Pub. 13 2023-2024 Issue 4

NAVIGATING THE CURRENT AND FUTURE BANKING LANDSCAPE Why Lending Platforms are Essential Now More Than Ever Banker OVER A CENTURY: BUILDING BETTER BANKS — Helping Coloradans Realize Dreams January/February

contents ©2024 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 CFO & Director of Membership Lindsay Muniz Director of Education Patricia Wells Director of Communications Megan Carruth 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 BUILDING BETTER BANKS — Helping Coloradans Realize Dreams 6 16 4 MESSAGE FROM THE CEO 2024 Legislative Preview By Jenifer Waller, President & CEO, Colorado Bankers Association 6 Finding the Right Partners Matters with Card Conversions By Jeff Ostheimer, Director of Fintech Advisory Services, SRM (Strategic Resource Management) 8 Beneficial Ownership Final Rule and Its Impacts on AML Programs By Terri Luttrell, CAMS‑Audit, CFCS, Abrigo 12 CBA Centerpoint Going Beyond the Desk To Hear the Stories of Colorado Bankers 14 One Rule for All Interagency Guidance for the Risk Management of Third-Party Relationships By Julia A. Gutierrez, Director of Education, Compliance Alliance 16 Navigating the Current and Future Banking Landscape Why Lending Platforms are Essential Now More Than Ever By Darren Hecht, SVP of Growth, Biz2X 18 I Hedged My Balance Sheet for the First Time in 2023. Now What? Hedging Best Practices for Financial Institutions By Ben Lewis, Managing Director and Head of Sales, Chatham Financial 20 WASHINGTON UPDATE Against a Rising Tide of Regulation, Banks Must Row Together By Rob Nichols, President and CEO, American Bankers Association 21 What is a Hook and Chain ATM Attack? By Cook Solutions Group 22 Tips for Selecting the Right Core Processor With a Seamless Digital Transformation By Kelly Flynn, National Director, ADVANTAGE, powered by JMFA 3 Colorado Banker

H 2024 Legislative Preview Happy New Year. We enjoyed a brief respite for the holidays, but we’re back at it. The State Legislative session started in mid-January and runs through mid-May. Some of the issues we anticipate addressing during this session include: 1. The Colorado Department of Regulatory Agencies (DORA) recently released their 2023 Division of Banking Sunset Report. The second recommendation in the report would authorize a credit union to purchase the assets and liabilities of a state bank. This recommendation does not belong as part of the Sunset process. This is a significant change in policy and should be addressed separately from the sunset process. CBA, in partnership with Independent Community Bankers of Colorado (ICBC), sent a letter to DORA and Governor Polis advising of our opposition to the “Buy a Bank” recommendation in the Sunset Report. We will continue to educate and work with the bill sponsors to have the recommendation omitted from the final legislation. CBA has stated for the record that we will oppose Sunset if the recommendation remains. 2. A bill proposed to require a Right of First Refusal to local government/municipalities prior to the sale of a multi-family unit to preserve or expand affordable housing options. Working with the House bill sponsor, CBA was initially neutral on the legislation. Amendments added in the Senate impacted title insurance and lending opportunities on multi-family properties. CBA modified its neutral position to oppose it and requested a veto by the governor, which was granted. We do expect the bill to return in the 2024 session. We have an early draft of the bill — it has a Right of First Offer (ROFO) and Right of First Refusal (ROFR) component. CBA anticipates changes to the draft prior to introduction during the session. 3. As part of the state budget, Governor Polis has set aside $137 million for housing: more places to live near transit, affordable housing tax credits, development of accessory dwelling units (ADUs) and repurposing old infrastructure. ADUs would include incentives to municipalities to offset fees and loan loss reserves to help homeowners with financing costs. The governor’s office is trying to figure out the structure to include the PACE loan program as well. CBA has educated the governor’s staff on the limitations of PACE and lien priority. At the federal level, we will continue to work on the following issues: 1. Interchange: We have concerns about the Federal Reserve Board’s proposed reduction in debit card interchange fees from approximately 22 cents to 17.5 cents. CBA has written to Federal Reserve Bank President Schmid and is asking banks to submit comment letters. Comments are due by Feb. 12. The cuts in checking account revenue for covered banks would be significant, and many of those banks will have to increase consumer fees for checking accounts and ATM transactions. Merchants, on the other hand, will have no obligation to pass their cost savings on to consumers. MESSAGE FROM THE CEO By Jenifer Waller, President & CEO, Colorado Bankers Association Colorado Banker 4

Potential consequences of the proposed reduction also include: • The need for banks to increase borrowing costs and fees for other services, which will negatively impact customers who may not qualify for credit card products or other alternatives; • The discontinuation of a bank’s lowest-margin products, thus reducing access to affordable basic banking services for low- and moderate-income individuals and families; and • The financial pressure on banks approaching the $10 billion threshold may lead to a significant increase in bank consolidations. 2. Credit Card Routing Bill: Sens. Roger Marshall (R-KS) and Dick Durbin (D-IL) introduced the Credit Card Competition Act in 2023, which would extend Durbin’s network mandates to credit cards for card issuers with assets over $100 billion. Reps. Peter Welch (D-VT) and Lance Gooden (R-TX) have introduced a House version of the deeply flawed and harmful Credit Card Competition Act. Both bills failed to gain traction and any additional cosponsors as standalone proposals, so their authors attempted to add the legislation as an amendment to a must-pass piece of legislation like the omnibus spending bill. Senator “Over my 16-year tenure with Bankers’ Bank of the West, every minute of our work has been dedicated to bringing solid expertise, services, and products to ensure community banks sustain a competitive edge. We’ve certainly grown strong as partners, looking out for each other—and we look forward to continuing that tradition.” Bankers’ Bank of the West LOAN PARTICIPATIONS|MERCHANT SERVICES|ATM DEBIT|WIRES bbwest.com | 800-873-4722 www.bbwest.com President and CEO Bill Mitchell We Champion Community Banking Member FDIC Marshall has vowed to attempt to add the bill to any must‑pass legislation. We anticipate this legislation will be introduced again this year. 3. Overdrafts: CFPB Director Chopra announced a new push to eliminate or greatly reduce the ability to charge overdraft fees. The agency already targeted NSF fees. 4. Capital Increases: FDIC Chair Martin Gruenberg called for stricter capital requirements for midsize banks. He stated this would apply to all banks $100 billion and over. Rules are not yet drafted. We are working with the American Bankers Association and other states to respond and express bankers’ concerns. Lastly, please join us at our annual Legislative Briefing, which is scheduled for March 6 at the History Colorado Center. Take advantage of this unique opportunity to engage with elected officials in a meet-and-greet setting. Attendees will not only gain valuable insights into the issues being addressed in the legislative session but will also have a chance to build relationships with legislators to foster collaboration and ensure their voices are heard in shaping policies that impact the banking industry. This event is free for CBA bank members. Space is limited, so please register soon. Questions? Contact Lindsay at lindsay@coloradobankers.org or (303) 825-1575. 5 Colorado Banker

T Finding the Right Partners Matters with Card Conversions By Jeff Ostheimer, Director of Fintech Advisory Services, SRM (Strategic Resource Management) The financial landscape evolves fast, with banks constantly seeking ways to enhance their services, stay competitive, and comply with laws and regulations. One significant challenge they face is the conversion of their card processors — a complex and mission-critical task that can benefit from the expertise of a consulting partner. Let’s explore why it’s crucial for banks to select a consulting partner to guide them through the card conversion process. Navigating Complexity with Expertise Card conversion isn’t a simple software switch; it involves technical, operational and regulatory complexities. A consultant can bring experience and domain knowledge to the table. External experts and their partners understand the intricacies of card processing systems, compliance requirements and industry best practices. This expertise can help banks make informed decisions and avoid common pitfalls during the conversion process. Tailored Solutions for Unique Needs Every bank has unique requirements, a unique customer base and a tailored technology stack. Consultants work closely with banks to understand their needs and goals before suggesting customized strategies and solutions aligned with an FI’s objectives. The goal is to ensure a seamless transition that minimizes disruption to internal and external operations and customer services. Risk Mitigation Card conversions carry inherent risks such as data loss, service interruptions and security vulnerabilities. Banks could use a hand with risk assessments and mitigation. An outside consultant can identify potential issues and develop comprehensive contingency plans to address unforeseen challenges. A proactive approach safeguards the bank’s reputation and financial stability. Regulatory Compliance Compliance and regulatory impacts are critical concerns for banks, especially when handling sensitive customer data. Identify a consultant well-versed in industry regulations, including PCI DSS and regional banking standards. They can ensure the conversion process adheres to such standards, reducing the risk of compliance violations and associated penalties. Cost Efficiency While working with an external consultant has a cost, it can lead to significant expense savings in the long run. Banks can benefit from optimized processes, identified cost-effective solutions and a highly informed outside perspective on vendor decisions. A strategic approach can lead to a more cost-efficient conversion, benefiting the bank’s bottom line. Project Management Excellence Card conversions are complex, multifaceted projects requiring meticulous planning and execution. Find partners who are well-versed in project management and have the hands-on expertise to ensure timelines are met, tasks are coordinated efficiently, data is migrated and budgets are managed effectively. Outside advisors are the glue that holds the entire conversion project together, allowing the bank’s internal teams to focus on their day-to-day responsibilities. Smooth Customer Experience Banks rely on their reputation for trust, reliability and customer retention. A poorly executed card conversion can lead to customer dissatisfaction and attrition. Seek assistance as you look to maintain a seamless customer experience by minimizing disruptions, providing clear communication and addressing issues promptly. Conclusion In an era of digital transformation and heightened competition in the banking sector, card conversions are necessary to stay competitive and compliant. However, the complexity and risks associated with these conversions make it imperative for banks to engage consulting partners. SRM brings a wealth of experience, expertise and strategic thinking to ensure that the conversion process is successful and advantageous for the bank and its customers. By selecting the right partner, banks can confidently navigate the intricate path of card conversion and achieve their long-term goals. Jeff Ostheimer is the Director of Fintech Advisory Services at SRM (Strategic Resource Management) based in Memphis, TN. Jeff spent nearly two decades working directly with the banking C-suite on core and digital transformation initiatives. Jeff regularly provides insights on open banking, banking as a service and fintech trends to SRM’s clients and the industry at large. To learn more about SRM’s expertise in card conversions, core banking systems, fintech consulting, vendor sourcing and beyond, contact Colorado representative Phillip Foster (pfoster@srmcorp.com or (303) 588-1484). Colorado Banker 6

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T Beneficial Ownership The latest final rule on beneficial ownership information (BOI) reporting gives financial institutions and their business clients more details about what’s required. Here’s a rundown of what’s behind the new rules, the latest BOI registry details and how anti-money laundering (AML) programs can prepare. Why Is Beneficial Ownership Reporting Required? Effective Jan. 1, 2024, many companies are required to begin reporting to the U.S. government information about beneficial ownership or who ultimately owns or controls them. U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a new regulation on the requirements, including how AML staff will access the information through a new federal beneficial ownership information (BOI) registry. However, much of the process has not been finalized or is broad in terms. This uncertainty is confusing financial institutions and their business clients. What’s clear so far is that the Corporate Transparency Act (CTA) mandated the creation of a database for obtaining and holding BOI for certain U.S. entities. As described below, approximately 35 million reporting entities will have a year to provide information on their beneficial owners to FinCEN’s new registry. The CTA was aimed at satisfying global criticism, particularly from the Financial Action Task Force (FATF), that the U.S. is a haven for money launderers due to a lack of transparency and loopholes allowing shell companies to hide the true nature and ownership of a business. The more critical potential outcome of BOI reporting is assisting law enforcement in solving financial crime. BOI Reporting Responsibilities: Who and When What changes will reporting entities see now that FinCEN has launched the federal BOI registry? FinCEN has published two rulemakings regarding the registry and related requirements. Below is a short recap of each. The descriptions aren’t all-inclusive and don’t constitute legal advice. The Final Rule for Beneficial Ownership Reporting, issued in Sept. 2022, establishes definitions for reporting provisions of the FinCEN BOI database. Some key provisions of this rule for the beneficial ownership changes in 2024 include the following: • The rule is effective as of Jan. 1, 2024. • Reporting companies created or registered before Jan. 1, 2024, have one year (i.e., Jan. 1, 2025) to file their initial BOI reports. FINAL RULE AND ITS IMPACTS ON AML PROGRAMS By Terri Luttrell, CAMS-Audit, CFCS, Abrigo Colorado Banker 8

• Reporting companies created or registered after Jan. 1, 2024, have 90 days after receiving notice of their creation or registration to file their initial BOI reports. • Updates to a company’s BOI must be filed within 30 days of the change. • Reporting entities that fail to register the BOI information as mandated could face federal penalties, as not registering is a criminal offense. • Reporting companies are defined as a corporation, limited liability corporation (LLC) or any entity created by filing a document with a secretary of state or similar office, whether domestic or foreign. • Entities with more than 20 employees and more than $5 million in reported gross receipts or sales are exempt from reporting, subject to other criteria. • Other legal entities, including certain trusts, are excluded from the definitions as filing a document with a secretary of state or similar office does not create them. (Excluding trusts in the final rule could leave a significant loophole for money launderers to use to hide true beneficial owners.) • The definition of a beneficial owner is anyone who owns or controls at least 25% ownership of a reporting company as well as those with “substantial control.” Substantial control is defined as anyone who can make important decisions on behalf of the entity. This definition is different from existing customer due diligence (CDD) rules that took effect in 2018. As explained further below, financial institutions should comply with the 2016 regulatory definition of beneficial owners. Who Can Access BOI Registry Information? The second FinCEN rule describing changes to reporting on ownership is the Beneficial Ownership Information Access and Safeguards Final Rule, which was issued in Dec. 2023. This rule implements the CTA provision establishing guidelines for who may access BOI through the registry, for what purposes and for safeguards to ensure that the information is protected. FinCEN said the rule for the beneficial ownership registry balances the statutory requirement to create a database with the need to safeguard BOI from unauthorized use. The final rule includes requirements for disclosing information about beneficial ownership to financial institutions and other specific groups. Three key provisions of the BOI registry access rule that are especially relevant to AML programs cover the following topics: 1. Authorized recipients of beneficial ownership information: Financial institutions are one of five groups of authorized BOI recipients that will have access to the FinCEN registry. Compared to the original proposed rule, the final access rule broadens the purposes for which financial institutions may use BOI. Institutions are allowed to use BOI for all of their AML/CFT programs, including customer due diligence, sanctions screening, enhanced due diligence efforts and investigations and reporting of suspicious activity. This gets to the heart of the CTA’s purpose: deterring illicit financial activity. Other categories of authorized recipients are: • Certain domestic agencies, including law enforcement. • Certain foreign agencies and other authorities. • Certain regulatory agencies. • Certain officers and employees of the U.S. Department of Treasury. 2. When financial institutions will gain access to BOI: FinCEN’s scaled approach for providing access to the BOI registry begins Feb. 20, 2024. Financial institutions will be the last group to gain access, and the timeline is undetermined. Once they are given the go-ahead by FinCEN, banks and credit unions are required to obtain consent from the reporting customer, the FI’s client, before accessing the information. The final access rule does not dictate how to receive consent and allows for flexibility based on differences in FIs across the nation. Financial institutions will have to certify to FinCEN that they obtained consent, although the certification format has not yet been disclosed. FIs must also certify that they are protecting the data by adhering to all aspects of the Gramm-Leach-Bliley Act. 3. Verification of BOI: Verification of information that a reporting entity provides to FinCEN is briefly mentioned in the final reporting rule. The rule states that the beneficial owners will be verified as living persons. However, they will not be verified as being the true beneficial owner for that particular company. This is in line with the current CDD regulations. However, FinCEN confirmed that verification of BOI is an integral part of its overall efforts and continues to assess options to verify BOI. More is expected on this later. What’s Next for BOI Reporting Regs The next expected rulemaking will revise FinCEN’s CDD rule to align current regulations with the first two rules. One important aspect to reconcile between the 2016 CDD rule and the new final rule is the definition of the “control” prong. The new beneficial ownership information rule requires companies to file information for each beneficial owner. Under the existing CDD rule, companies must only name one person with significant control. The Anti-Money Laundering Act of 2020 (AMLA) requires this final piece of the beneficial ownership regulation to be issued no later than one year after the effective date (Jan. 1, 2024) of the BOI Reporting Rule. However, FinCEN has missed more 9 Colorado Banker

than one regulatory deadline, so this realignment may come later than expected. Additionally, the CDD rule was effective in 2018 — two years after the regulation was finalized. As a result, it’s unclear whether FIs will face any near-term deadlines related to this issue. Immediate Changes for Banks and Credit Unions? For financial institutions in the U.S. and their AML programs, the bottom line is that very little has changed at this point: • The existing CDD and beneficial ownership requirements that took effect with the 2016 CDD rule still apply. FinCEN’s draft of a rule realigning the CDD rule with the new BOI definitions and requirements is expected sometime in 2024. • Banks and credit unions are not responsible for their business clients complying with the new BOI reporting requirements. • Beginning Feb. 20, 2024, staged access to the registry will begin, but FIs will be the last group added and the date hasn’t been determined. • FIs must certify that the BOI will be held securely and that the FI has received approval from the reporting entity to access their ownership details. FinCEN has not given guidance on obtaining BOI access consent and so far is leaving that up to individual FIs. Now is the time to begin considering how to request consent, whether via a change in disclosures or a more targeted method. • Be prepared to write procedures around access to the BOI database once more details are rolled out. Educate Clients on BOI Changes and Fraudsters As noted above, financial institutions are not responsible for client compliance with beneficial ownership information reporting. BOI registration is the responsibility of the 35 million reporting companies. However, most of these firms are likely unaware of the new requirements and may not even be familiar with FinCEN. Even if familiar with the requirements, many company owners won’t know how to register because detailed guidance isn’t written. There is no finalized reporting form or instructions on how to register. FinCEN Director Andrea Gacki said during a briefing on the final access rule that the form will most likely not be confirmed until at least February 2024. Mandated reporting can be confusing for businesses that have never been under this type of government requirement. It’s important for them to understand the role of BOI registration in safeguarding the U.S. financial system and our global reputation. FinCEN is conducting outreach to educate businesses by holding national briefings and issuing fact sheets, a Q&A and videos. It also has a Small Entity Compliance Guide for BOI reporting. Banks and credit unions are encouraged to direct clients to the FinCEN website for comprehensive information. Additionally, Director Gacki said at the recent ABA FinCrime Conference that FinCEN welcomes assistance from financial institutions in educating their clients. Collaboration on education is crucial. Proactively engaging with business clients on BOI requirements establishes trust while also demonstrating proficiency in navigating new regulations. Remember, failure to register BOI could lead to federal penalties for reporting entities. Safeguarding your business clients from such risks not only ensures compliance but also enhances overall goodwill. Financial institutions and their business customers or members should also be aware that illicit actors are already trying to take advantage of uncertainty around the BOI changes. FinCEN warned recently of fraudulent attempts to obtain personal information from reporting entities. The fraudulent emails or letters may be titled “Important Compliance Notice,” and may ask recipients to click on a URL or scan a QR code. FinCEN does not send unsolicited requests and advised against responding to the messages, clicking on any links or scanning any QR codes within them. Remember, there is currently no final reporting form. Transparency is the Goal The CTA became effective on Jan. 1, 2024, and the BOI registry is a reality. Although not much changes immediately for financial institutions, it is critical to understand the legislation and how it affects business clients. The final rule for BOI reporting outlines crucial provisions that reporting companies must adhere to, emphasizing the need for transparency in corporate structures. As financial institutions and their clients navigate these new requirements, the true intent of the registry — to curb illicit activities and enhance financial transparency — remains paramount. Industry leaders eagerly await clarity on access protocols, verification processes and alignment of customer due diligence rules. But the related changes will shape domestic financial practices and resonate globally, reflecting the United States’ commitment to combat money laundering and enhance transparency. Stakeholders are on standby, ready to adapt to the evolving regulatory landscape and its far-reaching implications. Abrigo’s mission is to help financial institutions make BIG things happen. Offerings include compliance, credit risk and lending software solutions at www.abrigo.com. Colorado Banker 10

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How did you get started in the banking industry? I was a law student at Creighton University and realized I did not want to practice law as a career. At that time, I decided to pursue an MBA concurrent with my law degree and focused my studies on business, specifically banking. After graduation, I joined a regional bank’s Executive Development Program to learn about all aspects of banking and chose to join the commercial lending department. I have remained in commercial lending thus far in my career. The study of law has provided me with a strong foundation for banking and lending. What makes your bank unique? Adams Bank & Trust was chartered in 1916 and is in its fourth generation of family ownership, with the fifth generation currently assuming leadership roles. Our bank will remain under family ownership and continue to grow organically. In 2000, the bank expanded its branch footprint from Nebraska to Colorado and subsequently into Kansas. The bank’s commitment to its community is very strong. Our team believes the community has helped us to become what we are, and we owe it to the community to give our time in service. One additional unique aspect is that our bank’s first branch was located in a town that is currently submerged under Lake McConaughy near Ogallala, Nebraska. What is the most rewarding aspect of your job? The most rewarding aspect of my job is assisting others in accomplishing their goals. Whether that is a business owner seeking to expand their business or an employee aspiring to gain skills to advance their career, I gain fulfillment from being a trusted advisor and resource. Tell us something about yourself most people don’t know. I have four daughters — ages 16, 12, 9 and 6. They are all wonderful and different; I am hoping one of them will someday decide to enter the family business of banking. So far no takers! John Berkhausen President of Commercial Banking Adams Bank & Trust CBA Centerpoint How did you get started in the banking industry? After graduating from the University of Wyoming in 1983, I accepted a position as a management trainee with the Fort Lupton State Bank, now known as Bank of Colorado. Forty years later, I’m still here serving as market president, a position I have held since 1990. What makes your bank unique? Bank of Colorado is one of the few remaining family-owned banks that still embraces the community banking model. Although the bank has grown to approximately $7 billion in assets with over 50 locations, ownership empowers local decision-making. What is the most rewarding aspect of your job? At this stage in my life and career, I enjoy educating and mentoring the next generation of bankers. I’m excited for the young talent rising in our organization. What is your favorite movie or book, and why? My favorite movie is “The Green Book.” It’s a wonderful story of how two totally opposite men embark on a musical tour in the early 1960s through the American South and the lifetime friendship and camaraderie that develops while they both encounter racism and prejudice. Who is one of the most influential figures in your life? The late Roy Dinsdale was the patriarch of our organization; I was fortunate to have had the honor to work for and with him. He led by example and taught me valuable traits such as honesty, integrity, modesty, hard work, generosity and common sense. Donald Tomoi Market President Bank of Colorado Do you know a deserving Colorado bank employee who should be featured in a future CBA Centerpoint? Colorado Banker 12

What makes your bank unique? Integrity Bank & Trust is an employee-owned community bank. We put an emphasis on the success of both our staff and our customers. We’re motivated and inspired to serve our community, including donating hundreds of volunteer hours to local nonprofits every year. Our vision is to have an enduring impact on our community. Another unique aspect is our open-door policy. This means anyone can pick up the phone and call an executive officer with suggestions, questions, concerns or comments. It’s important to us that all voices are heard. What is the most important thing you’ve learned from a career in banking? The most important thing I’ve learned in my 15-year career in banking is to be innovative, with a focus on efficiency. Change is constant; it is important to embrace change and navigate through the lens of innovation and efficiency for the best outcomes. Innovation + Efficiency = Success. What do you like to do to give back to the community? Where do I start? Giving back is a passion of mine. Helping others is a part of who I am. Integrity Bank & Trust sponsors multiple charitable events throughout the year — in 2011, we launched our annual Golf Tournament to raise money for local non-profits. Over the past three years alone, we raised $125,000 for organizations such as Children’s Literacy Center, Shield 616 and Arc of the Pikes Peak Region. I also enjoy volunteering at my church and a soup kitchen in downtown Colorado Springs. When you were a child, what did you want to be when you grew up? I always wanted to be a lawyer. I could debate anyone on any topic at any time and loved digging into problems and finding solutions. I figured if Tom Cruise could do it in “A Few Good Men,” so could I! My road took a different path when I started working at a financial institution as a part-time teller — I instantly fell in love with banking, and as they say … the rest is history! Lori Zarkovacki Controller/Vice President Integrity Bank and Trust GOING BEYOND THE DESK TO HEAR THE STORIES OF COLORADO BANKERS How did you get started in the banking industry? I worked in collections with Nordstrom in 2008 and took a leap of faith by agreeing to a four-month contract position with Western Union to mitigate their 2012 FinCEN and FTC violations. What do you like to do to give back to the community? I volunteer to coach young women in basketball for the City of Aurora. It’s a great experience to teach youth about sports, commitment and discipline. What is the most important thing you’ve learned from a career in banking? Making connections with others in your specific role and industry goes further than some education/webinars. Peers may have more experience, or they may have experienced the exact same scenario or situation you’re going through. You can use their knowledge and experience to help guide you down the right path to success. What topic could you give a 20-minute presentation on without any preparation? Vendor management. What do you geek out about? Jeeps, specifically Jeep Grand Cherokees! Who is one of the most influential figures in your life? My mother — she is a very strong and positive woman. What do you listen to on your morning commute? Nothing. A quiet drive into the office allows me to clear my head and focus on the items I need to work on when I get into the office. The silence, along with the beautiful view, brings peace before chaos. Sharvelle Washington AVP Compliance & Risk Bankers’ Bank of the West Contact Patricia Wells at patricia@ColoradoBankers.org. 13 Colorado Banker

T One Rule for All INTERAGENCY GUIDANCE FOR THE RISK MANAGEMENT OF THIRD-PARTY RELATIONSHIPS By Julia A. Gutierrez, Director of Education, Compliance Alliance The day-to-day functions of a financial institution would be impossible without the ability to outsource. Recently, existing guidance applicable to each specific regulatory agency — the Federal Reserve (Board of Governors of the Federal Reserve System), the FDIC (Federal Deposit Insurance Corporation) and the OCC (Office of the Comptroller of the Currency) — was replaced with a single rule, the Interagency Guidance on Third-Party Relationships: Risk Management (Interagency Guidance). The Interagency Guidance aligns the regulatory requirements and risk management expectations of third-party relationships among the “agencies” (Federal Reserve, FDIC and OCC). Financial institutions routinely rely on third-party relationships for their day-to-day functions and existence. In today’s ever-growing world of speed and technology, it would be nearly impossible to be successful and competitive without outsourcing to third-party vendors. Financial institutions may rely on outsourcing for a range of products, services and other activities. Outsourcing allows financial institutions a number of significant benefits including faster and more efficient access to technologies, human capital, delivery channels, products and services, and markets. It can also mean a more costeffective operational existence overall. Despite the option to outsource certain functions and activities, financial institutions must still adhere to risk management and compliance expectations. The use of thirdparty relationships does not eliminate the need for sound risk management within an organization. In fact, it’s quite the opposite when it comes to third-party relationships. Third-party relationships, especially those involving new technologies, could present an even higher or more elevated risk for financial institutions. A phrase we commonly use in the compliance industry is, “You can contract away the function, but you can’t contract away the compliance responsibility.” Financial institutions must understand their responsibilities to ensure safe and sound third-party relationships and practices in conjunction with the compliance of all applicable laws and regulations, including those intended to protect consumers. The New Interagency Guidance On June 6, 2023, the federal banking agencies issued the Interagency Guidance. Much of what is outlined in the new Interagency Guidance is already somewhat familiar to the agencies. The core concepts of the Interagency Guidance remain consistent with the individual agency guidance that existed prior. The new Interagency Guidance provides consistency and an interagency approach to managing thirdparty risk. This is especially important for those relationships which involve critical third parties and relationships that are customer-facing or may otherwise be impactful to consumers. The new Interagency Guidance was developed to align with the expectations and best practices in other areas of risk management. It creates a vendor management lifecycle which includes six steps: 1. Planning for a relationship 2. Due diligence and third-party selection 3. Contract negotiation 4. Oversight and accountability 5. Ongoing monitoring 6. Termination It’s worth noting that the guidance is broadly applicable and applies to all business arrangements. It doesn’t specifically address the various categories or the types of third parties, such as artificial intelligence or fintech firms. But the principles within the guidance will apply to all third parties and third-party Colorado Banker 14

relationships. That being said, financial institutions must manage all third-party relationships, but not necessarily to the same extent as the principles within the guidance can be tailored to the relationship. The Interagency Guidance provides a number of examples, which should not be interpreted as exhaustive, that financial institutions may consider for their due diligence processes. But, the agencies do note that the guidance does not impose any new regulatory requirements. While the new Interagency Guidance may not create new regulatory requirements for financial institutions, it is focused on managing various risks associated with outsourcing certain products, services and activities, especially those impacting consumers. The guidance is a reminder to financial institutions that consumer protections and compliance remain a priority among the regulatory agencies. The guidance emphasizes compliance and consumer protections, as those phrases, and similar phrases, are mentioned numerous times throughout the guidance. Financial institutions must be particularly diligent in ensuring they, and their third-party service providers, abide by and comply with all applicable laws and regulations. This includes ensuring that their financial institution, and any of third-party services providers, do not engage in any unfair and deceptive acts or practices. The new Interagency Guidance provides clarification regarding the oversight of a third party’s subcontractors, indicating that financial institutions should focus on the selection and oversight processes of their third party. Financial institutions are not expected to oversee the subcontractors directly. The guidance also clarifies and distinguishes the roles of the board of directors and senior management when it comes to third-party oversight. The guidance provides various factors that a board of directors may consider for carrying out their responsibilities, and it also identifies activities and responsibilities in which management may perform. Many see this new Interagency Guidance as a signal to financial institutions that enhanced risk management practices are an area of focus for regulators and are critical to the safety and soundness of an institution. This guidance, along with other recent consent orders, may be foreshadowing the supervisory focus on vendor management relationships and the bank’s risk management practices for maintaining such relationships. However your institution interprets the new guidance, it is essential that a review of its current policy/procedures and risk management practices is conducted to ensure it aligns with the new Interagency Guidance. Since much of the guidance seems to highlight due diligence, contracts and the management of third-party risk and relationships, banks should consider integrating or at least addressing their third-party relationship risk management program with their overall ERM (enterprise risk management) program. Julia A. Gutierrez serves as Director of Education for Compliance Alliance, developing curriculum and presentations as well as presenting at various schools and seminars, both live and in a livestream/hybrid format. Julia has over 20 years of financial industry experience with the Compliance Alliance team. 15 Colorado Banker

B NAVIGATING the Current and Future Banking Landscape WHY LENDING PLATFORMS ARE ESSENTIAL NOW MORE THAN EVER By Darren Hecht, SVP of Growth, Biz2X Banks today are facing an increasingly challenging environment. The aftermath of recent bank failures has impacted business confidence, leading to a shift in customer loyalty, with many moving their business banking to larger institutions. This trend has put additional pressure on regional banks, which find themselves in a precarious position — they are not as large and resource-rich as the major players, yet also not as niche and community-focused as smaller banks. The maturity of embedded finance, BaaS partnerships with FinTechs and the expected uptick in bank consolidation will further increase the divide and competitive pressures. This creates a digital imperative — smaller banks must adopt digital platforms or risk becoming irrelevant. The Digital Imperative The digital transformation in banking is not just a buzzword; it’s a critical pivot. Younger, digitally native clients are reshaping the banking landscape. Banks that lag in adopting digital tools risk losing relevance and a competitive edge. Digital platforms in lending are not just about originating more or automation but staying connected with a client base that increasingly prefers online interactions over traditional branch visits. The forewarning of this shift happened during the pandemic. Banks that lacked digital tools as they tried to roll out PPP loans quickly realized they lacked the technological capabilities to support clients outside of the branch. The banking industry has been historically slow to change — and for good reason. But years of talking about digital transformation did little to affect operations until the pandemic became a catalyst for change. This led many banks to adopt digital lending platforms, and clients got used to the experience. Many banks reverted to their legacy processes, prompting clients to ask, “Why can’t I still apply digitally?” The Lending Platform Advantage Investing in a lending platform is more than just enhancing loan processing. It’s a strategic step toward comprehensive business improvement that reshapes the way banks operate, interact with customers and probability. Lending platforms offer: • Improved Operational Efficiency: The automation and digitization of the lending process through platforms like Biz2X are transformative. By replacing manual, time-consuming tasks with automated workflows, banks can significantly reduce the workload on their staff. This shift not only cuts down operational costs and minimizes human error but frees up branches to focus more on value added Banks that lag in adopting digital tools risk losing relevance and a competitive edge. Colorado Banker 16

WE'VE GOT YOU COVERED WWW.CP2LAW.COM DENVER | FORT COLLINS | GREELEY Coan, Payton & Payne, LLC provides a full range of legal services to the banking industry. activities vs. chasing clients to complete applications. The streamlined process ensures faster loan processing, quicker decision-making and a more agile response to market changes. This efficiency is vital for banks to maintain competitiveness in a rapidly evolving financial landscape. • Risk Management: Advanced lending platforms revolutionize the way banks assess and manage risk, providing more accurate and comprehensive risk assessment using more available data. These platforms are able to aggregate, flag and analyze key signals holistically to identify potential risks and help lenders make more informed decisions to both expand access to credit while reducing default risk. Using rule-based decisioning also allows the bank to automatically set and apply risk-based pricing. Post-decision lenders can gather ongoing insights on borrower health that are crucial for maintaining a healthy loan portfolio and mitigating risks before it’s too late. • Enhanced Customer Experience: Customer expectations are increasingly geared toward quick, seamless and accessible services. Digital lending platforms like Biz2X simplify the loan application process, making it more user-friendly and efficient. This simplification not only enhances customer satisfaction but also fosters loyalty by providing a hassle-free banking experience. The ability to apply for loans online from any device, track application status and receive timely updates is in line with the demands of modern banking customers. • Preparation for Future Growth: The financial market is never static, and banks need to be equipped to adapt and grow with it. Advanced lending platforms position banks to be more responsive to market shifts and emerging opportunities. With tools that offer insights into market trends and customer behaviors, banks can identify and capitalize on new growth avenues. These platforms also enable banks to scale their operations efficiently, catering to a larger customer base without proportionately increasing their operational complexities. Such scalability is essential for banks aiming to expand their reach and influence in the banking sector. Overcoming Current Challenges Banks may be hesitant to lend in the current environment due to high interest rates and economic uncertainty. Banks are re-evaluating their portfolios and lending strategies to diversify portfolio risk, as nobody wants to be left holding the short end of the stick. With rising inflation and historically high rates, small businesses’ financial confidence has taken a hit, and their reliance on community banks to support them during this time is critical both to clients and banks to maintain the deposit relationship. This vicious cycle has seized up businesses’ ability to obtain financing and will accelerate the shift to alternatives. Nowhere is this more pronounced than in commercial real estate, that many banks have loaded up on in recent years. With many employees still working from home, commercial real estate sits empty at a significantly higher rate than before the pandemic, elevating the risk for backers. Using digital tools as a way to efficiently process smaller ticket loans can offer banks the right tools to focus origination and diversify portfolio concentration risk. Strategic Vision: Looking Beyond Immediate Challenges Banks need to look beyond the immediate lending environment and consider the broader benefits of digital lending platforms. These include maintaining customer relationships, exploring new market opportunities and preparing for future economic cycles. The Fed has indicated inflation has likely peaked, and the economy is cooling, with rates expected to come down later in 2024. It’s never been a better time to upgrade technology to reduce costs, reduce reliance on physical branches, and implement the right digital tools to maintain competitiveness and capture future demand. The current banking climate presents both challenges and opportunities. For banks, especially those in the middle tier between local and national in size, the path forward lies in embracing digital transformation. Learn more about Biz2X, the digital lending platform enabling financial institutions to accelerate growth with a custom omnichannel experience and best-in-class risk analytics tools. Visit www.biz2x.com. 17 Colorado Banker

I Hedged My Balance Sheet for the First Time in 2023. Now What? HEDGING BEST PRACTICES FOR FINANCIAL INSTITUTIONS By Ben Lewis, Managing Director and Head of Sales, Chatham Financial 2023 was a wild ride. Many banks came under stress after 500 basis points of rate increases. Investors and depositors worried about unrealized losses and withdrew their capital and liquidity, leading to a small number that failed. Management teams reacted quickly and began hedging their balance sheets. For many banks, maybe yours included, it was the first time using derivatives. You may be asking yourself, what now? How do I optimize this solution now that I have it? What are best practices? 1. Strategic tool vs. last resort. Some bankers employed derivatives because they felt compelled to hedge and are hoping they won’t need to do it again. That mentality misses the strategic tool that derivatives are for balance sheets and customers. Derivatives allow banks to optimize customer requests, investment decisions and funding choices. In some cases, they provide significant cost savings or bring forward future income. In other cases, they allow leadership to meet market demands without taking interest rate risk. 2. Hedging vs. trading. Well-meaning brokers may suggest a derivative because it is a good “trade” that may “make” money for the bank but exacerbate its risk to rising or falling rates. The best practice considers derivatives as hedges, not trades — risk management, not investment. In application, this means starting from the balance sheet: what is the risk position? Where is it trending? Would a derivative help change that direction? And lastly, best practice measures the proposed transaction’s impact on earnings in different rate environments before executing. 3. Proactive vs. reactionary. Sometimes, when a balance sheet’s risk position is lopsided, management turns to derivatives to bring the balance back. But derivatives are not a silver bullet. Colorado Banker 18

They can’t unwind what has already occurred. Instead, the best practice is a proactive approach that considers unlikely outcomes and looks at the opportunities that the market presents in light of what the balance sheet needs. For example, throughout 2023, banks used pay-fixed swaps to ease NIM pressure and to hedge against losses on fixed-income portfolios. The yield curve was inverted (i.e., short-term rates were higher than long-term rates), allowing banks to hedge against rising rates while also receiving income from the swap. 4. Consistent vs. sporadic. The best practice is to make derivatives part of every ALCO meeting so that it becomes muscle memory. ALCO should review existing positions and determine whether to leave them in place or unwind early. It means considering derivatives alongside ALCO’s tools, i.e., the bond portfolio, wholesale funding and loan/deposit products. For example, ALCO wants to extend the duration of the balance sheet because it is too asset-sensitive and is concerned about the possibility of falling rates. Using the bond portfolio, running a loan special or using a derivative can all accomplish the same outcome, with derivatives having the added benefit of using less capital and having an immediate impact on the balance sheet. 5. Holistic vs. micro and macro. When a bank installs native hedging tools vs. outsourcing to a third party, it opens doors to both the balance sheet and customer hedging. With a holistic hedging program, a bank can hedge at the balance sheet level and introduce customer swaps. Customer swaps offer a means to meet fixed-rate debt requirements without taking rate risk, give the customer a lower all-in rate vs. traditional fixed-rate loans and provide the bank with fee income. And there is no conflict between the balance sheet and customer hedging; the two are complementary. For example, a bank generates $100M of floating-rate loans to customers and offers swaps to those who want a fixed rate. If the balance sheet becomes too asset-sensitive, a swap can be used to hedge the risk of falling rates. In the process, the bank generates fee income, provides the customer with a lower fixed rate and hedges against the unlikely but unfavorable possibility of falling rates. Hedging interest rate risk with derivatives is an essential tool in every ALCO’s toolkit. Applying these best practices on how and when to use that tool will help management teams optimize their balance sheets. Ben Lewis is a managing director and global head of sales for Chatham’s Financial Institutions practice. Since joining Chatham, Ben has worked with depositories of all sizes, helping them manage interest rate risk through the prudent use of hedging strategies. Prior to his work with financial institutions, Ben worked with private equity firms and REITs to hedge their interest rate and foreign currency risk. Before joining Chatham, Ben served eight years in the U.S. Navy as a P-3C Orion Naval Flight Officer, serving in both Operation Enduring Freedom and Operation Iraqi Freedom. Ben graduated with distinction from the United States Naval Academy with his bachelor’s degree in economics and is a CFA Charterholder. 19 Colorado Banker

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