The Nebraska Independent Banker INNOVATION STATION DRIVING STRATEGY WITH AI AS A TOOL 2024 • Issue 6
Lending Services Operational Services Audit Services The customer service that MIB provides to our community bank is exceptional. Tim Burns, our relationship manager, listens to our needs and helps our bank meet our goals. Their website protal we use for reports is very user-friendly and easy to navigate. We appreciate the relationship we have with MIB today! 800-347-4MIB mibanc.com MEMBER FDIC Tim Burns Jami Schmidt Jami Schmidt/CFO Henderson State Bank Henderson, NE WHY ? We understand the issues unique to the banking industry. With over 100 years of banking experience, our knowledgeable staff will provide the complete independent services required by best practices and regulatory guidance. COMPLIANCE SERVICES • ACH Audit • BSA Audit • Lending Compliance Audit • Deposit Compliance Audit • Directors’ Examination • Interest Rate Risk Review • Home Mortage Disclosure Act (HMDA) Review • Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act Audit LOAN SERVICES • Loan Review IT SERVICES • Internal/External Penetration Test • Internal/External Vulnerability Assessment • Social Engineering Assessment • Information Technology (IT) Security Audit • Business Continuity Management Audit www.mibanc.com/audit AUDIT SERVICES
6 ©2024 The Nebraska Independent Community Bankers are proud to present The Nebraska Independent Banker as a benefit of membership in the association. No member dues were used in the publishing of this news magazine. All publishing costs were borne by advertising sales. Purchase of any products or services from paid advertisements within this magazine are the sole responsibility of the consumer. The statements and opinions expressed herein are those of the individual authors and do not necessarily represent the views of Nebraska Independent Community Bankers or its publisher, The newsLINK Group LLC. Any legal advice should be regarded as general information. It is strongly recommended that one contact an attorney for counsel regarding specific circumstances. Likewise, the appearance of advertisers does not constitute an endorsement of the products or services featured by The newsLINK Group LLC. The Nebraska Independent Banker is a collective work, and as such, some articles are submitted by authors who are independent of the Nebraska Independent Bankers Association. While the Nebraska Independent Banker 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. Nebraska Independent Community Bankers 1201 Lincoln Mall, Ste. 103 Lincoln, NE 68508 (402) 474-4662 nicbonline.com The Nebraska Independent Banker is a publication of The Nebraska Independent Community Bankers Association. Issue 6 • 2024 TAKE A LOOK INSIDE 14 20 NICB Executive Committee Chairman Rick Heckenlively Points West Community Bank Sidney Chairman Elect Dave Ochsner Commercial Bank Nelson Vice Chairman Jim Niemeier Citizens State Bank Friend President/CEO Dexter Schrodt Secretary Kelly Lenners First State Bank Nebraska Pickrell Treasurer Arnold Lowell CerescoBank Ceresco Immediate Past Chairman Corby Schweers Elkhorn Valley Bank Wayne 4 FLOURISH AI: The New Frontier By Rebeca Romero Rainey, President and CEO, ICBA 5 Banker Showcase 6 PORTFOLIO MANAGEMENT Bridging the Gap Rate Cuts Could Hit Your Margin, But There Are Steps You Can Take to Reduce the Pressure By Michael Benedict, Managing Director, Fixed Income Strategies, Stifel 10 A Growing Fraud Scheme Your Financial Institution Should be Aware of, and How to Protect Against Losses By Shelli Clarkston, Spencer Fane LLP 12 ICBA Live 14 Checking Your BSA Program Is More Important Than Ever By William J. Showalter, CRCM, CRP, Senior Consultant, Young & Associates Inc. 20 INNOVATION STATION Driving Strategy With AI as a Tool By Charles Potts, Executive Vice President and Chief Innovation Officer, ICBA 22 Fraud and Financial Crime By BHG Financial Institutional Network 27 NICB Endorsed Partners 27 Associate Members 2024
Rebeca Romero Rainey is the president and CEO of ICBA. Connect with Rebeca on X @romerorainey. FLOURISH If you’ve ever watched an episode of “Star Trek,” you’ve heard its famous introduction proclaiming we must “boldly go where no man has gone before.” With artificial intelligence (AI), this may be our new reality. Today, we’re seeing AI and related technologies — such as robotic process automation and machine learning — employed in a wide range of applications, from back-office operations to fraud detection systems and more. As new AI-powered solutions are introduced, we recognize both the opportunities and risks they bring. Just as easily as AI can help detect anomalies to flag potential fraud, so can it be used to create a customer deepfake to enable a fraudulent transaction. To safeguard our banks, we must understand how AI is being used today for the good and the bad, then evolve our risk management procedures accordingly. That very balance means that as we explore AI opportunities, we do so with an eye toward our dedication to safety and soundness. At the end of the day, AI is a tool and utility, and as with any technology, it’s incumbent on us as users to determine how it can be used and where the risks lie. But as we navigate this new AI space, we’re asking regulators to not be overly prescriptive with their guidance. We need the flexibility to explore this technology as we remain alert to potential pitfalls. AI: By Rebeca Romero Rainey, President and CEO, ICBA THE NEW FRONTIER 4 NEBRASKA INDEPENDENT BANKER
To safeguard our banks, we must understand how AI is being used today for the good and the bad, then evolve our risk management procedures accordingly. As we shared in our response to the Treasury Department’s request for information on AI — available in full at icba.org/advocacy — it’s not the technology that warrants scrutiny; it’s the application. As any technology evolves, we must lean into existing guidance around fair lending and privacy, regardless of what the tool is. There’s a fine line as we think about and understand the new, unknown risks AI might create, but fortunately, we have an opportunity to weigh in and identify those concerns as they emerge. We can be more surgical in our approach to future guidance to allow for the technology to evolve. In the meantime, community bankers can stay up to speed on AI developments through resources like the articles in this issue as well as education opportunities, including our AI Demystified: Webinar Series or our AI ThinkTECH Solutions Forum. (Find out more about these resources at icba.org/education.) As we attempt to boldly go where community banking hasn’t gone before with AI, we are armed with the information we need to use it for the benefit of our banks and our customers in a strategic, safe, sound and efficient manner. We Want to Feature You in Our Next Issue of The Nebraska Independent Banker! The Banker Showcase shines a light on those employees that make a difference. To be featured, please email Dexter at dexter@nicbonline.com. NEBRASKA INDEPENDENT BANKER 5
BRIDGING THE GAP Rate Cuts Could Hit Your Margin, But There Are Steps You Can Take to Reduce the Pressure By Michael Benedict, Managing Director, Fixed Income Strategies, Stifel Well, it finally happened. After increasing short-term policy rates at the fastest pace in modern history and holding them there for more than a year, the Federal Reserve reduced the federal funds rate by 50 basis points (0.50%) in September to kick off an eagerly anticipated rate-cut cycle. According to the FDIC, community bank net interest margin (NIM) rose by seven basis points in the second quarter of 2024, but profitability pressures clearly remain. Both return on assets (ROA) of 0.95% and return on equity (ROE) of 9.60% increased only modestly versus the previous quarter. Given the liability sensitivity exhibited by the industry over the past year and a half, one might think that the directional change in short-term policy rates — and an associated re-steepening of the yield curve — might be a boon for bank profitability. However, there are a couple of reasons this may not be the case. Takeaways From Previous Cycles Though a steeper yield curve is better for bank profitability over the medium to long term, asset yields may be more responsive to reduced policy rates than liability costs in the near term. This seems somewhat counterintuitive but is primarily driven by two factors. The first is that a greater percentage of assets than liabilities are indexed. That means that once the index declines, coupons reset lower at the next reset date. What’s considered a boon when PORTFOLIO MANAGEMENT 6 NEBRASKA INDEPENDENT BANKER
Though a steeper yield curve is better for bank profitability over the medium to long term, asset yields may be more responsive to reduced policy rates than liability costs in the near term. interest rates rise will work in reverse as rates decline. Second is the migration of non-maturity deposits into CDs. While most CDs feature relatively short tenures, this movement lengthens the average maturity of liabilities and will limit banks’ ability to reduce deposit rates in lockstep with policy rates. This delay is amplified for institutions in competitive markets, as your ability to lower deposit rates may be limited if others in your footprint are reluctant to do so. Both factors will course-correct over time, but a review of asset and liability betas from previous easing cycles suggests that it may take two years or more before the cumulative decline in funding costs meaningfully outpaces the cumulative decline in asset yields. During the transition period, strategies geared toward increasing asset yields become the best defense against continued margin pressure. Remixing the balance sheet, purchasing loans to supplement organic originations or repositioning a portion of the securities portfolio are several strategies that can be employed to drive incremental movements as a stopgap measure. NEBRASKA INDEPENDENT BANKER 7
What Could Be Different This Time? To paraphrase the saying, history often rhymes but never repeats. So, recognizing that previous rate-cut cycles may provide useful guidance, how might the current cycle differ? First and foremost is the economy. To date, the economy has weathered a restrictive policy stance remarkably well. There are still several pockets of concern that need to be monitored — low levels of housing turnover, credit performance in commercial real estate and the effects of higher interest rates on consumer credit, to name a few. That said, absent a material deterioration in economic performance, the pace and depth of policy adjustments may be somewhat lesser in this cycle than in the past. This is especially true when recognizing that inflation readings remain above the Federal Reserve’s longer-run target of 2%, which may limit its ability to move to an accommodative policy stance. As a reference point, it seems important to note that the easing cycles since the turn of the century have averaged nearly 350 basis points of cuts over the 12 months following the initial move lower. At the time of writing, fed funds futures project a decline of roughly 240 basis points over 12 months beginning in September 2024. If realized as expected, this would place the current cut cycle among the shallowest of modern monetary policy and would likely limit the amount of relief for bank profitability. Second is the impact of technology. The development of technologies allowing consumers to quickly compare deposit rates nationwide means that your competition isn’t just across the street anymore. Furthermore, those same consumers can just as easily place their funds into other short-term products, such as money market funds. Wait, Prepare and See Indeed, data from the Federal Reserve show that retail money market fund balances ended the second quarter of 2024 at $1.89 trillion, an increase of roughly 67% over the previous peak of $1.17 trillion. While difficult to quantify the precise impact on deposit pricing, the sizable increase has undoubtedly affected the banking industry. That growth will almost certainly slow or reverse as policy rates move lower, but a mass migration into the banking system seems appears unlikely outside of a crisis scenario where return of principal becomes more important than return on principal. Until then, depositors will likely remain more rate-sensitive than in the past. Each rate cycle is unique, but previous reductions in short-term interest rates have taken time to meaningfully improve profitability across the banking industry. Complicating matters further, the relatively shallow market-implied path of policy rates and increased competition due to technology developments may create additional setbacks even if the yield curve normalizes. As such, management teams hoping for the first fed cut to provide near-term relief may not get all they want, but those who plan appropriately will be in prime position to benefit when the environment improves. Michael Benedict (benedictm@stifel.com) is a managing director, fixed income strategies, at Stifel, ICBA Securities’ exclusively endorsed broker. 8 NEBRASKA INDEPENDENT BANKER
Recently, financial institutions are facing large losses as a result of a growing fraud scheme. It is important for institutions to understand this fraud scheme and know how to protect themselves from potential losses. The fraud scheme begins when an individual intercepts a check in the mail. Typically, these checks are payable to a business. The same or another individual then forms an entity in a state with the same name as the payee business. For example, for a check payable to ABC Inc., the individual will set up a corporation in the name of ABC Inc. and will prepare the relevant corporate documents. The individual will then go into the institution and open a new account in the name of ABC Inc. The institution will obtain the Articles of Incorporation as well as a Certificate of Good Standing, corporate resolutions and bylaws. The institution will then deposit the intercepted check into the new account. Sometime later, the actual payee eventually contacts the payor to report that it never received the check, and the payor contacts its financial institution only to be told that the check has cleared. The payor’s institution then submits a breach of transfer warranty claim to the institution of first deposit for fraudulent endorsement. However, the funds in the new account have been withdrawn. Financial institutions are left facing the issue of determining who is liable for the funds. The fraudster is ultimately liable for the stolen money but typically cannot be located or has already spent the money. As a general rule, the most negligent party should be held liable; however, the law may shift liability to another party, possibly to your institution. When it comes to forged endorsements, the Uniform Commercial Code (UCC) § 4-207 Transfer Warranties provides that all signatures (such as an endorsement) are authentic and authorized. Under UCC § 3-403, an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the check or takes it for value (such as the financial institution of first deposit). However, UCC § 3-406(a) provides that a person whose failure to exercise ordinary care substantially contributes to the making for a forged signature on a check is precluded from asserting the forgery against a person who, in good faith, pays the check or takes it for value or collection. If the person asserting the preclusion fails to exercise ordinary care in paying or taking the check and that failure substantially contributes to the loss, the loss is allocated to the A GROWING FRAUD SCHEME YOUR FINANCIAL INSTITUTION SHOULD BE AWARE OF, AND HOW TO PROTECT AGAINST LOSSES By Shelli Clarkston, Spencer Fane LLP 10 NEBRASKA INDEPENDENT BANKER
extent to which the failure of each to exercise ordinary care contributed to the loss. UCC § 3-406(b). Simply, if the financial institution of the first deposit did not exercise ordinary care in taking the check for deposit, it will be precluded from asserting liability for the forgery against the payor’s financial institution. So, what does your financial institution need to do to show that it acted in good faith and exercised ordinary care when accepting the check for deposit? The following checklist details some actions your institution should take: • Follow all procedures for Customer Identification Program (CIP) and beneficial ownership, including obtaining valid government-issued identification. • Closely examine the identification provided to determine if it is genuine (institutions typically utilize an I.D. Checking Guide that contains images of valid driver’s license formats for all 50 states.) • Compare the check issuance date with the entity formation date. A check issuance date before the entity formation date could be an indicator of fraud. • Compare the address of the payee on the check (if there is one) with the address for the entity. Different addresses could be an indicator of fraud. • Look at the address of the payee and the entity in comparison to your institution’s branch locations. An address that is not close to any branch location could be an indicator of fraud. If your institution needs assistance with handling a fraudulent endorsement dispute, or other breach of transfer warrant dispute, Spencer Fane has attorneys available to help. 800.228.2581 MHM.INC Now more than ever people want self-service options. With our core integrated ITMs we can make this a reality both in the lobby and in the drive-up of your branch. SELF-SERVICE BANKING NEBRASKA INDEPENDENT BANKER 11
March 11–14, 2025 Gaylord Opryland Resort & Convention Center NASHVILLE RHYTHM. AMPLIFIED. Together, community bankers amplify the power and successes of our industry at the largest annual gathering of community bankers—ICBA LIVE 2025. Plug into a wide range of educational offerings to boost your knowledge and bring it back to your bank. Synchronize with fellow community bankers and industry experts on the latest industry trends and innovations. Celebrate the unique rhythm of our industry through energizing and inspiring general sessions and unparalleled networking events. Register today at icba.org/live 12 NEBRASKA INDEPENDENT BANKER
SOCIAL ENGINEERING NETWORK MONITORING BY COMMUNITY BANKERS FORCOMMUNITY BANKS CivITas Bank Solutions was born from the needs voiced by community banks for affordable real-world technology and information security solutions. Anne Benigsen President David Philippi VP - Business Development Chris Tuzeneu VP – Information Security PENETRATION TESTING VULNERABILITY SCANS info@acivitas.com www.acivitas.com Enjoy your association news anytime, anywhere. Scan the QR code to visit our online publication to stay up to date on the latest association news, share articles and read past issues. nebraska-independentbanker.thenewslinkgroup.org
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. 14 NEBRASKA INDEPENDENT BANKER
• Daily coordination and monitoring of compliance by a designated person. • Training for appropriate personnel. • Risk-based customer due diligence/beneficial ownership procedures. 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 NEBRASKA INDEPENDENT BANKER 15
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 noted previously, 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 16 NEBRASKA INDEPENDENT BANKER
agency regulations. New and different money laundering schemes involving customers and financial institutions 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 it 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. NEBRASKA INDEPENDENT BANKER 17
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. Bill can be reached at (330) 678-0524 or wshowalter@younginc.com. Member FDIC Traci Oliver Eric Hallman Tara Koester Bankers’ Bank of the West We champion Community Banking bbwest.com | 800-873-4722 www.bbwest.com YOUR NEBRASKA RELATIONSHIP MANAGERS As a bankers’ bank we strive to help with every level of service and expertise. That is why we service anything from loan participations, merchant services, ATM/debit and much more, because we aim to answer your questions with, “…yes, we can do that too!” 18 NEBRASKA INDEPENDENT BANKER
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INNOVATION STATION DRIVING STRATEGY WITH AI AS A TOOL By Charles Potts, Executive Vice President and Chief Innovation Officer, ICBA Artificial intelligence (AI) has become the buzzword for financial services, but it’s moved beyond just hype. Today, community bankers and their partners are experimenting with AI-like tools in the predictive and generative space to support business objectives, including chatbots to offer 24/7 customer support, monitoring transaction data to spot suspicious activity, underwriting loans and more. Therein lies the key to AI success: aligning it with overall bank strategy. As exciting of an offering as it is, AI is a utility. For community bankers to use it effectively, we need to assess how it helps us solve a problem for our banks. 20 NEBRASKA INDEPENDENT BANKER
Check Out the ICBA ThinkTECH Solutions Forum: Putting AI to Work Our recent ThinkTECH Solutions Forum session answered the question of how to effectively use this AI at your community bank. Scan the QR code to access the recording. https://tinyurl.com/putAI2work Identifying Community Bank AI Solutions At ICBA Innovation, we’ve been watching AI’s evolution closely and are struck by three important observations: 1. There’s still a great deal of confusion in the industry — from solution providers to bankers to regulatory agencies — as to what AI actually is. As an industry, we have allowed external forces, including people with financial interest in these technologies, to form the narrative. This, in turn, creates uncertainty. 2. However, there’s true technological evolution in this space. Established fintech companies are offering improved solutions using AI-based tools, and new companies are entering the pipeline. 3. We’re witnessing AI-based tools that can help our banks, and we’re finding ways to shine a light on those solutions. Supporting AI Strategy These developments led us to host our AI Solutions Forum. We identified AI solution providers that were already doing work with community bankers and asked those bankers to share how AI addressed problems, where they are seeing successes and where these solutions fit into their strategies. The resulting AI Solutions Forum provides a firm base on which community bankers can learn and grow. It’s a chance for both C-suite and up-and-coming leaders to expose themselves to something new in a safe, trusted environment. It’s our goal not to just dive into the shiny new thing but to create a place for substantive, peer-to-peer dialogue and strategic exploration. AI may be the technology du jour, but it has real potential to solve community bank problems. So, we want to ensure you have the information you need to make informed decisions and drive your strategy forward — one new tool at a time.
FRAUD AND FINANCIAL CRIME By BHG Financial Institutional Network In the world of financial lending, institutions need to have multiple checks and balances in place to protect their assets, their customers and the future of their organization. Sadly, some individuals try to use our fair nature against us for deceptive gain. Efforts to obtain funding through fraudulent means can often be recognized during the initial application review or customer interaction. Outlined here are several methods to support your institution in recognizing fraudulent activities. In the world of financial lending, institutions need to have multiple checks and balances in place to protect their assets, their customers and the future of their organization. 22 NEBRASKA INDEPENDENT BANKER
Due Diligence in Fraud Prevention According to the Federal Trade Commission, nearly $8.8 billion was lost to fraud in 2022, representing an increase of over 30% from 2021.1 More than ever, due diligence must be conducted to confirm that applicants who come to you for financing are forthright in their intentions. The following are several fraud indicators your credit team should look for in applications that may reveal a bad actor’s true intentions: • Inconsistent Information: If the applicant provides loan information that does not align with or contradicts other documentation, it could be a sign of fraud. Advise your team to pay particular attention to discrepancies in income details, address history and employment history. ◻ Prevention Tips: While typos or small mistakes can happen, these errors can be quickly fixed in a conversation with your applicant. If the applicant is evasive when responding to these inconsistencies or disappears from the process, your suspicions of fraudulent activities were most likely correct. • Unverifiable Information: Applicants who provide information that cannot be easily verified may be attempting to deceive a lender. Examples of unverifiable information include nonexistent references, fake employment details and degrees earned from defunct institutions. ◻ Prevention Tips: You can ask for new references and confirm employment and degrees via your own independent searches. You can also confirm whether the employer still exists and is still active by visiting a business entity search website where the company is located. Educational degrees can be verified via the National Student Clearinghouse or Department of Education websites within the institution’s state. • Abnormal Behavior: Applicants who display overly aggressive, evasive or unwilling behavior when asked to provide additional information may likely be trying to hide something. ◻ Prevention Tips: Knowing the difference between someone having a bad day versus someone attempting to deceive us is not easy to judge. Here are some helpful tips to consider. During in-person engagements, watch closely for individuals who avoid eye contact or turn their bodies away during one-on-one conversations. In emails or on the phone, fraudulent cues can be more difficult to detect, but if someone suddenly gets defensive when asked a question or becomes noticeably quiet, there may be a hidden reason behind it. • Unusually High Income: While a high income does not indicate fraud, it is well worth looking into further if an applicant’s income seems excessively high relative to NEBRASKA INDEPENDENT BANKER 23
their stated profession, or if there is a sudden, large shift relative to the income they earned compared to the previous year. ◻ Prevention Tips: Third-party vendors, such as Inscribe, can be instrumental in finding inconsistencies in an applicant’s income. These third-party automated systems can provide insight into which documents may or may not be fraudulent, such as pay stubs, W-2s and bank statements. • Rushed Application Process: Often, fraudsters will want to rush the application process to minimize the chances of being caught. Be extra cautious if an applicant pressures you or your team for quick approval. ◻ Prevention Tips: Slow it down. Take your time and review the application carefully. The applicant could innocently want to expedite the process to get the desired result sooner. Regardless, never allow their need for speed to accelerate the process to the point of negligence. • Use of Stolen Identity: Stolen or fabricated identity documents may be used by bad actors applying for loans. Be vigilant about verifying the authenticity of the provided documents. ◻ Prevention Tips: Leverage third-party vendors to help identify stolen or faked identities. Companies such as Vouched can review identification and provide accurate, real-time insights into the authenticity of the documents. Alternatively, your team should be looking for any missing holograms, cheap lamination or identification that does not have images under ultraviolet light. Closing Thoughts As financial institutions navigate the lending landscape, it is important to adopt a stance of informed prudence. The battle against fraud and deceit requires unwavering commitment, steadfast due diligence and a keen awareness of the red flags that hint at ulterior motives. By employing a multifaceted approach that blends human discernment with cutting-edge technology, institutions can safeguard their assets, their reputation and the trust placed in them by their customers. 1. New FTC Data Show Consumers Reported Losing Nearly $8.8 B to Scams in 2022 Procedures for Checking IDs: How to Tell if an ID is Fake 24 NEBRASKA INDEPENDENT BANKER
Is your community bank bond portfolio performing? Meet Jim. Jim meets with community bankers across the U.S. to discuss ICBA Securities’ investment products, services, and education through our exclusively endorsed broker, Stifel. Investing through Stifel is a direct investment back into the community banking industry. When Jim is on the road, he always takes time to enjoy local restaurants and share on social media. As an ICBA member, you’ve got Jim’s help investing. Learn more at icba.org/securities Member FINRA/SIPC
26 NEBRASKA INDEPENDENT BANKER BOK Financial® and We go above. So you can go beyond.® are trademarks of BOKF, NA. Member FDIC. Bank dealer services offered through BOK Financial Capital Markets, which operates as a separately identifiable department of BOKF, NA. BOKF, NA is the bank subsidiary of BOK Financial Corporation. Investment products are: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE We go above. So you can go beyond. Seeking a fresh perspective on your interest rate risk and balance sheet management? As a community banker, your time is valuable. With mounting margin pressures, maximizing earnings from your investment portfolio is crucial. Our unique approach integrates portfolio management within the overall interest rate risk position, optimizing balance sheet performance. At BOK Financial Capital Markets, we help you navigate regulatory requirements with a comprehensive, cost-efficient, tailored solution to enhance your institution’s performance by engaging your management team to formulate ideas and execute strategies that drive results. Budgeting Profit projections ALCO Capital planning Decay/beta analysis Regulatory compliance Investment portfolio Investment mix Interest rate risk Loan pricing Board education Liquidity stress testing Brokered funding SCAN TO LEARN MORE OR VISIT BOKFINANCIAL.COM/INSTITUTIONS
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