The Latest Fraud Trends and Prevention Best Practices 2024’s Top Cybersecurity Threats Around the Town With CBW OFFICIAL PUBLICATION OF THE COMMUNITY BANKERS OF WASHINGTON SPRING 2024
Is your community bank secure? Meet Dina. Dina provides clients with the guidance they need to steer clear of card fraud all year long. Working together with ICBA Payments partners, she ensures client banks are receiving the level of care and support they deserve. Even when she’s waiting to pick up her kid from practice, she’s scribbling notes on how we can better protect banks from fraud. By working with ICBA Payments, your bank has Dina’s ongoing support. Learn more at icbapayments.com
Contents 4 Around the Town With CBW 6 3 Steps to Evaluate Credit Trends and Risk Management By Erica Crain, Managing Principal of Value & Risk Services, CLA 7 Register Today! 2024 CBW Convention & Trade Show 9 The Latest Fraud Trends and Prevention Best Practices By Ryan Dutton, Senior Fraud Operations Manager, SHAZAM 12 Comingling Personal and Business Funds By Jeff Thompson, CRCM & Katie Ferrell, CRCM, CAMS, United Bankers’ Bank 14 Many Teller Cash Recycler Brands Are Obsolete Some Are Even at End of Life and Are a Security Risk By Scott Fieber, Chief Strategy Officer, Cook Solutions Group 16 2024's Top Cybersecurity Threats By Steve Sanders, Chief Risk Officer and Chief Information Security Officer, CSI 18 [Small] Business is Booming Is Your Bank Ready To Ride the Wave? By Core10 20 Loan Participations Plant the Seeds for Lending Growth By Matt Helsing, SVP & Northwest Regional Manager, PCBB 22 Recession Proofing How To Benefit From a Lull in the Economy By Jim Reber, President and CEO, ICBA Securities 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 Mike Wilson RiverBank (360) 754-5138 www.communitybankers-wa.org CURRENCY | 3
Around the Town With CBW 4 | CURRENCY
The past few months have been exciting. CBW has attended events across the nation — having fun, strengthening relationships and advocating for our members. We hope you’ll join us on our next adventure. CURRENCY | 5
3 Steps to Evaluate Credit Trends and Risk Management BY ERICA CRAIN, MANAGING PRINCIPAL OF VALUE & RISK SERVICES, CLA When a message is repeated, it’s likely intended to carry some weight. In this regard, the federal banking regulators have issued more than a “friendly reminder” by placing credit risk in the top examination priorities for the year. Additional emphasis was focused on assessing how banks are identifying and responding to credit risk as economic conditions evolve. Then, in February 2024, news headlines reiterated the significance of credit risk with an update about New York Community Bank and a lacking loan review program and deteriorating credit quality trends for banks has come to the forefront. Credit risk has been in the spotlight for years. In May 2020, federal regulatory bodies came together and issued guidance about the significance of credit risk review systems. In 2021 and 2022, financial institutions got a heavy dose of guidance on the Allowance for Credit Losses, which included key principles around credit risk identification and management. Last year, the federal regulatory agencies issued guidance on loan accommodations and workouts in anticipation of a commercial real estate meltdown. The messaging has been quite strong. So, how is a weak loan review program a critical matter in 2024 for one of the largest financial institutions in the United States? Working with financial institutions across the nation, a common question asked is about the reassessment of credit risk appetite, culture, risk reduction strategies, concentration management and credit review functions in light of the current economic shifts and ongoing regulatory focus. However, a usual response is that not much has changed or been considered necessary as the financial institution has never received any criticism from regulators in the past. Financial institutions have significant experience navigating evolving credit cycles, and this evolving economic and regulatory environment presents another opportunity to consider whether strategies need to change. Credit stresses are growing, and borrowers have to adjust to tighter financing conditions. Cash flow stress, lower income and higher costs are realities of an increasing number of consumer and commercial borrowers that impact their repayment performance. For your financial institution, look at the evolving credit risk exposure and consider some simple steps such as: 1. Assess your current loan portfolio by key segments and document the risk exposure. Although commercial real estate has been making headlines, there are also signs of weakness in other consumer lending categories. Stay informed and consider the ripple effect of softening conditions throughout the entire portfolio. 2. Evaluate your independent loan review process. Consider if your internal team is adequately staffed or providing the expertise needed. Challenge the results of thirdparty providers and go deeper into areas demonstrating increased risk for your financial institution. Your loan review process shouldn’t just be a validation of your assigned risk ratings. If your third-party provider is not giving you the insights you need in the current environment, consider other options. 3. Engage proactively with your borrowers who appear to be at risk to identify opportunities to help. The time investment today could help offset potential significant losses in the future. Last but not least, you can also engage a trusted partner who can help you navigate the risks in your portfolio by providing a credit risk review that empowers management with insights and opportunities in your bank’s loan portfolio. 6 | CURRENCY
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Debit card fraud is on the rise. It accounts for about 40% of all card fraud. Here’s what our SHAZAM fraud specialists are noticing and what financial institutions can do to protect their cardholders. SOCIAL ENGINEERING SCAMS ARE STILL COMMON Bad actors continue to use social engineering schemes to trick cardholders into providing their sensitive information or making fraudulent transactions. In these schemes, bad actors often claim to be a trusted financial partner or a representative of a well-known merchant. In their calls, emails or text messages, they will allege there’s a problem with a person’s card or account. These false narratives are meant to play on cardholders’ emotions to trick them into giving up their sensitive data, such as their card number, log-in credentials or a one-time password. Education is key in protecting cardholders from being caught up in these malicious attacks. Remind them to be skeptical of unsolicited calls or emails. Cardholders should avoid giving out sensitive information over the phone or via email. Financial institutions may need to verify personal information if a cardholder calls them, but never the other way around. Financial institutions should also review their internal verification processes. Pay attention to customer behaviors and listen to their responses. Empower staff members to investigate further if a cardholder request is unusual behavior from previous interactions. If their gut is telling them something is off, odds are they are probably right. FRAUDSTERS LURKING TO ATTACK BINS Cybercriminals are constantly looking to stay in the shadows to get their hands on cardholder information. The industry continues to see this behavior by fraudsters through BY RYAN DUTTON, SENIOR FRAUD OPERATIONS MANAGER, SHAZAM The Latest Fraud Trends and Prevention Best Practices CURRENCY | 9
enumerative account testing to identify validly issued cards and solve card issuance strategies. To make it more difficult for fraudsters to predict patterns, it’s our recommendation, and industry best practice, to randomize card issuance in your assigned bank identification number range. Think of it this way — randomization is the equivalent of finding a needle in a haystack. Who wants to go searching for that? Certainly not a criminal. ACCOUNT TESTING: THE FIRST SIGN OF FRAUD Fraudsters often test the waters on any cardholder information they may have illegally obtained by making a small transaction, typically under $5. If a test authorization is approved, fraudsters then use the information to commit more fraudulent transactions or sell the information on the dark web. The ability to detect these threats before they can cause damage is critically important. Review active cases and submit updates when you confirm the activity with your cardholder. Our fraud escalation team constantly analyzes fraud cases and is always available to help explore custom research and rule‑strategy options to respond to issuer-specific fraud trends. PROTECTING FINANCIAL INSTITUTIONS AND CARDHOLDERS Fraud is more complicated than ever. Having sophisticated tools to fight back is paramount for a financial institution’s fraud mitigation strategy. Review active cases and submit updates when you confirm the activity with your cardholder. If the cardholder can’t be reached or the activity can’t be verified, request to update the case status to “unable to confirm.” You can also adjust your financial institution’s daily limits. A daily limit on debit card withdrawals ensures the account associated with the debit card is safe and cannot be emptied in the event a person’s debit card is compromised. If your cardholders, in general, are not asking to raise limits, consider lowering them to better protect your cardholders and your financial institution. Financial institutions can go even further with card blocks. This gives you the power to manage authorization blocking at the primary account number (PAN) and BIN levels. You can implement blocks by combinations of criteria or just one for a specific amount of time or indefinitely. The wide array of available blocking criteria allows you to create blocks easily based on cardholder requests and fraud trends identified by your institution. Fraud investigations are a constant balance of risk versus convenience. It is important to remember even small fraudulent transactions can quickly become big problems for you and your cardholders if they go undetected. But by investing time and resources into fraud mitigation strategies you can reduce fraud losses for your financial institution and provide peace of mind for your cardholders. Ryan Dutton is an experienced fraud strategy manager with a 17-year history of working in the fraud detection industry, focusing on the management of payment card fraud. Ryan’s focus is managing payment card fraud. His work at SHAZAM gives him a front-row seat to the challenges facing community financial institutions. Having sophisticated tools to fight back is paramount for a financial institution’s fraud mitigation strategy. 10 | CURRENCY
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Comingling Personal and Business Funds BY JEFF THOMPSON, CRCM & KATIE FERRELL, CRCM, CAMS, UNITED BANKERS’ BANK When business customers comingle funds between personal and business accounts, it can create challenges both for the bank and the customer. This article highlights scenarios that should be avoided and how to educate business owners on potential negative implications. SCENARIO 1: CASHING A CHECK WRITTEN TO A BUSINESS John Doe brings in a check written to his single member LLC, JD Associates, and wants the bank to cash the check and issue proceeds directly to him. Regardless of the size of the check, this method of conducting the transaction should be avoided because while Mr. Doe is the sole owner of that business, he is not the payee. John should deposit the check into the appropriately styled account and issue a check made payable to himself off the business account, or if necessary, negotiate a cash withdrawal after the item is safely deposited and any appropriate hold period has elapsed. Failure to handle the transaction in this manner creates risks because the item no longer includes the appropriate chain of custody to meet the requirements of Section 3-302 of the Uniform Commercial Code — Holder in Due Course. More importantly, if the check was written to pay for a product or service of JD Associates LLC and there is an issue or dispute with the product or service at a later time, Mr. Doe’s corporate veil that he created when he formed the LLC could be compromised, and his personal assets could be at risk if the situation results in a legal disagreement. 12 | CURRENCY
SCENARIO 2: BUSINESS OWNER MAKES A MORTGAGE PAYMENT WITH CORPORATE FUNDS Jane Doe owns Jane’s Bridal Shop LLC (JBS). Jane’s personal mortgage is with your bank, and the JBS account is held with a competitor. Jane writes a check from the JBS account to your bank to pay her mortgage. While it appears that she is simply paying herself, writing a business check to cover a personal expense potentially invalidates the personal liability protections Jane is afforded through her LLC. If JBS is sued in the future and the opposing attorney is able to collect the canceled checks used to pay the personal mortgage, they may be able to convince a court Jane’s personal assets are no longer off limits from being seized. This legal battle could potentially place your bank in the middle of a lawsuit, and while there may be no financial loss to your bank, considerable manpower and resources could be exhausted by answering subpoenas. In addition to the scenarios above, making exceptions for customers to enable comingling of personal and business funds can create compliance monitoring challenges. For example, a well-defined BSA program has parameters in place to identify abnormal trends or behaviors that contradict customer due diligence data. If customers are not utilizing their accounts as intended and styled, it could create false alerts and confusion for BSA staff. Additionally, many business account fees are derived from transaction activity. Condoning the use of personal accounts for business purposes could have an impact on fee income. Often, exceptions to the previous scenarios are granted because a business owner is well known to the bank and, at the time of the transaction, it seems simpler to avoid a few extra steps, or the business owner simply is unaware of the implications that could arise from certain transactions. Take the time to educate business owners on proper management of their accounts and the personal liability that could result from comingling funds in order to foster trust and reduce challenges that could arise well after the transaction takes place. CONTACT US TODAY TO PLACE YOUR ANNOUNCEMENT AD Call 801-676-9722 or scan the QR code to fill out the form. Employees are motivated when they are recognized and feel valued. It’s about… ▷ Who to congratulate ▷ Who to acknowledge ▷ Who to thank for a job well done This magazine is a great platform to celebrate your team’s accomplishments! Place QR Code Here IT’S ABOUT THE CURRENCY | 13
Obsolete Some Are Even at End of Life and Are a Security Risk BY SCOTT FIEBER, CHIEF STRATEGY OFFICER, COOK SOLUTIONS GROUP Many Teller Cash Recycler Brands Are When it comes to lobby teller cash recyclers, not much has changed over the last decade since they released. When implementing this technology in the branch, people often overlook the strategic possibilities of recyclers. For years, we loved the implementation of a dispenser that would replace our traditional teller cash drawer and allow for a safe and automated way to handle cash at the teller line. It helped us avoid cash counting mistakes and made the overall branch operation flow in a smoother way. When the technology advanced to full cash recycling, which enabled the ability to not only dispense cash but also accept it, we felt like we arrived at the finish line! The full circle of the cash journey in the branch was now complete with a single piece of technology! No more need for a vault, cash drawers and time-consuming cash audits; the list of benefits went on forever. This technology has been so successful that it is very rare to find any financial institution today that doesn’t have this technology deployed. Finally, technology has caught up with the financial industry. 14 | CURRENCY
The technology caught on so quickly that it has slowly become an afterthought. If you were to pick a black hole of technology within a financial institution, teller cash recyclers would fit that bill better than maybe any other technology. When deploying the first unit, so much planning and testing went into it. Once the rollout to the entire branch footprint was completed, it hasn’t seen a second look. To my surprise, my initial feeling was completely wrong. This technology has not stopped evolving over the years. Many financial institutions are caught in a comfortable spot but quickly get behind unknowingly. I have seven teller cash recycling strategies worth a re-look. I want to share some thoughts that would be worth asking yourself when looking at your current cash recycling technology to see if you are staying current. 7 TELLER CASH MANAGEMENT & RECYCLER STRATEGIES 1. Rolled Storage Modules (RSM) are outdated: This has quickly become a technology of the past. RSMs limit your cash capacity, transaction speed and, more importantly, ability to audit and share cash between devices. Interoperability is becoming a bigger and bigger need. If you can’t share your cash from device to device without touching it physically, you’re missing the boat. 2. Self-audits are now automated: Still counting cash with dual control by hand to make sure your units are in balance? STOP! Today’s technology is way past those days. 3. Capacity has increased: Cassette-based recyclers provide close to double the capacity compared to an RSM recycler. Odds are, with a cassette-based recycler, you can reduce the number of machines you need to buy and maintain to stay profitable. No one wants to run out of cash or a denomination, doubling up your available currency levels brings that peace of mind and exceptional consumer experience. 4. Open platforms for integration: Do your recyclers run closed proprietary software that inhibits software collaboration with older branch technology? If so, ask yourself why. Integrating your recyclers to AI platforms, branch surveillance systems for dispute tracking, remote resolution software that the servicer of your choice can use, and the list goes on. Don’t give up your freedom by deploying a recycler that doesn’t offer an open platform to collaborate with your other technology partners. 5. Price has come down: Let us be real, recyclers should not be the same price as an ATM. If you haven’t shopped for upgraded technology lately, you will be surprised that you were likely overpaying for subpar technology. 6. Cash handling ecosystem: This is not just a teller cash recycling conversation. This should be part of a greater conversation around how you need to handle the cash distribution channels available to you. There are several pieces to this puzzle, and making sure they fit is important. Do not make a siloed decision solely around the safe behind the teller row. 7. Secure/Certified Service Provider with remote security patching capabilities: In the era of increased cyberattacks, you can’t afford to overlook this point. All this new technology is only as good as the service provider keeping it hardened, secure and stable. Make sure your service provider is SOC 2 Type II certified, does not sub the maintenance out to a non-secure provider and can provide critical remote security patches, cyber threat monitoring and maximize remote fixes. Although teller cash recyclers have been around for a while, you shouldn’t wait to enhance your deployment strategy. We need more out of the technology we have already before we add new technology. Open platforms give you a starting chance. Cook Solutions Group can help you start the discussion around a vendor-agnostic approach that truly fits your growing needs. CURRENCY | 15
As the process of protecting systems, networks and endpoints from attack, cybersecurity is critical to any organization. Since banks must protect customer data, keeping up with evolving cyber threats and concerns is vital. In its annual "Banking Priorities" survey, CSI asked bankers across the country about their views on top cybersecurity challenges. This article explores how bankers view the changing cybersecurity landscape. EXPLORING BANKERS’ TOP CYBERSECURITY CONCERNS As part of our country’s critical infrastructure, financial institutions are prime targets of cyberattacks and must navigate an evolving threat landscape. Let’s examine the breakdown of bankers’ top cybersecurity concerns in this year’s survey: • Adapting to Changes in the Cyber Insurance Market: The results reveal that 19% of bankers view this as their top concern, which is unsurprising as cyber incidents continue to rise. In addition to cybersecurity monitoring solutions and increased personnel training, cyber liability insurance provides another layer of protection for institutions in the event of an attack. This result highlights a potential uncertainty about upcoming developments in the cyber insurance market, whether regarding price increases or coverage exceptions. Institutions should carefully review their coverage, and some are seeking assistance from IT governance services to evaluate their needs. 2024's Top Cybersecurity Threats BY STEVE SANDERS, CHIEF RISK OFFICER AND CHIEF INFORMATION SECURITY OFFICER, CSI • Being Unprepared to Respond to a Cyber Attack: 18% of bankers expressed concern with their preparedness for cyberattack responses. As incidents evolve, institutions must ensure they plan accordingly, including developing and testing robust incident response plans (IRPs) that detail the steps to take in the event of a cybersecurity incident. Having an established IRP makes it easier for institutions to act decisively and minimize negative consequences if faced with a cyberattack. • Lack of Compliance with Cybersecurity Frameworks: 17% of bankers selected lack of compliance with cybersecurity frameworks as a top concern. Implementing robust cybersecurity frameworks, such as the National Institute of Standards and Technology’s Cyber Security Framework (NIST CSF), helps institutions identify and apply solid controls in high-risk areas. Proven frameworks also enable banks to maximize compliance initiatives and cybersecurity spending. • Cyber Risks Not Being a Priority for Executive Leadership: This year, 17% of respondents indicated concern that cyber risks are not a priority for their institution’s executive leadership. Institutional leadership should recognize cybersecurity as a business issue, and a chief information security officer (CISO) plays an important role in guiding cybersecurity spending. 16 | CURRENCY
ARE BANKERS READY TO RESPOND TO CYBERSECURITY THREATS? Preparing for the inevitable cyberattack is a never‑ending responsibility. Let’s gain insight into banking executives’ perspectives on their own cybersecurity readiness: • Improving Cybersecurity Education: 92% of respondents agree — with 50% strongly agreeing — that their bank could improve cybersecurity education. If your employees receive a suspicious email, do they know the proper steps to report it? Educating employees on evolving threats and the latest social engineering schemes is one of the most effective ways to mitigate cyber risk. • Understanding Cyber Risk: Most respondents (89%) agree they understand their institution’s cyber risk. But as risk continues to evolve, are banks keeping up with the latest threats? Understanding recent cyber incidents provides key insight into how bad actors execute attacks and helps institutions stay one step ahead. As discussed previously, consider implementing a cybersecurity framework to guide risk mitigation if you haven’t already. • Producing a Business Case for Cyber Spending: An overwhelming majority (92%) of respondents feel their CISO can produce a strategic business case for cyber spending. Since cybersecurity affects the entire organization, it should be viewed as a business issue. IT governance helps your institution ensure your technology investments support your unique goals while mitigating IT- and cybersecurity-related risk. IT governance experts can also supplement your CISO’s efforts in making a business case for cyber spending. While these responses are encouraging, many financial institutions stand to benefit from hosting internal discussions between their CISO and other C-suite executives to ensure everyone is on the same page and confident surrounding cybersecurity preparedness. Additionally, they should focus on resource optimization, streamlined processes and a commitment to ongoing education to fortify their institution against the ever-changing threat landscape. HOW DO BANKERS FEEL ABOUT CYBERSECURITY COMPLIANCE? As cybersecurity threats increase, so does regulators’ emphasis on cybersecurity compliance, which involves fulfilling necessary regulatory requirements and implementing security controls for protection. This enhanced focus requires banks to uphold a secure IT infrastructure and proactively address risks. Given regulators’ increased focus on this area, it’s no surprise that 87% percent of bankers reported being at least somewhat concerned about cybersecurity compliance. Survey results reveal that bankers are using a variety of methods and tools to stay compliant. The top tools used for cybersecurity compliance are conducting risk assessments and impact analysis studies (46%). Well-executed risk assessments are a key component of a cybersecurity plan because they help organizations identify and manage financial, operational and other risks associated with internal and external incidents. WHY INSTITUTIONS SHOULD UNDERSTAND TOP CYBERSECURITY THREATS Dealing with cybersecurity threats is nothing new for financial institutions. Still, institutions should exercise constant vigilance and stay abreast of the latest threats to ensure they mount the most effective defenses. By keeping a pulse on current threats and where the cybersecurity landscape is headed, your institution will be better positioned to keep your network, data and users secure. Learn more about bankers’ perceptions of the 2024 financial services landscape in the full Banking Priorities Executive Report by scanning the QR code. https://www.csiweb.com/docs/banking-priorities-2024/ Steve Sanders serves as CSI’s chief risk officer and chief information security officer. In his role, Steve leads enterprise risk management and other key components of CSI’s corporate compliance program, including privacy and business continuity. He also oversees threat and vulnerability management as well as information security strategy and awareness programs. With more than 15 years of experience focused on cybersecurity, information security and privacy, he employs his strong background in audit, information security and IT security to help board members and senior management gain a command of cyber risk oversight. CURRENCY | 17
[SMALL] Business is BOOMING National surveys indicate that capturing small businesses is a strategic priority for most community banks, yet many feel they lack the comprehensive toolkit to compete effectively. The landscape of small business has evolved dramatically, particularly in the wake of the pandemic. The surge in new business formations has been fueled by a trifecta of factors: instability in the job market, the acquisition of new skills leading to increased leisure time and a growing desire for income diversification. Moreover, the barriers to entry for entrepreneurship have never been lower, with minimal costs and expertise required to establish a business online. The rise of non-employer SMBs, now numbering over 27 million out of the nation's 33 million, highlights the growing phenomenon of side hustles and digital entrepreneurship. Yet, community banks are struggling to gain market share in this sector. In the SMB market, the top four U.S. banks claim 55% of primary business banking relationships. Community banks only command a fraction of this market. This trend persists despite surveys revealing that SMBs express a desire to work with smaller banks. Why? Research indicates a shifting landscape in small business banking preferences. Fintech solutions are gaining traction by offering streamlined, automation-driven services that cater to the evolving needs of modern entrepreneurs. As a result, the majority of SMBs relying exclusively on banks for payments or credit decreased from 64% in 2020 to 45% presently, signaling a need for community banks to adapt and innovate to remain competitive in meeting the needs of modern entrepreneurs. Furthermore, net promoter scores among business owners paint a mixed picture, with community banks scoring lower than regional banks and significantly lower than large banks. Neo banks, with their innovative digital-first approach, are also gaining traction among small business owners, further intensifying competition in the market. Is Your Bank Ready To Ride the Wave? BY CORE10 18 | CURRENCY
To thrive in this dynamic landscape, community banks must adapt their strategies to cater to the changing demands of small businesses. This entails embracing technology to enhance their offerings, providing expert advice, offering seamless and convenient banking experiences, and delivering personalized solutions that blend human interaction with digital convenience. By investing in digital capabilities such as mobile and online banking solutions, integrating customer relationship management systems and leveraging data-driven engagement strategies, community banks can position themselves as trusted partners for small businesses seeking tailored financial solutions. This customer-centric approach is crucial for community banks to differentiate themselves in a crowded marketplace and foster long-term growth for both their institutions and their small business customers. So, what do small business owners seek from their banking partners? Survey data highlights three key areas: • Expert Advice: Small business owners crave guidance and expertise in navigating financial complexities, freeing them to focus on their core competencies. • Convenience: Seamless, hassle-free banking experiences are paramount, enabling entrepreneurs to devote more time to growing their businesses. • Personalization: Tailored solutions that blend human interaction with technology are in demand, offering a differentiated banking experience. Community banks must rise to the challenge by leveraging technology to enhance their offerings and meet the evolving needs of small business customers. Integrating customer relationship management (CRM) systems and digital origination channels for deposits and loans with core banking platforms can enable targeted, datadriven engagement strategies, while providing industry-specific insights directly to relationship managers empowers them to deliver personalized service at scale. Furthermore, investing in digital capabilities is crucial to meeting the expectations of modern entrepreneurs. According to research from BAI, nearly 70% of small business owners prefer to conduct banking tasks remotely, highlighting the importance of mobile and online banking solutions. By prioritizing technology investments and streamlining processes, community banks can remain relevant in the digital age. In conclusion, the journey towards attracting and retaining small business customers begins with a customercentric approach. By actively listening to their needs, delivering tailored solutions and embracing digital innovation, community banks can differentiate themselves in a crowded marketplace and foster long-term growth for both their businesses and their customers. Whether you are just starting to serve your customers online or are ready to take your small business banking services to the next level of innovation, Core10 has the people, tools and expertise you need in an innovation partner. Contact us today at core10.io/contact to learn more. Core10, founded in 2016, is a U.S.-based provider of lending, account opening and middleware products, as well as software development services. Core10 is your trusted partner for banking digital transformation and innovation. The company’s Accrue platform provides an omnichannel digital lending and deposit account opening solution to help elevate and streamline banking operations. Its Mesh middleware layer gives banks a flexible, modern infrastructure to connect their entire technology ecosystem with their core. Supporting their product lines, Core10's professional services team has years of experience building APIs and core connectivity as well as custom software product development. Resources "BAI Research Reveals Large Banks Still Lead in Small Business Banking, but Neo-Banks Are Making Fast Inroads." BAI, Accessed 1 April 2024, https://www.bai.org/news/bai-researchreveals-large-banks-still-lead-in-small-businessbanking-but-neo-banks-are-making-fastinroads/#:~:text=Financial%20services%20 organizations%20continue%20to,and%20 Credit%20Unions%20at%2039 Kelly Main. “Small Business Statistics Of 2024." Forbes, Forbes, Accessed 1 April 2024, https://www.forbes.com/advisor/business/smallbusiness-statistics/ Lillard, Max. "Are Big Banks Still the Best Partners for Small Businesses? SMB’s Explore Alternative Lenders." Capterra, Gartner, Accessed 1 April 2024, https://www.capterra.com/resources/smallbusiness-financing/ Russell, Whitney Stewart. "2024 Trends and Opportunities in Small Businesses." Presentation, Fiserv Insights, Fiserv, 23 Feb. 2024, ABA Conference for Community Bankers. "The Top Business Banking Insights for 2022." BAI, Accessed 24 April 2024, https://www.bai.org/ research-and-benchmarking/the-top-businessbanking-insights-for-2022/ Thollesson, Gita, Lohn, Anna-Fay, Smart, Debbie. “The State of Commercial Banking.” Accessed 1 April 2024, https://7044196.fs1. hubspotusercontent-na1.net/hubfs/7044196/ Final%20State%20of%20Commercial%20 Banking%20Jan%202024%20Market%20 Analysis_Final.pdf "What’s Going On In Banking 2024." crnrstone.com, Cornerstone, Accessed 1 April 2024, https://www.crnrstone.com/whatsgoing-on-in-banking-2024#:~:text=Key%20 Findings%20of%20the%20Study,threats%20 increased%20significantly%20for%202024 CURRENCY | 19
Loan Participations Plant the Seeds for Lending Growth BY MATT HELSING, SVP & NORTHWEST REGIONAL MANAGER, PCBB When one of your best customers approaches your community bank about a new loan, ideally, you would always be able to say yes. Regulations, however, set limits on how much funding lenders can provide borrowers. Community banks have options, however, to meet these regulatory requirements and still meet the needs of their customers. They can partake in these larger loans by entering into loan participations with other institutions. While you’re likely familiar with loan participations, your bank may not be focused on products like this, instead emphasizing increased deposits and other immediate streams of liquidity. However, there are some very valid reasons that you should be considering more loan participation deals right now. We asked PCBB’s Senior Vice President and Senior Lending Officer Peter Dewes for his advice on why now could be an ideal time to ink some loan participation deals. CURRENT CHALLENGES FOR THE BANKING INDUSTRY • Deposit Competition: According to the FDIC’s latest Quarterly Banking Profile published March 7, Q4 of 2023 was the first time in seven quarters that deposits experienced growth. Yet, for community banks, deposit costs still outpaced loan yields for all of 2023. • Liquidity Struggles: “In the last year or so, institutions have seen deposit outflows, which limits the ability for them to lend as much as they would like to,” Dewes says. Higher deposit costs will challenge banks, even after interest rates drop, according to a Deloitte report. The consultant firm predicts the average cost of interestbearing deposits for the U.S. banking industry in 2024 and 2025 will remain elevated at 1.7% and 1.5%, respectively, even as the fed funds rate declines from the recent peak. This may crimp bank profitability in the medium term. 20 | CURRENCY
THREE BENEFITS OF LOAN PARTICIPATIONS IN THE CURRENT MARKET 1. Minimize liquidity issues amid deposit competition. Participating out existing loans already in an institution’s portfolio provides “liquidity space” for them, Dewes says. “It opens up additional capacity to lend because a participant is buying a portion of an existing loan, which frees up those dollars for other loan opportunities,” he says. “It also allows them to continue to work with their borrower and bring in a participant so they can conclude a loan with a borrower.” 2. Enhance customer relationships. Banks may seek a loan participation to ensure they don’t lose their best customers due to lending limits for a single borrower. “They want to provide the loan to their borrower,” Dewes says, “but it’s too big for them. In this instance, the bank could reach out to another financial institution or a correspondent bank to participate in the loan. This would allow the bank to meet the needs of their customer by offering them the larger loan amount they need while still staying within their per-loan maximum dollar amount.” 3. Boost profitability. Entering into loan participations allows community banks to conduct regular business without interruption. “That’s what’s so critical for institutions,” Dewes says. “For them to operate and to be profitable, they have to lend money. By using a participant, this allows them to seamlessly continue to lend to their borrowers regardless of their liquidity position.” CONSIDERING YOUR PARTICIPANT Loan participations themselves can be very beneficial to helping your community bank maintain relationships with good customers and increase their lending. When it comes to choosing a participant, though, Dewes has some words of caution: “There is the risk that the participant bank that has the financials on the borrower might think that they’d be a good target, so they start marketing to them to try and effectively steal the client away.” For this reason, it’s prudent to consider alternatives to other banks when you are deciding on a partner. For instance, a correspondent bank cannot originate loans to the general public. “This eliminates the risk of competition with the lead institution that’s offering the participation,” says Dewes. “That’s your insurance. A correspondent bank will never talk to the borrower unless the lead institution allows them to.” Consider entering into a loan participation to minimize liquidity issues amid deposit competition, enhance customer relationships and boost profitability. To continue this discussion or for more information, please contact Matt Helsing at mhelsing@pcbb.com or visit www.pcbb.com. Dedicated to serving the needs of community banks, PCBB’s comprehensive and robust set of solutions includes cash management services such as Settlement and Liquidity for the FedNow Service, international services, lending solutions, and risk management advisory services. CURRENCY | 21
How To Benefit From a Lull in the Economy BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES Tell me if you’ve heard this: An inverted yield curve is highly correlated with a subsequent recession. And might I point out that the U.S. treasury curve has been upside down for pushing two years now? Since we’re playing master of the obvious, let’s mention that the Fed — while not quite ready to start cutting rates — seems satisfied it’s laid the groundwork for inflation to get back in the 2% box that has proven elusive for several years. The press release following the Jan. 31, 2024, FOMC meeting stated, “The risks to achieving its employment and inflation goals are moving into better balance.” To be sure, the economy still seems to be chugging along quite nicely, thank you. As of this writing, there are “three” handles on several of the more critical economic barometers, which is a pretty good trick to pull off for an economy supposedly being dragged down by a restrictive monetary policy. Fourth quarter gross domestic product has run around 3.2%, the aforementioned inflation (the Fed’s preferred index is “Core PCE”) is sticky at 3.9% and unemployment boasts an impressively low 3.7%. This is not the stuff of an economy that’s about to run off a cliff (probably). ON THE OTHER HAND Of course, we’ve been getting a steady diet of not-so-positive news, too. The U.S. went blowing through the $1 trillion level in credit card debt in December 2023 and continues to pile onto that record. Delinquencies on consumer borrowings, particularly with the younger-aged cohorts, have been running hot as rates are at a generational high. And the mortgage finance industry is a story unto itself. We must go back to the start of the 21st century to see refinance activity this low, and even further to 1995 to see fewer purchase applications. That’s what 7% market rates will do to a borrower base whose average current mortgage is still well below 4%. That differential is the highest in history. Where this leaves us: If community bankers were so inclined, they could find options for their bond portfolios that would look pretty good if rates were to begin trending down. The good folks at Stifel have pointed out that there can be a number of months and even quarters after the final rate hike before the first cut occurs. “Higher for longer” may be in play for 2024, and we’ve seen this movie before. Remember, the last hike was last July. PLENTY TO CHOOSE FROM Buyers can pick just how much recession-proofing they want to build into their balance sheets. Thanks to the inverted curve, something with a four- to five-year average life will look attractive compared to longer options. And since community banks’ interest rate risk positions have returned to near‑balanced postures, most depositories can buy some fixed-rate items without aggravating their asset/ liability exposures. Recession Proofing 22 | CURRENCY
Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker‑dealer for community banks. One of the simplest options is a deep discount callable agency. These were issued in 2020 or 2021 as rates were buried near zero. The bonds themselves can have minuscule coupons (1% or even less) and prices in the low 90s. Usually, their yields to maturity will beat noncallable “bullets” by 10-12 basis points (.10%-.12%), with an enormous upside if they ever get called, which is less than likely. In the mortgage-backed securities (MBS) space, attractive offerings are plentiful. One generic example: Seasoned 20-year pools with 2.0% coupons have been available around 89 cents on the dollar and will have around 30 basis points more yield than the discount callable mentioned above. As mentioned in this space before, there is now an unusually wide range of coupons and prices in the secondary market, so investors can pick and choose their favorite risk/ reward profile. DELAYED RESPONSE As the comments from the Fed members so far in 2024 have pushed back the expectations of actual rate cuts into the future, so have market rates risen modestly this year. At the time of this writing, the treasury curve has added around 40 basis points (.40%) across the maturity spectrum. What this means for buyers is that there is still additional incentive to layer in some purchases into what seems to be the waning periods before a secular shift in the economic cycle. Unless, of course, the strength of the American consumer keeps producing “three” handles in triplicate. In this case, the long-anticipated recession would be on indefinite hiatus, and significant rate cuts would be a conversation for future periods. And that is something you perhaps haven’t heard before. Independent Banker A COMMUNITY BANKING PODCAST FROM ICBA icba.org/podcast LISTEN IN PRESENTING SPONSOR Your host, ICBA Chief Innovation Officer Charles Potts, speaks candidly with community banking leaders to glean actionable insights and inspiration on everything from managing talent and advocacy to the demands of the ever-shifting financial technology landscape. HEAR COMMUNITY BANKERS: • Talk about their experiences advocating for the community banking industry, innovating in ways big and small, and educating bank staff to ensure they have the skills they need to thrive. • Share their personal journeys in banking and how they have evolved professionally. • Speak openly about the industry— it’s future and evolution. CURRENCY | 23
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