurity training as a top tactic in 2022, but it’s important to remember that banks benefit significantly from an informed customer base. Since customers, especially those newest to digital banking, are another component of the “people factor,” institutions must ensure they reinforce the importance of good cyber hygiene through cybersecurity awareness programs, which could include videos and gamification. 3. Update Your Incident Response Plan (IRP): Institutions must consider all the operational, financial and reputational implications of being held hostage to ransomware. Your bank’s IRP should include planning for data and system backups, communication plans, business continuity plans if employees or customers are unable to access your systems and dealing with the attackers. You don’t want to confront those issues for the first time during a ransomware attack. With 23% of bankers reporting IRP testing as a top tactic to combat cyber threats, remember that maintaining a tested IRP puts your bank in a stronger position to withstand an attack. 4. Conduct Vendor Due Diligence: Even if your internal systems and employees are prepared for a cybersecurity attack, your bank is vulnerable if an external vendor does not adhere to the same defense standards. Appropriate cybersecurity due diligence and regular monitoring should be conducted on all third-party vendors, especially any external vendor who has access to your sensitive data or systems. This process is critical to mitigate risk of supply chain attacks, which have surged in the past year. 5. Implement Multi-Factor Authentication (MFA): Incorporate MFA into all applications where employees – or customers – must enter their credentials. With MFA, multiple authentication factors are required to verify a user’s identity, preventing unauthorized account access. This verification strengthens resiliency and provides an effective defense against the two largest threat vectors: social engineering and phishing. When confronted with this extra obstacle, many hackers will move to a less secure target. Maximize Protections with a Layered Approach to Cybersecurity As institutions navigate the changing cybersecurity landscape, embracing a layered approach to cybersecurity will maximize protections for your bank. Implementing multiple layers of security – including cybersecurity training and tools – makes it more difficult for cybercriminals to infiltrate your systems and keeps employees and customers secure. Download CSI’s 2022 Banking Priorities Executive Report for additional insight into bankers’ perceptions of cyber threats, technology, compliance and more. Steve Sanders serves as CSI’s chief information security officer. In his role, Steve leads CSI’s information security vision, strategy and program and chairs the company’s Information Security Committee. He also oversees vulnerability monitoring and awareness programs as well as information security training. With over 15 years of experience focused on cybersecurity, information security and privacy, he employs his strong background in audit, information security and IT security to help board members and senior management gain command of cyber-risk oversight. As institutions navigate the changing cybersecurity landscape, embracing a layered approach to cybersecurity will maximize protections for your bank. Implementing multiple layers of security – including cybersecurity training and tools – makes it more difficult for cybercriminals to infiltrate your systems and keeps employees and customers secure. Continued from page 19 www.coloradobankers.org 20
THE BENEFITS OF SELLING YOUR CHARGED-OFF LOAN PORTFOLIOS Like many financial institutions nationwide, you probably have a considerable amount of charged-off loans from the last four years. Also, like many financial institutions, you might not know that your charged-off loans have value to a debt-buying company. Charged off loans are the dirty words in modern banking. You have lent funds to a customer, and it went bad. It is most likely due to a loss of job, divorce, injury, or in modern times, COVID. When this happens on a large scale, you are left with considerable loss. Now, we are sharing a great secret in the charged-off world that you might not know exists, selling your charged-off loan portfolios. Cherrywood Enterprises is a debt buying entity that has been in that space for over nine years, with their CEO Craig Geisler having spent over 14 years in the debt buying arena. Cherrywood Enterprises has worked with banks, credit unions, auto lenders, and commercial lenders nationwide, helping these entities understand the value of their chargedoff portfolios and infusing capital back into these financial sectors. What are the benefits of selling your chargedoff loan portfolios? • Create much-needed liquidity through a cash infusion from the sale of the distressed debt • Bolster the bottom line now versus waiting months or years for collection efforts to take effect • Reduce ongoing costs associated with internal collections as well as management of third-party agencies • Lessen or eliminate reliance on thirdparty collection agencies • Eliminate months or years of waiting without a guarantee of a return — a major benefit when factoring in the time value of money • Protect your brand — this is typically the effect of a debt buyer owning the purchased accounts outright, having a longer time horizon, and, therefore, a strong incentive to work professionally with debtors and obtain repeat business from you The process of selling your charged-off debt portfolios is simple: we first send you a Mutual NDA to protect both parties’ proprietary information. We also send you a blank Excel Spreadsheet with the headers of information we would need to review your portfolio, and in addition, we would need the sample docs for one account. It takes us approximately three to five business days to review these docs, and we will come back with an offer for your portfolio. Once we agree on a price, we send you a Purchase and Sale Agreement for both parties to sign, and within 24 hours of receiving that signed agreement, funds are wired directly into your account. Once you have the funds, we will need the backup docs for all of the accounts sold, and we are on our way. It’s that simple! No further action is required on those accounts that you have sold! Plus, this is a program that you can do on a monthly, bi-monthly, quarterly, or annual basis! It’s just a matter of changing dates and numbers! To get started, feel free to call us at (561) 508-7650 or email our CEO directly at cgeisler@cherrywoodenterprises.com. Come and see how easy and beneficial selling your charged-off loan portfolios can be!
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