THE OFFICIAL PUBLICATION OF THE MONTANA INDEPENDENT BANKERS ASSOCIATION WINTER 2025 COMMUNITY BANKS THRIVE IN '25 INSIDE: WHY ADVOCACY SHOULD BE A TOP PRIORITY IN 2025 Pg. 9
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10 2025 MIB EXECUTIVE OFFICERS Loren Brown, President Ascent Bank, Helena lbrown@ascentbank.com Amber Brown, Vice President Peoples Bank of Deer Lodge abrown@pbdl.net Clinton Gerst, Secretary Bank of Bozeman cgerst@bankofbozeman.com Laura Clark, Treasurer Opportunity Bank lclark@oppbank.com Tim Schreiber, Immediate Past President Farmers State Bank tims@farmersebank.com Kenny Martin, ICBA State Director Independence Bank, Helena kennym@ibyourbank.com 2025 MIB BOARD OF DIRECTORS Tom Christnacht First Security Bank of Deer Lodge Bill Coffee Stockman Bank, Miles City Daniel Day Bank of Montana, Missoula Shawn Dutton First Security Bank of Roundup Logan Hensley Valley Bank of Kalispell Brice Kluth First State Bank of Shelby Scott Mizner American Bank, Bozeman Mike Moore Stockmens Bank, Cascade Joel Rosenberg Three Rivers Bank of Montana, Kalispell Andrew West Eagle Bank, Polson Phil Willett Pioneer Federal Savings and Loan, Dillon ASSOCIATE BOARD MEMBER Ryan Fritz Citizens Alliance Bank rfritz@citizensalliancebank.com MIB STAFF Jim Brown, Esq., Executive Director Montana Independent Bankers jbrown@mibonline.org ©2025 The Montana Independent Bankers Association (MIB) | The newsLINK Group LLC. All rights reserved. Community Banker is published four times per year by The newsLINK Group LLC for MIB 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 MIB, 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. Community Banker is a collective work, and as such, some articles are submitted by authors who are independent of MIB. While a first-print policy is encouraged, 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. Montana Independent Bankers 1812 11th Ave. PO Box 4893 Helena, MT 59604 (406) 449-7444 jbrown@mibonline.org mibonline.org 8 6 PRESIDENT’S MESSAGE 4 Finding Joy in the Storm By Loren Brown, President, MIB EXECUTIVE DIRECTOR’S MESSAGE 6 Promoting Community Banking Across Montana By James E. Brown, Esq., Executive Director, MIB FLOURISH 8 Striking Balance in 2025 By Rebeca Romero Rainey, President and CEO, ICBA FROM THE TOP 9 Why Advocacy Should Be a Top Priority in 2025 By Lucas White, Chairman, ICBA 10 Yield Enhancer or Gimmick? Callable Securities Present Risk and Reward By Jim Reber, President and CEO, ICBA Securities 11 Convention & Trade Show Save the Date! FEATURED ASSOCIATE MEMBER 12 Pinion By Angela Murdo, Principal and Financial Institution Business Advisor, Pinion 14 Bankers Day at the Capitol 15 What Never Changes at the FHLB By Joe Kesler, Member Director, FHLB Montana 17 Checking Your BSA Program Is More Important Than Ever By William J. Showalter, CRCM, CRP, Senior Consultant, Young & Associates Inc. 20 Member News 20 MIB Upcoming Events 22 Business Perpetuation Plans By Shaun McChesney, Marsh McLennan 24 2024 MIB Membership Directory 25 MIB Associate Member Resource Guide 26 MIB Associate Member Banks 27 Bank Training Webinars Contents WINTER 2025
Greetings, my friends! I am thrilled to be looking out the window and seeing snow on the ground and in the mountains as I write this winter edition article for the Community Banker. “The Browns Go to Washington, D.C.” and “Finding Joy in a Storm” were two intertwined themes that I thought about as I prepared to write this President’s Message to all of you. Last summer, the Council of Community Bank Associations (CCBA) let the Montana Independent Bankers know that they would be hosting a Leadership Conference in Washington, D.C., in December, and they wanted the executive director, president and the next president to attend. If you are like me, you might not have known that there is an association of all of the state banking associations just for community banks. That is the CCBA. Not every state has a banking trade association just for community banks like we are so privileged to have in Montana with the Montana Independent Bankers. The CCBA works to help share ideas and resources between the different state associations. So, Executive Director Jim Brown, Vice President Amber Brown and I flew to D.C. to share what was working for the MIB and what we were struggling with and to hear the same from other state associations. We got really good at telling everyone that we were in no way related and that it was not a requirement to have the last name Brown to be part of the MIB leadership! Our time at the CCBA Leadership Conference was incredibly valuable and insightful! We already believed, but we got the resounding feedback that all of the state community banking associations wholeheartedly realize the difference between a community bank and a regional or national bank. All the associations are working very hard to protect community banking and everything that it does for our great country. However, some of the ways that the different leadership teams are going about supporting and maintaining our associations are different. There are a lot of different dues structures and methods used throughout the PRESIDENT’S MESSAGE FINDING JOY IN THE STORM BY LOREN BROWN, PRESIDENT, MIB 4 Community Banker
country, and there are differences in membership requirements for different state associations. Some associations are good at providing lots of member benefits to their banks as part of their dues, and others generate lots of income to help the associations thrive from the services they offer to their members. We heard about associations that have 100% membership of every community bank in their state and others that are struggling to keep enough membership just to continue to be an association. Association bylaws, board membership and professional leadership all play an important role in the success of state associations. I think the really important thing for all of you to know is that your association is doing well in all of the areas we reviewed, but we also got some great feedback and ideas for ways we can do even better! Amber, Jim and I are thankful the ICBA and the CCBA put this conference together and allowed us to meet with other folks from around the country who know how critical community banking is and want to ensure its continued success! The conference gave me some time on two long airplane trips to reflect on something important I have found in life. It is easy to get bogged down in negativity when things get rough or they aren’t going our way. However, challenging times also present one of the greatest opportunities for growth and to learn and try new things. To that point, one of my favorite camping trips as a youth growing up in Boy Scouts was a winter camporee when a blizzard came in and dropped a ton of snow coupled with wind and temperatures around 20° below zero. At first, we younger Scouts all complained about how cold and miserable it was and asked if we could go home. We ended up learning how to build snow shelters from the older boys that turned out to be far warmer than our tents to sleep in. We got to have more fun working as a team with the senior youth to accomplish things in the snow than I had ever had at a camp. That camp sticks out in my mind as one of my favorite childhood memories. This past summer, I took two new skydivers under my wing and convinced them to go on a cross-country (jumping a few miles from the landing area rather than over the top of it) sunset skydive. While we were in the plane, a storm blew in and brought with it wind and pouring rain. We still decided to make the jump, and I nervously watched my two baby birds get blown around in the wind, hoping they would make it back safely and regretting my decision to take them on the jump. When they landed, completely drenched, not only were they totally fine, but they had learned new skills and were thrilled with the fun they had on the new experience! It turns out I had nothing to regret! I think about life experiences like that and how the same thing can happen in banking. We have had a wild few years with a pandemic and the end of historically low rates coupled with the fastest increase in overnight rates in history — topped off with all kinds of political and economic noise and challenges such as inflation and staffing shortages. I realized that we can either focus on the obstacles that are put in our way as community bankers, or we can use these as learning opportunities to make our banks better! Every new regulation, fintech or economic hiccup presents us with a way to adapt and provide better service to our customers, more resources for our communities and better places to work for our staff if we are willing to change and grow. We just have to look to each other for support, ideas and new ways of doing things. That is what the Montana Independent Bankers Association is all about. The CCBA and ICBA are there to help all of our state community banking associations in the same way. I hope that each of you can find joy in a storm, whether that is personally or professionally, in your bank, your family, an organization you are part of or some other part of your life. If I can be part of helping find that joy, I would love to do so! Community Banker 5
Happy New Year, and welcome to the inaugural 2025 edition of the Community Banker. 2025 marks my 13th year as executive director of the MIB. Looking back over the last decade-plus, I am heartened by how far the Association has come. Together, MIB has achieved much, including increasing its associate membership to nearly 60, growing annual convention participation, expanding member services and strengthening our partnership with ICBA. Thanks to the hard work and diligence of the MIB board, the Association has bucked the national trend by expanding at a time when many state financial services associations are contracting. Looking forward, 2025 will be another great year for Montana’s community banks. The Association has retained the services of Shane Scanlon to serve as the MIB lobbyist for the 2025 Montana Legislative Session. Shane is no stranger to the MIB, having served on the staff of United States Sen. Steve Daines and, more recently, having served as the campaign manager for Tim Sheehy’s successful campaign for the U.S. Senate. As the 2025 Montana Legislative session kicked off on Jan. 6, by the time you read this, Shane will have hit the ground running on behalf of Montana’s community banking industry. The MIB board is pleased to partner with Shane and feels confident that MIB’s policy agenda will receive favorable treatment from Montana’s legislators. Looking further into 2025, at the request for MIB’s membership, MIB is pleased to announce that the annual convention will return to Big Sky. The annual convention and tradeshow will be held at the Big Sky Resort on July 16-18, 2025. Coming off the 2024 convention, wherein the Association experienced record associate member participation and sponsorship, MIB expects this year’s convention to be one of its most widely attended yet. So, save those dates on your calendar and join us for big fun, engaging speakers and beautiful views at Montana’s largest annual gathering of community bankers. And, as a reminder, your personal interactions at the convention with your banking peers and community is the highest member benefit MIB can and does provide. Some additional things to note as we move into this new year. MIB member and associate member renewal packets were mailed out in December. If you have not renewed your membership, what are you waiting for? Get those renewals back in. If you did not receive your 2025 membership packet, please contact me to get your membership information or if you would like more information about becoming a member. EXECUTIVE DIRECTOR’S MESSAGE PROMOTING COMMUNITY BANKING ACROSS MONTANA BY JAMES E. BROWN, ESQ., EXECUTIVE DIRECTOR, MIB 6 Community Banker
Further, as you likely know by now, in November, I was fortunate to be elected to serve as Montana’s state auditor. My four-year term of office kicked off on Jan. 6. I very much appreciate the support I received from the MIB board and membership during my run for office. With the agreement of the MIB board, for now, I will continue as the executive director of the Association until such time as a suitable replacement is identified, trained and hired. Speaking of tradeshows and conventions, ICBA has announced that ICBA LIVE will be held in Nashville this year. The national convention is slated for March 11-14, and one of the highlights is attending the ICBA PAC auction. And, with the great work performed by ICBA PAC on our behalf during the 2024 elections, the importance of electing pro-banking candidates cannot be overstated. As a reminder, the contributions you make to the ICBA PAC and to the MIB PAC are the lifeblood of our collective legislative advocacy efforts. This past election season, thanks to your support, MIB was able to financially assist multiple pro community banking candidates both for legislature and statewide office. I trust you will enjoy this edition of the Community Banker. The MIB and the MIB staff are proud of the continued quality of this publication, and we encourage you to peruse the informative articles written by ICBA President and CEO Rebeca Romero Rainey and Montana FHLB Rep. Joe Kessler. In 2025, MIB will continue to work on promoting community banking across Montana. That’s why, this year, we have decided to once again undertake a digital marketing campaign on behalf of our member banks. We thank you for all you do on behalf of your communities, your customers and your colleagues. Community banking has many great days ahead of us. MIB is here to partner with you to see them come to pass. From us to you and yours, we wish you a happy, fun and productive year. James Brown, Esq. MIB Executive Director Sometimes SBA lending decisions are difficult. But not this one. q ICBA’s only Preferred Service Provider for SBA and USDA lending Get started today. 800.340.7304 holtandmon.com ICBA’s only choice makes yours easy. Our industry experts handle the hard work at no net cost to your bank, while you empower small businesses and earn non-interest fee income. Over 40 years of serving community banks add up to trusted data, processes and procedures that meet stringent SOC 2, Type II security and privacy standards set by the American Institute of Certified Public Accountants. No other company comes close. TM Community Banker 7
WHERE I’LL BE THIS MONTH We will be hosting state association colleagues at our Innovation Center in Atlanta, and I’ll be making a trip to Minnesota to visit the ICBA team there. STRIKING BALANCE IN 2025 BY REBECA ROMERO RAINEY, PRESIDENT AND CEO, ICBA FLOURISH The start of a new year brings with it opportunities, and as we enter 2025, we do so with an eye toward the potential that awaits. For years, we’ve been seeking balance across a number of areas, encouraging regulators and legislators to initiate more proportionate rulemaking, embracing innovation for our banks to become nimbler and more efficient, and engaging in education to expand our knowledge in today’s banking environment. This year, we’ll see results through focused strategy and hard work. LEADING WITH ADVOCACY Without a doubt, advocacy serves as the most critical piece of our mission in 2025. With a shift in control in Congress and the White House, our focus will be on regulatory relief and proportionate rulemaking. We want to amplify the impact of community banks at the local level and champion issues ranging from rethinking the de novo framework to seeking regulatory relief on Dodd-Frank Act Sections 1071 and 1033 and beyond. Our messages this year center on both right-sizing regulation and demonstrating the community bank difference. We’re moving from a defensive position of responding to thousands of pages of new regulation to an offensive one where we can be proactive and speak to community-friendly and community bank-forward rulemaking. We have the opportunity to instigate a more balanced approach to regulation, supporting a vision that considers effects on consumers in the context of the ability to do business. This balanced approach is critical for industry viability moving forward. The moment is now to effect real change. But the reality is that there are a lot of pressing needs with policymakers as the year begins, so it’s our job to ensure that our issues are prioritized and our voices are heard. GROWING WITH INNOVATION AND EDUCATION Of course, while we are speaking up for the interests of our communities and our banks, we also need to continue growing as businesses, adapting to a changing industry. From new fintech innovations to a better understanding of the risk and compliance requirements of today’s environment, ICBA Innovation and ICBA Education stand ready to ensure you have the information you need to advance your business plans this year. It’s with that in mind that I encourage you to join us at ICBA LIVE, taking place March 11-14 in Nashville, Tennessee. There, you can explore what’s next on our advocacy agenda, how our innovation programs can support your bank, and what you and your team need to know to be the change you seek in 2025. This year is about recommitting to ICBA’s pillars of advocacy, innovation and education, and embracing the potential that awaits. I, for one, am feeling very optimistic. 8 Community Banker
WHY ADVOCACY SHOULD BE A TOP PRIORITY IN 2025 BY LUCAS WHITE, CHAIRMAN, ICBA Following a significant election year, Congress is fired up to get new legislation on the table. This is our opportunity to drive home the importance of the high-tech, high-touch community banking model. FROM THE TOP The start of the new year brings with it a fresh slate and a collective reset on priorities. As we develop annual objectives, we need to be mindful of what is transpiring within our banks, but also what is transforming the industry around us and how we can effect positive change. That’s why advocacy must be a priority this year. SETTING NATIONAL PRIORITIES ICBA is nonpartisan and has a long history of working with both sides of the aisle, and we have a new administration and elected officials who need to fully understand the community bank difference. Our voices need to be heard on a wide range of issues, including Section 1071 of the Dodd-Frank Act, the Secure and Fair Enforcement (SAFE) Banking Act, the Access to Credit for our Rural Economy (ACRE) Act and more. In addition, with the Tax Cuts and Jobs Act of 2017 set to expire at the end of 2025, it’s going to be a big year to discuss taxes — and with them, credit union disparities. The odds are in our favor: Following a significant election year, Congress is fired up to get new legislation on the table. This is our opportunity to drive home the importance of the high-tech, high-touch community banking model. It’s our chance to demonstrate how community banks prioritize a legislative and regulatory environment that keeps the banking system safe and sound, creates a level playing field in financial services and allows for the flexibility necessary to serve the distinct interests of communities across the nation. THE POWER OF THE COLLECTIVE But it takes the power of this entire community to amplify those messages and bring them to life. Members of Congress need to hear specific examples from their constituents about how community banks meet their districts’ needs. Members of Congress need more than platitudes and big-picture ideas; they need to understand how what we do every day makes a difference in their MY TOP 3 In addition to remaining a vocal advocate for community banking, here are my three New Year’s resolutions for 2025: 1. Spend more time at home, in my bank and with my community. 2. Be more present with my kids. 3. Continue running for health. constituents’ lives and strengthens their communities. In short, they need to hear our stories. So, as you set your intentions for 2025, I hope that one of them is to attend ICBA’s Capital Summit (icba.org/capital-summit), slated for May 12-15 in Washington, D.C. Mark your calendars now to join your colleagues in raising your voice for community banking. This will be a pivotal year for us, where collectively, we will make a difference. Now’s the time to make sure advocating for community banks is among your top priorities. Community Banker 9
YIELD ENHANCER OR GIMMICK? CALLABLE SECURITIES PRESENT RISK AND REWARD Most representatives of the broker-dealer industry have been suggesting to their customers, especially community banks, that their collection of bonds could be situated to perform pretty well in 2025. You can be forgiven for rolling your eyes if you’ve heard this. And I get it: Persistently stubborn inflation forced the Federal Reserve to hike rates, and now to keep them elevated, for the foreseeable future. This, of course, has kept the market values of your portfolio depressed for what is going on three years now. While it’s true that portfolio yields are now at a multiyear high, they haven’t kept pace with your cost of funds. Some banks have a negative spread between their investments and their deposits, and that does not help net interest margins. However, there could be an unrecognized upside to your bond portfolio if you own certain securities — namely, callable bonds at a discount. THE TALK OF THE TOWN The good news is that most banks now own at least some bonds at prices below par. That was not the case prior to the Fed boarding the good ship Rate Hike in early 2022. At that point, portfolios had a dreadful makeup: low yields (well under 2% tax equivalent), long durations (well over four years), and high book prices (nearly 103.00). Thanks to the prolonged period of high rates, yields are now approaching 3%, and book prices are near par (100.00). It’s also worth noting that most bonds owned by banks have embedded call options. This gives the issuers — or borrowers — the right to pay the debt back early if they so choose. Somewhere around 80% of all the bonds in all the community bank portfolios have some kind of call features. While that sounds enormous or even egregious, consider that virtually all loans are also redeemable at the borrowers’ pleasure. That’s why management of call risk is a major focus for asset/liability committees. THE RUNDOWN This may be painfully obvious, but we’re going to review how a bond that’s redeemable early, when purchased at a price below par, has some latent upside. Although rates pretty much ran in place in 2024, there are plenty of seasoned bonds issued in 2020-21 still available at deep discounts. Two of the most common varieties are agencies and mortgage-backed securities (MBS). Agencies are callable in full, so they’re easier to analyze. If an investor buys a bond at say, 97 cents on the dollar, the worst case is for it to not get called. If it ever does, the discount price adds to the yield to the call date, and the investor reaps an income windfall. One other item to note: The worst case is still better than the yield to maturity on a non-callable “bullet” bond. MBS are similar but not identical. The principal on a mortgage bond is returned to the investor in a series of monthly payments. Investors receive a BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES 10 Community Banker
pro-rata share of all the principal repaid and prepaid, from all the loans in an MBS pool. If a security is purchased at the 97.00 price mentioned above, and some homeowners decide to cash in their chips early, the bank receives its share at 100.00, and that, too, is a yield enhancement. Unlike an agency, over time some mortgages will prepay early regardless of current market rates, as certain life events occur in any rate environment. WORTH IT? Investors are guaranteed of uncertainties regarding cash flows in a callable-heavy portfolio. It requires the manager to constantly review the upcoming call dates, as well as variables such as current versus seasoned coupons. It’s worth asking: Are callable bonds worth the trouble? I believe the investors have spoken, and their answer is “yes.” There are times when non-callable portfolios outperform those with lots of optionality, namely in falling rate scenarios. That’s why high performing portfolios in 2025 have large doses of the ultimate non-callable bonds, those being treasury notes. But in rising rate environments, callables are the winner. Here’s some free advice for those shopping for callable agencies: The yield give-up for buying a bond that’s callable one time only (“European”) versus periodically (“Bermudan” or “American”) is quite modest; in many cases less than 10 basis points (0.10%) to maturity. Add to that the current opportunity for a head start by insisting on deeply discounted bonds that were launched in the 2020-21 era, and you’ve got built-in upside. That sounds to your correspondent like a yield enhancer — and most assuredly not a gimmick. Jim Reber ( jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. CONVENTION & TRADE SHOW Big Sky Resort July 16-18, 2025 mibonline.org SAVE THE DATE! Community Banker 11
PINION BY ANGELA MURDO, PRINCIPAL AND FINANCIAL INSTITUTION BUSINESS ADVISOR, PINION FEATURED ASSOCIATE MEMBER As a proud member of the Montana Independent Bankers for over 20 years and a participating annual conference member, we at Pinion consider ourselves a true partner with the MIB’s mission to help community banks flourish. UNITED IN MISSION As a U.S. Top 70 accounting firm and leading business advisory firm, Pinion has remained steadfast in its core mission for over 90 years: To impact and make a difference in the lives of our people, clients and the world we live in. With roots dating back to 1932, the firm proudly serves, fosters and collaborates with its communities. Pinion was awarded the 2024 Outstanding Associate Member award for the firm’s commitment to the MIB. This was accepted with immense pride and accomplishment, as it acknowledges the impact that our specialized banking team has on the banks we serve, their customers and the financial institution industry overall. A STORIED HISTORY Rooted in our communities, Pinion has expanded upon traditional accounting services to deliver increased value and growth for its clients through comprehensive strategies and specialized advisory for a variety of industries. Through the years, we have expanded to add expertise, resources, innovation and depth for the benefit of our clients. 12 Community Banker
Each industry we serve, including community banking, has their own robust team dedicated to alleviating the challenges they face and mining opportunities for their success. Today, we have offices and clients encompassing the U.S. from coast-to-coast, providing nationalized scope and resources, while meeting each client’s challenges with personalized attention within Montana. We embrace our rich 90-year history and connections formed between our people and their communities — and recognize it’s what has set us apart and remains our key differentiator. Pinion has been named a top accounting firm in the U.S. and operates as an alternative practice structure in accordance with AICPA regulations with KCoe Isom, a certified public accounting (CPA) firm for our audit and assurance services. PROACTIVE IN SERVICE As I work with clients across this industry, I see a single commonality that supports our purpose — to enrich the banking industry with resources, information and insights. As a consulting firm that has a specialized team dedicated to challenges, changing regulations and opportunities for financial institutions, we aim to maximize your ability to thrive as a business, protect your customers and optimize your community relationships. Many of the people on our team bring a unique understanding of banking from first-hand experience. This, combined with accounting and business advisory expertise, allows our team to provide a variety of services to many of the MIB member banks, including: • Financial statement audits • Directors’ exams Pinion has remained steadfast in its core mission for over 90 years: To impact and make a difference in the lives of our people, clients and the world we live in. • Internal audit and compliance exams • Loan reviews • Consulting • Tax consulting and preparation • BSA and ACH exams PURPOSEFUL INSIGHTS TO MOVE BUSINESSES FORWARD Why are we called Pinion? In its simplest definition, a pinion is the part of a machine that is required to make the machine focus in a specific direction. It helps drive things forward. We view our client’s business as a large operating machine, and we are the pinion that helps them drive forward and steer them in the right direction so they can achieve success. Community Banker 13 38697 Partner with us for: • Loan participation purchases and sales* • Bank stock financing • Bank executive and employee financing *We do not reparticipate loans. Craig McCandless Call me at 406.850.3790 Based in Billings, Mont. Serving Montana, Wyoming and Idaho Our Mission Is to Help You Succeed
BANKERS DAY AT THE CAPITOL On Jan. 7 and 8, MIB joined with the MBA to host the biannual Montana Community Bankers Day at the state Capitol. The event, held at the Great Northern Hotel, brought together bankers from across The Treasure State to discuss policy issues important to the industry. In addition, Montana Senate President Matt Regier, Senator Minority Leader Pat Flowers, and Minority Whip Jon Karlen engaged in a question-and-answer dialogue with attendees. The two-day event finished with a formal dinner with Montana legislators. It was capped off with a presentation by Chris Warden, executive director of the C.M. Russell Museum, on the masterful works of Montana’s most famous artist and their relevance to the Montana Capitol Building. 14 Community Banker
I recently read a new book called “Same as Ever,” which has a unique twist to the typical management book. The thesis is that it’s much more important to study the things that never change instead of spending time trying to predict the future. For example, Amazon founder Jeff Bezos says he’s often asked what’s going to change in the next ten years, but he almost never gets the question: “What’s not going to change in the next 10 years?” And he believes the second question is more important. In his business, it’s impossible to imagine a future where Amazon customers don’t want lower prices and fast shipping. And so, he puts enormous investment into those unchanging customer desires. As we enter a new year with a new administration taking shape, it’s tempting to relax and miss the lessons of the book for the FHLBank System. Under the Trump administration, FHFA Director Sandra Thompson, architect of the “FHLBank System at 100” Report, will likely be asked to resign. Pending regulatory actions may be put on hold. Some efforts may not be dead, as some initiatives have months of momentum behind them, but we hope many of the detrimental efforts will become dormant. But putting aside what looks like good news, what are the almost universal truths when it comes to the FHLBs? Here are three of my thoughts along with a conclusion on where to invest our efforts. These views are mine alone and not the official position of the FHLBank System. First, I think we can count on the universal truth that many in regulatory positions over the FHLBs will want to be generous with our money. The most egregious example I saw of this tendency in 2024 was a stern letter from the Deputy Secretary of the Treasury. By law, the FHLBanks contribute 10% of income to affordable housing. The Deputy Secretary strongly suggested this be increased to 20% and, most shocking, suggested the banks collectively contribute $20 billion of capital over their regulatory minimums to a Department of Treasury housing slush fund. BY JOE KESLER, MEMBER DIRECTOR, FHLB MONTANA WHAT NEVER CHANGES AT THE FHLB Community Banker 15
Fortunately, the FHLBanks pushed back on this outrageous pressure. The System as a whole had already voluntarily contributed more than 15% of net income the last two years. FHLB Des Moines led the way in innovative efforts helping communities in Montana with programs such as the Member Impact Fund and a mortgage rate buydown. Unsurprisingly, we kept the $20 billion of capital over regulatory minimums as a prudent risk-absorbing cushion for the System. Apparently, that capital looked like an easy target. But we said no. Second, I think we can count on some regulators not understanding our business. I began my career at age 22 as an OCC examiner. I still cringe thinking about how I must have terrorized some community banks, pretending to know the business and making suggestions to seasoned bankers. But that was relatively harmless compared to the damage regulators can do in tinkering recklessly with the FHLB mission. The misguided efforts last year to “reform” the FHLB System when it is not broken or in need of reform validate the second universal truth. The FHLBanks’ rock-solid reputation and mission as a reliable provider of liquidity for financial institutions felt under attack last year. Misguided notions were discussed about moving the FHLBanks away from just strict collateral standards and introducing additional risk-based consideration for extending advances. Or, the suggestion of policing members’ compliance programs before approving advances shows just how disconnected the regulators behind those suggestions are from the core business of the FHLBanks. Finally, on a more positive note, the FHLBs will always be a critical and reliable source of liquidity for member institutions. In spite of the dynamic environment last year that generated numerous bad ideas to reform the FHLB, the System received rave reviews for stabilizing the banking system after the failures of March 2023. The Congressional Budget Office, for example, highlighted that the Federal Home Loan Banks played a crucial role in managing system liquidity during the crisis. When Silicon Valley Bank and others collapsed, it triggered concerns about a broader liquidity crisis in the banking sector. The FHLBs responded by significantly increasing their lending to member institutions. This is our mission; this is what we do best. In conclusion, I want to extend my sincere thanks to the Montana Independent Bankers for your proactive work in defending our cooperative. My final enduring truth is that I believe with your support we can maintain the strength of the FHLB as a reliable lender for your liquidity needs. commerce.mt.gov/housing • Low interest 30-year mortgages • Down payment assistance • Quality loan servicing • Reverse annuity mortgages for senior homeowners The Montana Board of Housing offers: Ask a participating lender today! This message is brought to you by the Montana Department of Commerce. 16 Community Banker
CHECKING YOUR BSA PROGRAM IS MORE IMPORTANT THAN EVER BY WILLIAM J. SHOWALTER, CRCM, CRP, SENIOR CONSULTANT, YOUNG & ASSOCIATES INC. Over the past year, we have seen at least 27 Bank Secrecy Act (BSA) enforcement actions from an array of financial institution supervisory agencies. Banks of all sizes, including community banks, continue to be hit with cease and desist (C&D) orders, formal agreements, consent orders and even civil money penalties (CMP). Five of these actions involved monetary penalties of some sort totaling nearly $4 billion — all but about $109 million coming from one case with four federal agency actions against one bank, and one $100,000 CMP imposed against an individual for BSA noncompliance. These enforcement actions remind us that even community banks and thrifts must have thorough and well-managed BSA compliance programs. The enforcement actions do not spell out specifics of what the agencies found at each institution, but they do give us important insights into what the regulators will expect during your next BSA compliance exam. Community banks should evaluate their BSA compliance programs in light of the corrective actions that these institutions are required to take. Another important issue that financial institution management should remember is that the USA PATRIOT Act made BSA compliance as important as Community Reinvestment Act (CRA) compliance in getting an application approved. The act adds BSA as a factor for consideration in merger transactions. The agency must take into consideration “the effectiveness of any insured depository institution involved in the proposed merger transaction in combating money laundering activities.” This means that banks and thrifts must have more than a written BSA program. They must be able to demonstrate that the program works. BSA COMPLIANCE PROGRAMS All insured banks and thrifts are required to develop, administer and maintain a program that assures and monitors compliance with the BSA and its implementing regulations, including recordkeeping and reporting requirements. Such a program can help protect a bank against possible criminal and civil penalties and asset forfeitures. At a minimum, a bank’s internal compliance program must be written, approved by the board of directors and noted as such in the board meeting minutes. The program must include at least the following elements: • A system of internal controls to assure ongoing compliance. • Independent testing of compliance. • Daily coordination and monitoring of compliance by a designated person. • Training for appropriate personnel. • Risk-based customer due diligence/beneficial ownership procedures. Community Banker 17
INTERNAL CONTROLS Senior management is responsible for assuring an effective system of internal controls for the BSA, including suspicious activity reporting, and must demonstrate its commitment to compliance by: • Establishing a comprehensive program and set of controls, including account opening, monitoring and currency reporting procedures. • Requiring that senior management be kept informed of compliance efforts, audit reports, identified compliance deficiencies and corrective action taken — to assure ongoing compliance. • Making BSA compliance a condition of employment. • Incorporating compliance with the BSA and its implementing regulations into job descriptions and performance evaluations of bank personnel. INDEPENDENT TESTING OF COMPLIANCE The bank’s internal or external auditors should be able to: • Attest to the overall integrity and effectiveness of management systems and controls, and BSA technical compliance. • Test transactions in all areas of the bank with emphasis on high-risk areas, products and services to ensure the bank is following prescribed regulations. • Assess employees’ knowledge of regulations and procedures. • Assess the adequacy, accuracy and completeness of training programs. • Assess the adequacy of the bank’s process for identifying suspicious activity. Internal review or audit findings should be incorporated after each assessment into a board and senior management report and reviewed promptly. Appropriate follow-up should be ensured. Regulators increasingly expect the BSA audit or testing program to also include these elements: • Confirmation of the integrity and accuracy of management information reports used in the AML compliance program. • Overall integrity and effectiveness of the program. • Evaluation of management’s efforts to resolve violations and deficiencies. • Evaluation of the effectiveness of the suspicious activity monitoring systems. • Review of the BSA risk assessment for reasonableness given the bank’s risk profile. BSA COMPLIANCE OFFICER A bank or thrift must designate a qualified bank employee as its BSA compliance officer, who has day-to-day responsibility for managing all aspects of the BSA compliance program and compliance with all BSA regulations. The BSA compliance officer may delegate certain BSA compliance duties to other employees but not compliance responsibility. The bank’s board of directors and senior management must ensure that the BSA compliance officer has sufficient authority and resources — time, funding, staffing — to administer effectively a comprehensive BSA compliance program. And, the BSA officer must have a direct reporting channel to the board of directors. BOARD OF DIRECTORS The board must ensure that it exercises supervision and direction of the BSA/AML program. This involves making sure that the institution develops sound BSA/AML policies, procedures and processes that are approved by the board and implemented by management. The board also has to ensure that the bank maintains a designated BSA officer with qualifications commensurate with the bank’s situation. As just noted, the BSA officer must report directly to the board and be vested with sufficient authority, time and resources. The board must provide for adequate independent testing of BSA/AML compliance. The board should bear in mind that it has the ultimate responsibility for the institution’s BSA compliance. TRAINING Financial institutions must ensure that appropriate bank personnel are trained in all aspects of the regulatory requirements of the BSA and the bank’s internal BSA compliance and anti-money laundering (AML) policies and procedures. An effective training program includes provisions to ensure that all bank personnel, including senior management, those who have contact with customers (whether in person or by phone), those who see customer transaction activity or those who handle cash in any way, receive appropriate training. Board members also need to receive regular BSA/AML training, though at a much higher level with less detail than institution-line employees. The training needs to be ongoing and incorporate current developments and changes to the BSA, AML laws and agency regulations. New and different money laundering schemes involving customers and financial institutions 18 Community Banker
should be addressed. It also should include examples of money laundering schemes and cases tailored to the audience and the ways in which such activities can be detected or resolved. Another focus of the training should be on the consequences of an employee’s failure to comply with established policies and procedures (e.g., fines or termination). These programs also should provide personnel with guidance and direction in terms of bank policies and available resources. BENEFICIAL OWNERSHIP PROCEDURES The beneficial ownership rule contains three core requirements: 1. Identifying and verifying the identity of the beneficial owners of companies opening accounts; 2. Understanding the nature and purpose of customer relationships to develop customer risk profiles; and 3. Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. A beneficial owner is an individual who owns more than 25% of the equity interest in a company or is the single individual who exercises control. Also subject to these requirements is the one person who has control of each legal entity customer. BEYOND THE BASICS BSA enforcement actions continue to raise the bar for all financial institutions. BSA compliance programs must meet additional standards in order to be considered adequate to meet the ever-evolving challenges that arise over time: • Customer Due Diligence (CDD): Verifying a customer’s name, address, date of birth and identification number will satisfy the basic BSA customer identification requirements. However, these four pieces of information will not be enough to help an institution determine a customer’s typical account activity. The recent C&D orders make clear that regulators expect community bank managers to use information collected as part of the institution’s CDD process to predict the type, dollar amount and volume of transactions that a customer is likely to conduct. This expectation goes beyond the new beneficial ownership rule to extend CDD expectations to the broader customer base. Several institutions subject to the recent round of enforcement actions were directed to develop specific procedures to describe how the institution will conduct customer due diligence. As computer and software technology has improved, regulators have come to expect small and large banks to gather and review information about the normal range of a customer’s banking activities. They view the CDD processes and analysis as providing the framework that enables institutions to comply with suspicious activity reporting requirements. • Account and Transaction Monitoring: A number of institutions that received the most recent orders did not have adequate, or any, procedures for detecting and reporting suspicious activities. The enforcement actions make clear that community banks must specify in writing how the institution will analyze and use customer information to detect suspicious activities. As this area gets more complex, it becomes more difficult to try to maintain an adequate suspicious activity monitoring regimen without some form of automated monitoring. CONCLUSION The costs of being subject to an enforcement action go beyond extra regulatory scrutiny in subsequent examinations. Institutions under the latest round of actions must report the enforcement action in communications with their shareholders and spend significant sums of money to hire outside consultants to train employees, audit the revised BSA programs and backfile required reports. They also must submit planned actions to the regulators involved for prior approval, as well as report regularly (usually quarterly) on their progress in remediating the deficiencies that led to their particular enforcement action. An interagency BSA enforcement policy statement clarifies that formal enforcement actions will not be issued for minor BSA infractions. These enforcement actions are levied against financial institutions — including community banks — with significant breakdowns in their BSA compliance systems. The consent and other orders illustrate that all banks are expected to have very specific procedures for how they will collect customer information, predict customer account activity, utilize transaction monitoring reports, and train and manage employees with BSA-related responsibilities. Be sure that you are not an object lesson for your banking fellows. If we can help, contact us. William J. Showalter, CRCM, CRP, is a senior consultant with Young & Associates Inc. (www.younginc.com) with over 35 years of experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also has developed and conducted compliance training programs for individual banks and their trade associations and has authored or co-authored numerous compliance publications and articles. William can be reached at (330) 678-0524 or wshowalter@younginc.com. Community Banker 19
MIB UPCOMING EVENTS 2025 MARCH 11-14 ICBA LIVE Gaylord Opryland Hotel Nashville, Tennessee MARCH 21 Washington, D.C., Advocacy Scholarship Application Due APRIL 25 MIB/CBM Board Meeting Sacajawea Hotel Three Forks, Montana APRIL 30 Graduate Banking School Scholarship Application Due MAY 12-15 ICBA Capital Summit Washington, D.C. JUNE 6 MIB Young Banker Award Application Due JULY 16-18 MIB Convention and Trade Show Big Sky Resort Big Sky, Montana SEPTEMBER Griz Tailgate Missoula, Montana OCTOBER MIB Women in Banking Conference Location TBD Bobcat Tailgate Bozeman, Montana Date TBD MEMBER NEWS LARGE BUSINESS OF THE YEAR Three Rivers Bank of Montana is the 2024 Kalispell Chamber’s Large Business of the Year award winner! Congratulations to the team at Three Rivers Bank of Montana. Way to make our state proud. 20 Community Banker
BUSINESS PERPETUATION PLANS In our work with business clients across the country, one consistent theme emerges in conversations with owners and leaders: “How do we transition our business to the next generation or plan an exit strategy that maximizes our return for the time, blood, sweat and tears we’ve poured into it?” As we navigate through that conversation with our clients, several key themes drive the discussion: • What would happen to your business if you were no longer in the picture? • How will your business operate when you retire? • What will happen to the ownership of the business and personal assets? • Would ownership be transferred? How and to whom? • What would your business do in the event of a sudden death? • Where would the money come from to pay business loans and cover ongoing expenses? • Most importantly, which legal and financial arrangements do you have in place to manage this? But, just as it is important to cover your buildings, equipment and vehicles, it is crucial to protect the assets you have worked so hard to build. PLANNING FOR BUSINESS CONTINUATION What the Heirs Want • Ongoing financial security after the loss or sale of the business. • Prompt settlement of the owner’s business and/or estate, which includes proper tax valuation of the business and/or estate. • Retention of the business interest by other current shareholders, which may be family members or a prompt sale of the business to “outsiders” at an attractive price. In the Absence of Planning, Unhappy Consequences Can Result • Conflicts and possibly even litigation between the remaining shareholders and the former owner’s heirs. • Delays in the transition to successor ownership. • Potential loss of customers, employees and creditor confidence can damage the business and possibly force its liquidation. Advantages of a Buy-Sell Agreement A formal, written buy-sell agreement among the owners/heirs is the first step in assuring: • An orderly and successful transition in business ownership. • A fair price and terms reasonable to all parties. BY SHAUN McCHESNEY, MARSH McLENNAN 22 Community Banker
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