Credit Union Bank Acquisitions A Disappointing Trend Spread the Wealth Some Bond Sectors Performed Better Than Others in 2023 OFFICIAL PUBLICATION OF THE COMMUNITY BANKERS OF WASHINGTON WINTER/SPRING 2024
Enjoy your association news anytime, anywhere. Scan the QR code to visit our online publication to stay up to date on the latest association news, share articles and read past issues. currency.thenewslinkgroup.org Keith Gruebele EVP, Institutional Relationships 954.263.6399 kgruebele@bhg-inc.com SCAN TO REGISTER The Cosmopolitan of Las Vegas 3708 Las Vegas Boulevard South Las Vegas, NV 89109 Register now 2024 National Seminar BHG Financial invites you to attend the in Las Vegas, NV April 8-10, 2024 2 | CURRENCY
Contents 4 President’s Message Credit Union Bank Acquisitions A Disappointing Trend By Kathy Swenson, CBW President and CEO 5 2024 Spring Conference Series 7 What Are Bankers’ Top 8 Factors in Deciding the Best Core Banking System? By Jason Young, CSI 11 Save the Date! 2024 CBW Convention & Trade Show 12 Spread the Wealth Some Bond Sectors Performed Better Than Others in 2023 By Jim Reber, President and CEO, ICBA Securities 14 6 Payment Trends Shaping Community Bank Priorities in 2024 By ICBA Payments 15 You Could Be Among The Next Generation of Financial Leaders In Washington State! WINTER/SPRING 2024 © 2024 Community Bankers of Washington | The newsLINK Group, LLC. All rights reserved. Currency is published by The newsLINK Group, LLC for CBW and is the official publication for this association. The information contained in this publication is intended to provide general information for review, consideration and education. The contents do not constitute legal advice and should not be relied on as such. If you need legal advice or assistance, it is strongly recommended that you contact an attorney as to your circumstances. The statements and opinions expressed in this publication are those of the individual authors and do not necessarily represent the views of Community Bankers of Washington, its board of directors, or the publisher. Likewise, the appearance of advertisements within this publication does not constitute an endorsement or recommendation of any product or service advertised. Currency is a collective work, and as such, some articles are submitted by authors who are independent of Community Bankers of Washington. While Currency encourages a first-print policy, in cases where this is not possible, every effort has been made to comply with any known reprint guidelines or restrictions. Content may not be reproduced or reprinted without prior written permission. For further information, please contact the publisher at 855.747.4003. OFFICERS CHAIRMAN John Manolides Commencement Bank CHAIRMAN ELECT Jim Arneson Community First Bank VICE CHAIRMAN Josh Deck Olympia Federal SECRETARY/TREASURER Leanne Antonio Yakima Federal PAST CHAIRMAN Tony George Kitsap Bank ICBA STATE DIRECTOR Denise Portmann Bank of the Pacific PRESIDENT/CEO Kathy Swenson DIRECTORS Dwayne Aberle Security State Bank Susan Dumontet 1st Security Bank of Washington Dean Brydon Timberland Bank Greg Deckard State Bank Northwest Rick Darrow Liberty Bank Russ Keithley Coastal Community Bank Dan Cox Riverview Bank Jolene Riggs Baker Boyer Bank Neil Zick Twin City Bank Andy Hunter SaviBank Mike Wilson RiverBank (360) 754-5138 www.communitybankers-wa.org 4 12 CURRENCY | 3
The apathy about the increasing trend for community banks to sell to credit unions is disappointing. While it’s happening nationwide, in Washington state, one community bank sold to a credit union in 2019, and there are two more pending. Community banks are the primary lenders to small- and medium-sized businesses in America. If a community bank disappears from a community, will the credit union fill the gap? Will the credit union continue the community bank’s CRA investments? Who is going to make up the loss of tax revenue? Certainly not the credit union, which is exempt from both Washington state’s B&O tax and federal income tax. Losing a community bank to a credit union does impact consumers with the loss of banking services, taxes and community investment. However disappointing, many consumers don’t understand the differences in financial institutions. In general, consumers want their money to be safe and easily accessible, and many don’t care who provides it. Credit unions traditionally had no ability to raise capital from investors, so their growth was fueled by retained profits. Now, it seems fast-growing ones have found a shortcut: acquiring the assets of a community bank by purchasing it directly, rather than the slow process of drawing away business with better rates enabled by their tax-free status. However disappointing, you can’t blame the board of a community bank for KATHY SWENSON, CBW PRESIDENT AND CEO Credit Union Bank Acquisitions A Disappointing Trend Losing a community bank to a credit union does impact consumers with the loss of banking services, taxes and community investment. PRESIDENT’S MESSAGE 4 | CURRENCY
accepting the best offer — their fiduciary responsibility is to their shareholders, not taxpayers at large. It’s disappointing that many of our elected officials appear apathetic about the loss of tax revenue resulting from the shift of activity from community banks to credit unions while simultaneously offering legislation to increase the tax burden on banks of all sizes. Where is the concern that several million dollars of tax revenue is re-routed to the bottom line of a credit union? Credit union assets have topped $2 trillion nationwide, and that number is growing rapidly. In particular, credit unions have focused on growing their business lending portfolios, an activity never considered when credit unions were originally granted their tax-exempt status. Those responsible for the public treasury could introduce legislation to prevent the sale or to require the purchasing credit union to compensate the state for the loss of revenue. But … silence. It’s disappointing that our elected officials appear apathetic that the CRA investments they are so eager to require of community banks could fizzle to nothing under a credit union. They could change regulations to require the same CRA investment from all credit unions or, at the very least, require the acquiring credit union to adopt the CRA requirements from the bank they are purchasing. But … silence. Thankfully, ICBA is not silent and is leading the charge to draw attention to and prevent the continued loss of community banks across the nation. In a recent post on X, ICBA noted that 20% of bank acquisitions are now by tax-subsidized credit unions. ICBA also filed a Community Reinvestment Act protest with the FDIC, saying that credit unions acquiring community banks “expand the section of the financial services industry exempt from taxation and the CRA, harming taxpayers and affected low- and moderate-income communities.” These issues are indeed best fixed at the federal level. A statechartered credit union could change to a federal charter if it doesn’t like more restrictive state regulations. If it continues, this rapid acceleration of credit unions acquiring community banks and the ensuing loss of choices, tax revenue and community investment will eventually disappoint even elected officials and consumers. CONFERENCE SERIES MAY 14-15 Entire bank joins for only $595! 2024 Spring Scan the QR code to register today! CURRENCY | 5
Is your community bank bond portfolio performing? Meet Jim. Jim meets with community bankers across the U.S. to discuss ICBA Securities’ investment products, services, and education through our exclusively endorsed broker, Stifel. Investing through Stifel is a direct investment back into the community banking industry. When Jim is on the road, he always takes time to enjoy local restaurants and share on social media. As an ICBA member, you’ve got Jim’s help investing. Learn more at icba.org/securities Member FINRA/SIPC 6 | CURRENCY
What Are Bankers’ Top 8 Factors in Deciding the Best Core Banking System? BY JASON YOUNG, CSI As we begin the new year, many institutions are reflecting on their goals and plans for the year ahead. And some may even be evaluating whether to change core providers as current contracts near expiration. But what should bankers consider when deciding upon the best core bank system? We used findings from surveys, industry research reports and interviews from recent years to develop eight factors that banks should keep in mind when deciding on the right core banking platform. TOP CONSIDERATIONS FOR EVALUATING A CORE PLATFORM Factors for switching technologies include cost, satisfaction with their existing technology suites or a cultural mismatch with their provider. But since a conversion often overhauls business processes and takes a considerate monetary and time investment, deciding on the right partner requires a great deal of consideration and discussion with key stakeholders at the bank. Here are eight factors that should play a part in bankers’ evaluation of core platforms: 1. Expected Comprehensive Functionality Bankers favor a core platform approach to technology primarily because it eliminates dealing with multiple vendors and disjointed experiences. So, it’s hardly surprising that product suites and functionality top the list of essentials as bankers begin searching for a new core. Core contracts can last for decades, so banks must consider whether the vendor’s technology will successfully carry them into the future and grow alongside them. A core banking platform must offer comprehensive functionalities to support various banking operations, including customer onboarding, account management, deposits, loans, payments and reporting. This also includes integrating digital banking solutions to rival big banks and digital experiences elsewhere. 2. Whether a Core Will Maximize Return on Investment Banks evaluate the cost-effectiveness of a core banking platform by considering factors such as the initial implementation investment, ongoing support costs and potential customization or integration expenses. The best deals with new technologies often originate from the core vendor or their existing partners, as there are fewer implementation and integration steps. Although customer demands often drive technological priorities, most investments ultimately seek to save money one way or another. For instance, responsive cloud-based architecture can eliminate some software and hardware expenditures. Built-in efficiencies like streamlined onboarding can also bolster the bottom line by helping customers open accounts and spend money from them faster. 3. Core Banking Platform Customization and Ease of Use Bankers look for banking functions to reliably fit together and interact cohesively. The core platform should be easily navigable with search functionality, easy-to-decipher data, readily available tutorials and reliable service representatives who assist with the platform as needed. On the vendor side, a thoughtful adherence to UX design principles can go a long way. Bankers often praise platforms with an aesthetic appeal, a natural hierarchy, CURRENCY | 7
Factors for switching technologies include cost, satisfaction with their existing technology suites or a cultural mismatch with their provider. straightforward language and accessibility. Overall, they look for consistency throughout the platform to create a coherent, straightforward experience when serving customers or accessing their data. 4. The Reliability and Stability of the Core Platform Given the stakes of employee demands and increasing competition, banks require a core banking platform that is reliable and stable. It should be capable of handling high transaction volumes and processing requests accurately and efficiently while maintaining uninterrupted service availability. If there are service interruptions, those support tickets should be resolved as promptly and effectively as possible. For that reason, many banks ask questions in the determination phase about how many support tickets a technology logs in a given week and how long it takes to resolve them. Further, a solid platform should have stringent security measures, including data encryption, access controls, audit trails and compliance with regulatory standards. 5. The Quality and Accessibility of Bank Data and Analytics Easy access to core data represents a massive advantage for a growing bank. Bank data and analytics offer insight into customer behaviors, performance indicators and regulatory reporting requirements. Accessing and querying core data should easily enable banks to identify opportunities for growth and relationship extension. As such, these banks look for robust reporting tools, account analysis and data-driven insight into customer profitability. Customer relationship management (CRM) is one such data source that offers efficiencies, as it enables bankers to track behaviors and transactions across the system on the customer level. Many banks also look for insight into overall profitability and net interest margin, as well as narrow performance analysis of branches and officers. 6. The Core’s Scalability and Flexibility Most institutions seek out a core platform that supports growth and can scale accordingly. This includes accommodating increased transaction volumes, additional branches and new products or services. While there are similarities across the board, every bank also has unique business processes and customer needs. Extensive API catalogs and support for thirdparty technology integrations assist in that pursuit and enable institutions to stay adaptable, even if the core provider doesn’t have the exact solution the institution needs. The resulting agility ensures that banks can quickly respond to market demands, regulatory requirements and technological advancements. 8 | CURRENCY
7. Tight Integration of All Banking Systems A cohesive core banking platform allows for easy data transfer that reduces expenses, opens accounts faster and enables the ability to launch new products more affordably. It also improves the overall user experience by making each component piece — even if it was added later or by a different vendor — fit into the technological puzzle without feeling tacked on or behaving like a disparate, siloed system. The standard of integration relates closely to the user experience, as it can help eliminate redundant processes and offer a more seamless feel. Tight integration also encompasses the digital experience — meaning the bank’s digital experience on a phone should mirror that on a laptop or tablet. 8. Core Vendor Support and Expertise Finally, the reputation and service offered by the core banking platform vendor are vital considerations for banks. While system functionality is vital in vetting the provider, the decision often comes down to which vendor will make the best partner, both in innovation strategy and culture. To understand whether the technology provider is a good fit, bankers often assess their industry reputations, the quality of interactions and how they answer questions. It’s also worthwhile for many to follow up with as many references as possible and ask other bankers’ opinions at networking events. Bankers also emphasize the importance of reliable technological implementations. They expect products to be fully ready for use, avoiding delays and ensuring a successful rollout that meets the needs of their customer base. Banks also require reliable assistance and dedicated personnel who can address their concerns reliably and proactively. SEARCHING FOR THE RIGHT CORE BANKING PLATFORM By carefully evaluating core banking technology, banks can empower themselves to thrive in the digital age while delivering exceptional customer service and creating a lasting partnership with their technology provider. Check out CSI’s “Definitive Guide to a Modern Core Banking Partnership” for a deep dive into the topic. Jason Young serves as CSI’s senior director of enterprise banking. CURRENCY | 9
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Spread the Wealth Some Bond Sectors Performed Better Than Others in 2023 BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES As we have navigated the holiday season and hopefully had some time to wrap up some gifts as well as a successful 2023, let’s now spend a few minutes looking into pockets of relative value in the bond market. To get there, we should remind ourselves of the vagaries and ironies of fixed-income investing. In my 35 years of portfolio management participation, I’ve noticed some recurring themes and doctrines, which have both positives and less-than-positives: • Higher rates = lower prices. • Selling bonds at a loss, versus a gain, has positive cash flow implications. • Community banks buy more securities in lower rate periods. • Higher coupons have less price volatility than lower coupons. • Yield spreads usually widen when rates fall. Let’s stay with this last bullet point for a minute. In practice, this means the value of a “risk” asset, which we’re defining here as anything other than a treasury note, will improve less than a similar duration treasury, given a drop in rates. There are several reasons for this reaction. One is that rates fall when investors expect the economy to slow down, so presumably, credit quality will become sketchier. Another is that the lower market rates translate into greater call risk since the likelihood of a bond ending up “in the money” to be redeemed increases. USUALLY, NOT ALWAYS The corollary to the preceding paragraph is that spreads narrow as rates rise. In the year just completed, in which Treasury yields fell thanks to a fourth-quarter rally, we saw an amazingly diverse set of returns for the various bond sectors that community banks like. Most of the mortgage sector, for example, saw their spreads widen. The genesis of the wider-spreads/higher-treasuries dynamic was, of course, the demise of several large banks beginning in March. Silicon Valley Bank, in particular, with its $200 billion-plus of mortgage-backed securities (MBS), caused that sector to have some indigestion through the summer as the FDIC’s bridge bank gradually disposed of the assets. Still, yield spreads were wider at the end of the year, partly the result of depositories in general not purchasing many bonds of any color or flavor. The MBS sector, in this column, includes traditional fixed-rate pass-throughs, collateralized mortgage obligations (CMOs) and even adjustable rate pools (ARMs). In the counter-intuitive world of bond investing, mortgage pools’ underperformance in 2023 would seem to indicate a pocket of value heading into 2024. MUNIS FOR THE BID? You may ask, “If MBS are cheap, what’s expensive?” On the other side of the past-performance spectrum are municipal securities. The muni market has other machinations going on that resulted in relatively low yields and spreads by the end of last year. Demand for munis is determined not so much by institutional investors but by the retail sector. Well over 60% of existing muni bonds are owned by individuals either directly or through municipal bond funds. Appetite for retail munis has generally grown over time as baby boomers retire, and except for temporary “headline” sell-offs such as those related defaults by Detroit or Puerto Rico some years ago, demand has been 12 | CURRENCY
UPCOMING WEBINARS ICBA Securities and its exclusive broker Stifel will present 16 webinars throughout 2024. There will be several tracks, including balance sheet management, enterprise risk and economic outlooks. We will again offer CPE credits for these events. Be on the lookout for announcements. Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. steady and growing. Recent credit-quality performance in the sector has been solid. The supply side of the municipal market is another story. According to the Federal Reserve, the entire muni market grew by only $50 billion between 2010 and 2022, or barely more than 1%. More recently, in 2023, there were a number of issues postponed into the future, presumably to chase lower interest rates. The amount of new paper issued in 2023 was over 20% less than in 2021. While some of that was due to fewer calls being exercised, the continued supply shortage has pulled down tax-equivalent yields for institutional buyers, including community banks, into “through the curve” levels. For maturities out to 10 years, investment-grade munis could yield up to 50 basis points (.50%) less than benchmark treasuries. COGITO, ERGO I SWAP? The previous two sections would seem to suggest a tidy bond swap strategy. The first step in any simultaneous purchase and sale is to find the most efficient securities to sell. Those would be the ones with the lowest return to the buyer, otherwise known as a “take-out yield.” Bonds that have lower returns than treasuries are hard to come by, but that’s exactly where shorter municipals were trading at the end of 2023. Securities to replace them? I’d start with some kind of MBS. Recently, strategists from Stifel have been suggesting “hybrid ARMs,” which have reasonable yields today and the possibility of maintaining them in the future even if rates fall. Most of them come with offering prices below par, which is another rarity. Ultimately, the theme of this column is that opportunities are abound for your bond portfolio at the start of the year. Some sectors look historically expensive, while others seem to offer uncommon value. Acting early in the year can get momentum started for a prosperous 2024. CURRENCY | 13
6 Payment Trends Shaping Community Bank Priorities in 2024 BY ICBA PAYMENTS 2023 swooped in and rocked a decades-long payments infrastructure with the perfect storm of fresh solutions, external pressures and market competition, but it also laid the groundwork for a year ahead filled with opportunity. The novel payments concepts and ideas that percolated are now primed for the next steps, positioning community banks for action in 2024. To ease the regulatory and economic forces pressuring margins and embrace new payments opportunities, community banks should focus on six key trends this year to drive their payments plans and activities: 1. Evolution of payments at the Point of Sale (POS): As open banking matures, Pay by Bank functionality accelerates — courtesy of megabank support — and instant payments uses expand, this trifecta of developments will drive the POS evolution. Expect to see these changes start to shift both the physical and e-commerce POS this year, with more dramatic transformation in the next decade. Community banks should begin evaluating their strategies as they relate to POS transactions. 2. Deepened business relationships: As a follow-up to their outsized roles as Paycheck Protection Program lenders, community banks can once again showcase the strength of their relationship-based business model. Solutions like instant payments offer attractive cashflow benefits for small-business customers while simultaneously helping community banks grow their deposits. By diversifying products, community banks can increase the number of solutions their business customers utilize and, in turn, strengthen their ties to the bank. 3. Increased revenue pressures: With interchange under fire from merchant incentives to fee cap proposals, payments revenue could be facing a hit. In addition, as instant payments catch on, the potential for the payments mix to shift grows. Community banks should focus on diversifying their payment product offerings to help bolster their noninterest income in new ways. 4. Expanded teen/family banking products: Demand for teen banking apps that support checking accounts, savings accounts, debit cards, P2P payments (primarily with parents) and financial education has seen explosive growth. In fact, more than 6 million families already use the Greenlight solution, one of the market leaders in this space. While Gen Z doesn’t currently represent a core customer base, establishing and nurturing these relationships could pay off in the long term. In 2024, community banks should place more emphasis on teen and family banking products with the long game in mind. 5. Growth in instant payments: The Fed closed out 2023 with more than 300 financial institution participants from 45 states utilizing FedNow — up from just 35 in July. Instant payments are on a growth trajectory and should become more of a priority for community banks in 2024 to ensure they embrace the future potential for more diverse product offerings. 6. Heightened attention to the customer experience: Some research indicates that customers want services from their primary bank, reporting that over half of consumers rate their primary bank as the most desirable provider for mobile/digital wallet app services. But the experience must meet market expectations. That pushpull effect will incentivize community banks to place more emphasis on customer experiences and digital interfaces in 2024. While the wheels were set in motion last year, we’re going to see an acceleration of payments prioritization among community banks as they continue to ramp up. And as they do, ICBA Payments will be there to provide strategic support, products and services to help community banks act on these opportunities and excel in 2024 and beyond. 14 | CURRENCY
■ Highlight how your education, interests and experience may fit into one of the many roles in a bank, credit union or at DFI as an industry regulator. ■ Match you up one-on-one with a mentor, providing a direct connection into the industry as you determine your future career opportunities. ■ Industry leaders will share insight about: ▪ Their career path into banking, lending, finance, and investing. ▪ Career growth opportunities and how organizations seek and hire new talent. ▪ Upcoming trends for the industry, including fintech and cybersecurity. ▪ The importance of financial education and outreach in Washington State. Could You Be Among The Next Generation of Financial Leaders in Washington State? At the Department of Financial Institutions (DFI), we’re working with our bank and credit union association partners to offer you a four-day mentorYou Could Be Among The Next Generation of Financial Leaders In Washington State! At the Department of Financial Institutions (DFI), we’re working with bank and credit union association partners to offer you a four-day leadership program June 17-21, 2024 (with June 19 off) to be conducted at Bellevue College in Bellevue, Washington. The workshop will: https://dfi.wa.gov/next-generation-financial-leaders Network with industry leaders! Learn about important career-building strategies and opportunities. Samuel Johnson, DFI, Financial Examination Supervisor Amy Hunter, DFI, Director Division of Credit Unions Roberta Hollinshead, DFI Director Division of Banks Join Us! Scan the QR code and apply to join the program today! Apply today! Monday & Tuesday: In person at Bellevue College Wednesday: Juneteenth Holiday Observance Thursday: Visit a financial institution Friday: Virtual event
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