May/June Banker OVER A CENTURY: BUILDING BETTER BANKS — Helping Coloradans Realize Dreams CFPB’s Small Business Lending Data Collection Rule INCREASES Operational Burdens and Regulatory Risk for Lending to Small Businesses Is Your Bank Ready for LIBOR Fallback?
contents ©2023 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 Patricia Wells Director of Communications Rita Fish Executive Assistant Margie Mellenbruch Bookkeeper* Melanie Layton Lobbyist* Garin Vorthmann Lobbyist* Andrew Wood Lobbyist* Caroline Woodhouse 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 coe vnetru ar y BUILDING BETTER BANKS — Helping Coloradans Realize Dreams 24 6 4 Chairman’s Message Reflections and Ruminations Mark Hall, CBA Chairman 6 CFPB’s Small Business Lending Data Collection Rule INCREASES Operational Burdens and Regulatory Risk for Lending to Small Businesses By Michael Flynn and Brett Voets, Buchalter APC 10 Insuring Calm Before the Next Storm Natural Disasters Increase Community Bankers’ Interest In Captive Insurance Companies By David Guerino, The KeyState Companies 12 “The World Has Changed” Are You Ready for the Deposit Battle Royale? By IntraFi 14 CBA Centerpoint Going Beyond the Desk to Hear the Stories of Colorado Bankers 16 Is Your Bank Ready for LIBOR Fallback? By Selena Samale , Stinson, LLP 20 Upcoming CBA Events 21 Lender Beware When Serving by Mail in Colorado By Holly R. Shilliday, Managing Partner – Colorado Office, McCarthy & Holthus, LLP 22 Primax Payments Pulse Shows Payment Preferences by Generation By Kim Ploof, Managing Vice President, Primax 24 How Banks Can Win the Battle for Deposits By Bob Koehler, Chief Innovation Officer at SRM (Strategic Resource Management) 27 Slip, Trip and Fall Prevention By Travelers 16 Colorado Bankers Association The 3 Colorado Banker
M CHAIRMAN’S MESSAGE Reflections and Ruminations Mark Hall, CBA Chairman My time as CBA Chairman is coming to a close. It has been a busy year for all of us. Ten months ago, we did not have a clear picture of the economy or the future of the financial services industry. Today, we are faced with a similar predicament. Our industry faces a future of uncertainty with a call from D.C. for more regulation and oversight. This is a short-sighted reaction to national events. I remain optimistic about our industry and its future. It is easy to get caught up in the negative hype of the media, but there are too many positive indicators to ignore. We have waited for years for Congress to enact Safe Banking legislation. We are closer now than ever before. A bipartisan bill was introduced in Congress. Sens. Jeff Merkley (D-OR) and Steve Daines (R‑MT), in conjunction with Reps. Dave Joyce (R-OH) and Earl Blumenauer (D-OR), are sponsoring the legislation. Former Representative Perlmutter was a strong advocate for Safe Banking, only to have his efforts wither and die in the Senate. Lawmakers from both parties have expressed optimism about finally enacting this important legislation. There are other fights on the horizon. The President attacked multiple industries from entertainment to the airline industry to banking, with statements regarding “junk” fees. In March, the White House, with the head of the Consumer Financial Protection Bureau (CFPB), urged states to expand efforts to crack down on surprise fees consumers are forced to pay. The CFPB has called these fees exploitative, and Julie Chavez, Senior Advisor to the White House, referenced them as predatory. This fight will be a dual attack, federal and state. We have strong leadership at CBA to guide us and represent our interests when outside forces work to our detriment. Last summer, political pundits were predicting a difficult mid-term election for the President. The anticipated “red wave” never materialized. Here in Colorado, we became a deeper shade of blue. This message is written in the waning days of the legislative session. We had more wins than losses this year. Our industry was effective in amending legislation and influencing policy thanks to CBA leadership. An association thrives and excels when its membership grows. We have continued to expand our membership both in banking and associate services. With new members, we infuse fresh ideas, new energy, and an untapped yield of future leaders. Our members help raise our voice in the community. Your association offered more seminars and professional development opportunities this past year than in previous years and continues to expand its educational offerings. The CBA education programs are, in many instances, an extension of your corporate training. It is an important employee retention tool. This is a service and benefit of the CBA membership. I hope each of you had the opportunity to take advantage of one of the many programs offered this past year either online or in person. CBA takes care of business. I have the greatest respect for Jenifer and her staff. The entire team is devoted to seeking exceptional outcomes on your behalf. I would like to take a moment to thank my fellow officers, Shawn Osthoff, Kevin Erikson, and Michael Brown. It has been a pleasure to work so closely with this group. We have tackled some difficult issues that required thorough cleaning. But at the end of the day, it all came out in the wash. Finally, the opportunities to meet new people and make new connections have been the best part of this past year. To represent you and the association has been an honor I will always treasure. My term is ending, but the work will continue. I hope that the coming years for the association are marked by even more growth and participation. Colorado Banker 4
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O CFPB’s Small Business Lending Data Collection Rule INCREASES Operational Burdens and Regulatory Risk for Lending to Small Businesses By Michael Flynn1 and Brett Voets,2 Buchalter APC On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) issued the long-awaited final version of its rules on Small Business Lending under the Equal Credit Opportunity Act.3 The new rule imposes significant burdens and risks on lenders and will likely result in significant amounts of loan-related data being made public, as discussed below. The lenders and loans/applications covered include: • Any financial institution that made over 100 covered loans in each of the previous two calendar years has data collection and reporting requirements in regard to covered small business loans. Covered small business loans are business or commercial loans to any company that grossed $5 million or less in revenue in its previous fiscal year. Thus, the rule has a broad application, covering a wide scope of lenders and loans. The full text of the CFPB’s Small Business Lending Data Collection Rule can be found by scanning the QR code. https://www.consumerfinance.gov/rules-policy/final-rules/small-business-lending-under-theequal-credit-opportunity-act-regulation-b/ The rule will implement the small business lending data collection requirements created by Section 1071 of the Dodd-Frank Act by amending Regulation B4 of the Equal Credit Opportunity Act (ECOA).5 The CFPB derives its rulemaking authority from both Section 1071 and the ECOA.6 The CFPB has indicated that the primary purposes of this rule are to facilitate the enforcement of fair lending laws created by the Dodd-Frank Act and to create a database available to the public that can be used to more effectively identify business and community development needs and serve women-owned, minority-owned and LGBTQ+-owned small businesses. Colorado Banker 6
Likely Issues for Lenders Regardless of its intended purposes, the rule creates significant and potentially costly issues for lenders, such as: • The need to develop a complex operational process to gather, store and report data on loans to small businesses; • Significant compliance and risk oversight; • The need to inquire from applicants and borrowers about detailed ownership information. • Heightened regulatory fair lending scrutiny in regard to lending to small businesses; and • Increased exposure to fair lending claims from private applicants and borrowers, and regulators. Compliance Deadline Dates The deadline for compliance with this rule depends on the number of covered small business loans the lender made in each of 2022 and 2023: • 2,500 business loans or more — comply by October 1, 2024 • 500 to 2,499 business loans — comply by April 1, 2025 • 100 to 499 small business loans — comply by January 1, 2026 A financial institution that did not originate at least 100 covered credit transactions for small businesses in each of calendar years 2022 and 2023 but subsequently originates at least 100 such transactions in two consecutive calendar years must comply no earlier than January 1, 2026. Lenders and Loans Covered by the Rule The lenders and lending activity covered by this rule are broad. The rule applies to covered financial institutions that originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years.7 Each phrase in that coverage definition must be considered: • Covered Financial Institution: A “covered financial institution” is any financial institution that has originated at least 100 covered credit transactions for small businesses in each of the preceding two calendar years.8 A “financial institution” is any partnership, company, corporation, association, trust, estate or other entity that engages in financial activity. This definition covers a wide variety of lenders, including depository institutions, online lenders, platform lenders, and commercial finance companies.9 • Small business: Essentially, a small business is one with $5 million or less in gross annual revenue during its preceding fiscal year. The definition actually refers to the definitions of “business concern” and “small business concern” in the Small Business Act (SBA), but CFPB diverges from these definitions by imposing the $5 million gross revenue limit.10 • Covered credit transaction: A credit transaction covered by the rule is an extension of credit primarily for business or commercial purposes.11 This would cover loans, lines of credit, and merchant cash advances, but would not include factoring transactions, leases, and credit secured by certain investment properties.12 • Single Family Residential Loans Not Covered — Home Mortgage Disclosure Act (HDMA)13 Overlap: If a loan meets the definition of a “covered loan” under HMDA, those loans are not covered by this new rule, and do not need to be reported as small business lending loans. This is because the new small business lending data collection rule specifically excludes all loans defined as “covered loans” in HDMA Regulation C.14 Data Collected and Reported The data collection and reporting requirements are detailed and stringent. Lenders who already do residential lending data collection and reporting under the rules implementing the HMDA will be familiar with the many types of data and the methods for collecting and reporting the data. They may find it somewhat easier to implement these small business lending requirements. However, for other lenders not already doing HMDA reporting, there are likely to be steep learning curves and difficult operational implantation processes. If a financial institution does fall within the purview of the rule, it is required to collect data on all loan applications it receives and loans it provides. The scope of the data required is wide-ranging.15 The data falls into two basic categories: • Information about the application and the loan, such as ◦ application date ◦ application method ◦ credit type ◦ amount applied for and borrowed ◦ action taken in regards to the application 7 Colorado Banker
• Information about the applicant/borrower and the owners of the applicant/ borrower, such as: ◦ applicant’s gross annual revenue ◦ number of workers for the applicant ◦ whether the applicant is a women-owned, minority-owned, and/or LGBTQ+‑owned business ◦ the ethnicity, race and sex of any individual who owns 25% or more of the applicant Gathering this scope of information will require the buildout of operational processes and significant training for personnel. Data for the previous calendar year must be collected and reported on June 1 of the following year and can be reported individually or through the parent of a financial institution. Publication of Data The CFPB will publish the data it collects on its website with such modifications and deletions as it determines are appropriate. In conjunction with this publication, each financial institution covered by the rule will be required to publish a statement on its website informing its visitors that the data it has reported is available on the CFPB’s website.16 17 Depending on the scope of the modifications and deletions to lenders’ data the CFPB chooses to make, it appears that individuals, as well as attorneys and interest groups, will have access to broad arrays of lenders’ data, including data related to fair lending issues. This will increase litigation risks for lenders, and along with regulatory reviews of the data, will require lender reviews of their own data. Enforcement, “Bona Fide Error” Exception and Safe Harbors It is expected that the CFPB will aggressively monitor compliance with this rule, and any violation is subject to administrative sanctions and/or civil liability, as provided by Sections 704 and 706 of the ECOA.18 In addition to administrative sanctions and civil liability for non-compliance, the rule will expose lenders to an increased likelihood of regulatory fair lending investigations and enforcement actions. The CFPB has stated that a key purpose of the rule is to examine small business lending from a fair lending perspective.19 Bona Fide Error: A financial institution can escape sanction and liability if its non-compliance was a “bona fide error.” In other words, the institution must show that the error was unintentional and occurred despite maintenance of procedures reasonably adapted to avoid such errors.20 A financial institution is presumed to maintain procedures reasonably adapted to avoid error if, based on a random sample of applicants, the number of errors found in a financial institution’s data submission is no greater than 6.4% for institutions processing 100 to 130 applications annually to 2.5% for the institutions processing more than 100,000 applications annually.21 An error is not bona fide if, based on the circumstances, it is reasonable to believe that the institution intentionally committed the error or failed to maintain adequate procedures.22 Limited Safe Harbors: The rule also creates certain limited safe harbors where errors associated with collecting and reporting data on an applicant’s census tract, NAICS code, small business status, and application would not constitute violations.23 Consequences of the Rule — Economic Costs and Reputational Risks Most, if not all, financial institutions will have to build out overlays to their loan application system that allow for the Colorado Banker 8
collection of data they are required to report to the CFPB. They will also have to engage in ongoing training on, and compliance and risk oversight of, these processes. They will have to develop methods for meaningful review of their data in order to identify possible issues and take remedial actions. The CFPB estimates that, depending on the covered financial institution, costs associated with preparing and implementing this reporting system can rise to as much as $100,000, and require hundreds of hours spent by junior, mid-level and senior employees.24 Further, the CFPB estimates that the overall market impact of these costs to financial institutions could be as great as $160 million dollars.25 Following implementation the CFPB estimates that the ongoing cost of maintaining these systems and abiding by the rules could range from $8,300 to $243,000, depending on the institution.26 Even if one accepts the CFPB estimates, the costs of compliance with these rules will likely be significant for all institutions and have the potential to affect how these institutions run their businesses. As discussed above, in addition to the economic costs associated with these rules, financial institutions also face economic and reputational risks in relation to their lending practices. In making their credit decision process public information, financial institutions can be scrutinized for who they choose or choose not to lend to, running the risk of being labeled as a discriminatory lender. Even more, this data could be utilized by class action attorneys and advocacy groups to initiate investigations and litigation. Need to Begin Implementation Given the dangers associated with failing to comply with these rules, and the difficulty and complexity of building out, testing and implementing similar data processes, it would be a best practice for all financial institutions covered by this rule to further study and begin implementing this rule as soon as possible. The CFPB has communicated that they will aggressively enforce these regulations, so failure to be prepared once collection and reporting become mandatory could result in serious consequences. 1. Michael Flynn is Of Counsel in Buchalter’s Denver office and is a member of the Firm’s Commercial Finance Practice Group and Mortgage Banking Industry Group, and Co-Chair of Buchalter’s Financial Services Regulatory Group, and its Title Insurance & Escrow Industry Group. 2. Brett Voets is an Attorney in the Firm’s Los Angeles office and a member of the Commercial Finance practice group. 3. Small Business Lending under the Equal Credit Opportunity Act, Consumer Financial Protection Bureau (Docket No. CFPB-2021-0015) (March 30, 2023). 4. 12 CFR Part 1002. 5. 15 USC 1691 et. seq. 6. Small Business Lending under the Equal Credit Opportunity Act, at p. 55. 7. Id. at 3. 8. Id. at 2–3. 9. Id. 10. Id. at 4. 11. 12 CFR 1002.2(g) (definition of “Business Credit” under Regulation B). 12. Small Business Lending under the Equal Credit Opportunity Act, at p. 61. 13. 12 CFR Part 1003 14. 12 CFR Part 1003.2(e). 15. For a full list of the data that will be collected, refer to 12 CFR 1002.107. 16. Small Business Lending under the Equal Credit Opportunity Act, at p. 525. 17. Although generally available to the public, the CFPB intends to create a firewall that will prevent the employees of a financial institution involved in credit decisions from accessing demographic information reported by applicants. This is unless a financial institution can demonstrate it that an officer or employee should have access to the applicant’s responses and the institution’s inquiries about the applicant’s protected demographic information. If this is the case, these employees may access the data as long as the financial institution provides notice to applicant of this access at the time applicant provides the information. Id. at p. 62. 18. Id. at p. 63–64. 19. Id. at p. 38. 20. Id. at p. 64, 881. 21. Id. at p. 64, 813. 22. Id. at p. 814. 23. Id. at 882–883. 24. Id. at p. 752–53. 25. Id. at p. 756. 26. Id. at p. 760. 9 Colorado Banker
D INSURING CALM BEFORE THE NEXT STORM NATURAL DISASTERS INCREASE COMMUNITY BANKERS’ INTEREST IN CAPTIVE INSURANCE COMPANIES By David Guerino, The KeyState Companies Devastating hurricanes in Florida, catastrophic flooding in Kentucky, and crippling heat waves and forest fires in the Western and Northeast regions of the U.S. — all in all, the U.S. experienced 18 catastrophic disasters in 2022 according to a recent report from the National Oceanic and Atmospheric Administration (NOAA). Damage from each disaster exceeded $1 billion and totaled a staggering $165 billion last year. Over the past decade, many community banks have formed wholly owned captive insurance companies (captives) to help them pre-fund and prepare for future natural disasters and to cover risks that their commercial insurers will no longer fully insure. What Is a Captive and How Can It Benefit Community Banks? A captive is a wholly owned subsidiary of a bank’s holding company, operating as a licensed insurance company. The bank pays annual premiums to its captive for coverages not included in their regular commercial policies. A captive structure is not meant to replace a bank’s current commercial policies, but to strategically augment them. Captives can cover insurance deductibles and exclusions, as well as emerging risks such as increasing climate catastrophes. With enhanced risk management and a meaningful federal incentive, banks in the KeyState Bank Captive Program can reduce the annual “total cost of insurance” by 20–30% and increase their average annual EPS by 1–2%. Insurance premiums do not leave your bank’s economic family unless you have to pay claims. What Banks Can Form a Captive? S and C Corp banks with $750 million to $15 billion in assets are well-suited for KeyState’s Bank Captive Program. Over 100 community banks have joined the Program since it was launched in 2012, including numerous banks in Mountain West and a large number of banks in the Midwest. Considering its compelling benefits and ease of use, KeyState added six new banks in 2022 and expects the Program to grow by over 10% in 2023. Captives and Climate Catastrophes Severe weather events aren’t new, but experts have noted a disturbing trend of increased frequency and severity of catastrophic natural disasters in the U.S. and around the world. Many companies in regions that are more prone to natural disasters have been utilizing captives as a risk management and funding mechanism for many years. Ten years ago, in the wake of Hurricane Sandy in 2012, one of KeyState’s bank clients in New Jersey with numerous coastal branches experienced significant changes to their commercial “named storm” coverage. Their commercial carrier raised their perbranch deductible to $250,000. The bank has five branches concentrated in a small stretch of the east coast which could all be impacted by a single future hurricane due to their proximity. The bank evaluated its options and ultimately decided to form a captive to help pre-fund for these potential future losses. Colorado Banker 10
COAN, PAYTON & PAYNE, LLC IS NAMED A BEST LAW FIRM BY U.S. NEWS & WORLD REPORT IN SEVEN PRACTICE AREAS INCLUDING BANKING, BANKRUPTCY & CREDITOR'S RIGHTS. DID YOU KNOW? Of course, banks in hurricane-prone regions are not the only banks facing exposure to losses from natural disasters. The increase in frequency and severity of natural disasters over the past decade has caused banks to re-evaluate their overall insurance programs and consider forming captives to enhance their coverage. Beyond natural disasters, a captive can also be structured to provide additional coverage for other types of manmade disasters like riots, cyber attacks, and terrorist attacks. Why is Now the Time for Community Banks to Evaluate Captives? In 2021, the 10 largest U.S. captive domiciles saw 95 new captive insurance company formations, which is a significant increase over previous years and an early indication that 2022 captive formations will exceed 2021 numbers. Large U.S. companies have used captive insurance companies for decades. With a hardening commercial market and increased risk of natural and man-made disasters, there are compelling reasons for banks to assess their current commercial insurance and consider future scenarios. Below are some examples as to where a captive could cover unfunded risks: • Commercial premium increases: Along with increasing costs for natural disasters, cyber coverage premiums are up 20–40%, while banker’s professional liability and crime bond premiums have risen 10–30%. • Commercial coverage limits: Higher deductibles, broader exclusions, and sub-limits applied to certain coverages make captives a viable alternative. • Coverages not available commercially: These include reps and warranty coverage for M&A transactions and legal expense coverage for class-action nuisance suits. • COVID claim rejections: While many commercial carriers have denied COVID business interruption claims, KeyState’s Bank Captive Program has settled more than $4 million in COVID claims. David Guerino is Senior Vice President & Managing Director-Captive Insurance for The KeyState Companies, which manages tax advantaged investment and insurance structures for over 130 community banks across the country. He oversees KeyState’s Bank Captive Program, which has been endorsed by 30 state banking associations including the Colorado Bankers Association. WE MAKE IT EASY LET OUR TEAM HELP YOU SECURE THE DEAL AND LOWER YOUR RISK • UP TO 90% OVERALL FINANCING • UP TO 25 YEAR TERM • FIXED-RATE PREFERREDLENDINGPARTNERS.COM | 303.861.4100 Leveraged financing and refinancing of owner occupied real estate and long-term equipment. Most for-profit small businesses eligible. SBA defines businesses with net profit after tax <$5.0 Million and tangible net worth <$15.0 Million as small. 11 Colorado Banker
ℐ “THE WORLD HAS CHANGED” ARE YOU READY FOR THE DEPOSIT BATTLE ROYALE? By IntraFi In just over a year, banks have gone through a headsnapping change, from being stuffed with cash and worried about having too much liquidity to watching those deposits leave in droves. Core deposits are on the decline, forcing banks to pay up on CDs and savings to try to stem the outflow. With the Federal Reserve expected to continue raising interest rates to combat inflation, deposit pressure is likely to worsen in the months ahead. According to the results of IntraFi’s most recent quarterly survey, 88% of bank executives think deposit competition tightened over the past 12 months, and 84% expect it to get worse in the coming year. To better understand how banks should be thinking about funding, IntraFi recently sat down with Neil Stanley, founder and CEO of The CorePoint, to discuss the battle for deposits, strategies to attract and retain customers, what banks should do if the Federal Reserve continues hiking rates, and more. What follows is our conversation, edited for length and clarity. Are we headed for a recession? All economies go into a recession at some time or another, and the last two we’ve had have been severe. It’s natural to be cautious after such upheaval, but the fear-mongering has been excessive. Bankers should take a hard look at employment data, inflation data, GDP history, and interest rates. I highly recommend looking at the Atlanta Fed’s GDPNow, which forecasts GDP based on real-time statistics. Right now, it’s forecasting 2.5% GDP growth for the first quarter. That’s not stunning, but it doesn’t indicate an economic catastrophe either. The U.S. economy has proved more resilient than its critics would have you believe. How squeezed are banks going to get if the Fed keeps raising rates? We’ve been through a lot, yet net interest margins have pretty much stabilized. Current data from the Uniform Bank Performance Reports compiled for December 2022 show In general, banks that pause to assess the situation, those that use better tools and products than the competition, are going to be much better off. Colorado Banker 12
that margins have actually increased slightly. So, it depends on what you’re looking at and what you’re doing. However, not all the rate hikes have flowed through to income statements yet. That will take a while. In a recent LinkedIn post, you asked bankers if they’re ready for the deposit battle that’s coming in 2023. Are they? Some are. Those who’ve been asleep for the last 15 years aren’t, and soon they’re going to wake up and realize this isn’t just a rate game. They may think the highest rate wins, but that’s not true. Of course, the low rate doesn’t win, either. Some bankers are refusing to change rates, and if they don’t find another way to keep their deposits, they’re going to experience some real pain. I just spoke with a banker this morning who’d publicly rolled out 5% CDs and 4% savings accounts without any kind of plan to keep from repricing all those accounts. How much is the deposit runoff we’re experiencing a natural correction of the deposit glut from the pandemic? We hit peak core deposits — $17.4 trillion — in the first or second quarter of 2022. By the end of 2022, we were at $16.4 trillion. Yes, money supply can go down, but it doesn’t go down easily. Ultimately, we’re talking about public policy and governmental engagement, and it’s hard to imagine public policy allowing the money supply to go back to 2019 levels. I also don’t think we’re headed back to the interest rate levels of 2019. As money supply grew, bank deposits moderated, plateaued, and are now dropping a little, but interest rates have to rise because of the inflation the money supply created. They’re going to pretty much do the same thing — plateau and drop slightly, but not to the levels of before all the stimulus. You were quoted in a recent American Banker article about how several large banks are offering higher rates, but only to consumers outside their branch network. What are your thoughts on that? It’s basically a bet on apathy. They’re likely betting that local markets won’t think it’s a big deal, but it is. Imagine if your rate was 0.4%, but it would be 4.6% if you lived in another state. On, say, a hundred thousand dollars, that’s a lot of money. As a bank CEO, I would never have supported that kind of strategy because it’s not good service. But if nobody protests, they’ll keep doing it. What’s the best way for banks to attract new deposits? One way is to pursue refinancing, which is the same idea as refinancing a mortgage. Many people have CDs with a sub-1% or sub-2% interest rate, and they’re waiting for maturity, kicking themselves because they could get 4.5% today. These are your refi candidates. Today, early withdrawal penalties tend to be trivial, given that many are based on sub-1% rates. Those amounts can be made up in no time now. Additionally, refi CDs can mature on the exact same day as current certificates using the customized approach I mentioned earlier. Any bank can run the numbers and show a customer, net of penalty, what they would end up with if they refinanced. By doing so, it can attract people who think they’ve made a mistake and have to wait. When they realize they don’t, they’re ecstatic. This beats the idea of a rate war in every possible way. In general, banks that pause to assess the situation, those that use better tools and products than the competition, are going to be much better off. IntraFi’s products have helped set institutions apart over the years. CDARS was a huge differentiator for us because we could tell customers we could insure their accounts even if they were five, ten, or even twenty times the size of our FDIC insurance. To listen to the full conversation, visit www.intrafi.com/press-insights/podcasts/. 13 Colorado Banker
What do you enjoy most about your job? The thing that I enjoy the most about my job is the people. I love to be involved in a community — meeting new people and building relationships with others. I have an opportunity to be a mentor to others that I work with, collaborate with leaders through non-profit boards, and work with customers to help them in all aspects of their banking needs. Through my career with Alpine Bank, I have built longterm friendships with customers and co-workers who have had huge impacts on my life. What makes your bank unique? I truly believe that Alpine Bank has the best culture in the banking industry. We are proud to be a true Colorado bank that is one of the most philanthropic companies in the state. Alpine Bank is employee-owned which gives each of us, as shareholders of the bank, an entrepreneurial stake in the company to help guide us to make decisions that are best for the bank and for our customers. What is the most rewarding aspect of your job? The most rewarding aspect of my job is the ability to give back to the communities in which we serve. I am able to volunteer in the community and for non-profit boards such as Make‑A‑Wish Colorado and as an advisory board member of the CBA. As a banker, I have the ability to impact our communities through non-profit investments of both time and money. It is so rewarding to play a small part of these non-profit entities and see first-hand how they effect change to make our communities better. When you were a child, what did you want to be when you grew up? I wanted to be a rockstar! I am not a good singer, but I’ve always thought that entertaining people through music would be so rewarding. What makes your bank unique? First Southwest Bank is a CDFI (Community Development Financial Institution). There are only two in the state of Colorado and no other CDFI banks in the entire four corners region. CDFI banks operate a little differently than traditional banks in that they typically have a mission-oriented focus and predominately serve populations and geographic areas that are underserved. What is the most rewarding aspect of your job? The most rewarding part of my job is being able to help entrepreneurs get access to capital, especially when they come to First Southwest Bank after others are unable to help them. It is rewarding to be able to watch them succeed, and I enjoy the friendships that ensue from the development of that relationship. What do you like to do to give back to the community? I like to spend my time where I feel like I can create the greatest value. I love to educate and be a role model for other aspiring women professionals. I am the President and Chair of our local Economic Development Organization, the Vice Chair of the Minority Business Office, and I am on the new Office of Financial Empowerment Council. I have spent my time volunteering for various non-profits, but one that stands out to me is the Boys and Girls Club because it allows me to give back to an organization that once helped me. Tell us something about yourself that most people don’t know. I grew up in a big family — I have 11 brothers and sisters. I grew up in poverty and know firsthand the inequities that can occur at the poverty level. I think it has given me a unique perspective and insight into how to help those in need. Growing up on the receiving end of a lot of support services gave me an appreciation for the value of those types of services. Sherry Waner Chief Development Officer First Southwest Bank Karrie Fletcher President Alpine Bank CBA Centerpoint Colorado Banker 14
GOING BEYOND THE DESK TO HEAR THE STORIES OF COLORADO BANKERS How did you get started in the banking industry? Well, my dad would have said that I’ve been a banker my whole life. When I was about eight years old, he would pay me to help with some of his rental properties. But my first “real” banking job was a summer stint with Rocky Mountain Bank Card approving credit transactions. It was there that I developed a fascination with numbers and recognized the importance of exemplary customer service. While pursuing a master’s degree in international finance, one of my professors asked what my career plans were. I wasn’t sure at that point, but after some discussion, he suggested I become a credit analyst for commercial loans. So I did. And it stuck. What is the most rewarding aspect of your job? My favorite thing (in banking and in life) is seeing people get to the next level. Whether it’s a business loan that allows a small business to acquire a new building, a team member whose confidence grows in customer interactions, or watching my kids develop and master new interests, I truly enjoy witnessing those lightbulb moments that propel someone to new heights. What do you like to do to give back to the community? As a bank, we commit to several Make A Difference (MAD) Days each year. Employees participate in one of three cross-department teams, each of which appoints a team lead, researches and chooses a local non-profit to serve, and schedules a day of volunteer labor. They work hard and it’s really a great source of pride for the individuals on the team, as well as the organization. What is your favorite book? Do I have to choose just one? I read a lot — mostly business books. But I also think a spreadsheet can read like a novel because numbers can tell fascinating stories. Anyway, three books I would recommend to anyone, regardless of their industry, are: 1. Outliers: The Story of Success by Malcolm Gladwell 2. The Ideal Team Player: How to Recognize and Cultivate the Three Essential Virtues by Patrick Lencioni 3. Extreme Ownership: How U.S. Navy SEALs Lead and Win by Jocko Willink and Leif Babin Andy Ellison President and CEO Mountain View Bank of Commerce What do you like to do to give back to the community? When I think about community giving, I think about crossing the finish line. I ask myself what will it take for the community to feel the impact of our donation. Sometimes, that’s getting behind a new idea or service to get it launched, other times it’s the final piece in completing an initiative. In any case, we want to be an active participant in building our communities and not a bystander. Charitable giving comes in many forms. Donations, volunteerism, and innovation are all tools we rely on to help others. That’s the power of community banking. We reinvest in those we serve both in banking expertise and by being a good neighbor. What is the most rewarding aspect of your job? That’s easy. Watching people succeed. I have been fortunate to witness our business clients and our staff grow in ways they never imagined. They have often taught me the power of resilience, the overwhelming benefit of patience, and have given me moments of pure happiness when they reach the next milestone in their business or career. Since many of these moments are reached through a deep, personal investment of time, energy, and effort, it provides a feeling of meaningful satisfaction that you want to repeat, both for them and those who helped get them there. Teamwork is key. I started as a bank teller and grew into a Community Bank President. I had a desire to grow, but others also invested in me. I want that for those I hire and for our business clientele. I never want those I serve to feel like there is a ceiling to their accomplishments. Who is one of the most influential figures in your life? It’s hard to name just one person. Dick Berg, Dale Leighty, and Jonathan Fox all come to mind because of their ethics and dedication to community banking. They teach trust, customer service and community commitment. They live what they believe with such enthusiasm that it inspires those around them. Andrew Trainor Community Bank President InBank 15 Colorado Banker
W IS YOUR BANK READY for LIBOR Fallback? By Selena Samale , Stinson, LLP With the remaining tenors of USD LIBOR going away on June 30, 2023, it is crucial for banks to ensure all outstanding action items for the transition have been addressed. The London Interbank Offered Rate (LIBOR) has been the dominant interest rate benchmark used in financial contracts in recent decades and is used as a reference rate in over $200 trillion worth of contracts worldwide. This guide provides an overview of the LIBOR Act and LIBOR regulations to transition what have been referred to in the market as “tough” legacy contracts without a clearly defined replacement benchmark. These new rules will automatically apply a board-selected benchmark replacement to LIBOR contracts subject to the Act after June 30, 2023. Colorado Banker 16
Background Scandals exposed around 2013 revealed that certain market players had been manipulating the LIBOR index during the 2008 financial crisis, and market confidence in LIBOR began to wane. Financial regulators and market participants began to search for alternative reference rates and develop plans for a transition away from LIBOR. Key milestones in this process include the following: • 2014 — The Board of Governors of the Federal Reserve System (Board) and the Federal Reserve Bank of New York (FRBNY) convened the Alternative Reference Rates Committee (ARRC) to identify a recommended replacement to LIBOR. • June 2017 — The ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended replacement for USD LIBOR. • October 2020 — The International Swaps and Derivatives Association (ISDA) published the ISDA 2020 IBOR Fallbacks Protocol (Protocol), a contractual protocol by which parties to derivative transactions governed by ISDA documentation and other financial contracts can agree (by electing to adhere to the Protocol) to incorporate robust contractual fallback provisions that replace LIBOR with an alternative benchmark based on SOFR. • November 2020 — The Office of the Comptroller of the Currency (OCC), Board, and Federal Deposit Insurance Corporation (FDIC) issued an interagency statement stating that banking organizations should generally not enter into new contracts referencing USD LIBOR after December 31, 2021. • March 2021 — The United Kingdom’s Financial Conduct Authority (FCA) announced that after December 31, 2021, the ICE Benchmark Administration Limited (IBA) would cease publishing 24 currency and tenor pairs (known as settings) of LIBOR; however, it would continue to publish the overnight, and one-, three-, six-, and 12-month tenors of USD LIBOR through June 30, 2023. The FCA also proposed that the IBA continue publishing the one-, three-, or six-month USD LIBOR settings on a “synthetic” basis until September 30, 2024, even though such synthetic LIBOR settings are “not representative of the markets that the original LIBOR settings were intended to measure.” • April 2021 — New York adopted N.Y. Gen Oblig. Law art 18-C addressing the effect of LIBOR discontinuance on contracts. Following this, other states (including Alabama, Florida, Indiana, Nebraska and Tennessee) adopted similar legislation. • March 2022 — Congress enacted the Adjustable Interest Rate (LIBOR) Act (LIBOR Act) to establish a set of default rules to apply to “tough” legacy contracts subject to U.S. law (i.e., contracts that use LIBOR as the reference rate but do not include adequate fallback provisions in the event LIBOR is discontinued). • December 2022 — Pursuant to its authority under the LIBOR Act, the Board approved its final Regulation Implementing the Adjustable Interest Rate (LIBOR) Act (LIBOR Regulations). • June 30, 2023 — Scheduled date for cessation of the overnight and one-, three-, six-, and 12-month tenors of USD LIBOR. What is SOFR? The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities and is published by the Federal Reserve Bank of New York. There are several differences between LIBOR and SOFR including the following: • LIBOR is unsecured and therefore includes an element of bank credit risk, which may cause it to be higher than SOFR. • LIBOR may include term premiums and reflect supply and demand conditions in wholesale unsecured funding markets, which may cause LIBOR to be higher than SOFR. • LIBOR is a forward-looking rate (meaning that the rate is known at the time it is applied), while SOFR is inherently a backward-looking rate (meaning that the rate is not known until the end of the calculation period). This initially caused some consternation among the credit community; however, the ARRC-recommend CME Term SOFR is forward-looking tenor of SOFR. Like LIBOR, there are different tenors of SOFR, including: • Fallback Rate (SOFR): a term adjusted SOFR plus a spread relating to USD LIBOR, published by Bloomberg Index Services Limited. Fallback Rate (SOFR) is a form of compounded SOFR in arrears. • CME Term SOFR: a daily set of forward-looking interest rate estimates calculated and published by CME Group in one-, three-, six-, and 12-month tenors. The use of CME Term SOFR is subject to certain licensing and other usage terms imposed by CME Group; however, under present usage terms, an end user1 seeking only to enter into a transaction using CME Term SOFR does not need a license from CME Group. Further, CME Group has waived fees for users of CME Term SOFR for cash transactions through 2026. Although LIBOR is a credit-sensitive rate and SOFR is a risk-free rate, they still generally trend together, except in rare periods of market disruption. To account for the “normal” difference based on a five-year historical median, the ARRC recommended spread adjustments in 2021, and the LIBOR Act includes spread adjustments corresponding to the different tenors of CME Term SOFR. Also in 2021, the ARRC published several recommended best practices for SOFR conventions in various types of loan transactions and for various tenors of SOFR. In selecting SOFR as the basis for the Board-selected benchmark replacements under the LIBOR Act, the Board asserts that it was guided by voluntary market practices, as in large part the loan market for cash (not derivative) transactions had already transitioned from LIBOR to Term SOFR. The Board’s selection of the SOFR-based replacement rates is intended to minimize market disruption. 17 Colorado Banker
Summary of the LIBOR Act and LIBOR Regulations. As the purpose of the LIBOR Act is to establish a clear and uniform process for addressing legacy contracts, the LIBOR Act and LIBOR Regulations only apply to contracts that (1) are governed by U.S. law or the laws of any U.S. state, (2) reference the overnight or one-, three-, six-, or 12-month tenors of USD LIBOR, and (3) do not have fallback provisions that provide for a clearly defined and practicable replacement benchmark for LIBOR, unless the parties to the contract agree in writing that the LIBOR Act does not apply. In addition, certain protective provisions of the LIBOR Act and LIBOR Regulations would also apply to a contract where the “determining person” elects to use the “Board-selected benchmark replacement” (as such terms are further described below). Generally speaking, contracts that fall within the scope of the LIBOR Act are affected by the LIBOR Act as follows: On the LIBOR replacement date (i.e., the first London banking day after June 30, 2023, assuming no further delays), all references to LIBOR in the subject contract will be replaced with the corresponding Board-selected benchmark replacement. The LIBOR Act and implementing regulations also permit “benchmark replacement conforming changes” for non-consumer loans, provide a safe harbor for contracts subject to the LIBOR Act, and preempt conflicting state or local laws. Other provisions of the LIBOR Act amend the Trust Indenture Act of 1939 (15 USC 77ppp(b)) and the Higher Education Act of 1965 (20 USC 1087-1(b)(2)(I)); however, a discussion of those provisions is beyond the scope of this article. What This Means for Your Bank A. Does the LIBOR Act apply to my contract? Contract Category Result LIBOR contracts that contain fallback provisions identifying a specific benchmark replacement that is not based in any way on USD LIBOR values (except to account for differences between LIBOR and the replacement, e.g., the spread) and do not require any person (other than a benchmark administrator) to conduct any poll, survey, or inquiries for quotes or information concerning interbank or lending rates. The LIBOR Act does not apply to these contracts, even if the fallback provisions lack an express non-representativeness trigger. These LIBOR contracts can generally be expected to transition to the contractually-agreed upon replacement benchmark per the contract terms. For these contracts, review the LIBOR fallback provisions closely and comply with all notice requirements. LIBOR contracts that do not contain any fallback provisions and do not identify a determining person (or that only identify a benchmark replacement based on LIBOR or require a person — other than a benchmark administrator — to conduct any poll, survey, or inquiries for quotes or information concerning interbank or lending rates). The LIBOR Act applies to these contracts. Any references to USD LIBOR in these contracts will, by operation of law, be replaced by the Board-selected benchmark replacement on the LIBOR replacement date. For these contracts, you do not need to send notice to the borrowers. On the LIBOR replacement date, all references to LIBOR will change to the corresponding Board-selected benchmark replacement as a matter of law. LIBOR contracts containing fallback provisions authorizing a “determining person” to determine benchmark replacement. The LIBOR Regulations expanded on the definition of “determining person” as set forth in the LIBOR Act to mean “any person with the sole authority, right, or obligation, including on a temporary basis (as identified by the LIBOR contract or by the governing law of the LIBOR contract, as appropriate) to determine a benchmark replacement, whether or not the person’s authority, right, or obligation is subject to any contingencies specified in the LIBOR contract or by the governing law of the LIBOR contract.” The LIBOR Act may apply to these contracts, depending on the actions/ inactions of the determining person. • The LIBOR Act will not apply to these contracts so long as the determining person selects a benchmark replacement by the earlier of the LIBOR replacement date or the latest date for selecting a benchmark replacement per the terms of the contract. • If the determining person does not do so, then the LIBOR Act will apply and any references to USD LIBOR in these contracts will, by operation of law, be replaced by the Board-selected benchmark replacement on the LIBOR replacement date. The determining person is not required to select the Board-selected benchmark replacement as the successor index to LIBOR in the contract. However, if they do, then the determining person will benefit from certain statutory protections (safe harbors) set forth in the LIBOR Act. Colorado Banker 18
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