JOSEPH ROTTINGHAUS CHAIRMAN TANNER JOHNSON CHAIRMAN-ELECT IRV MITCHELL IMMEDIATE PAST CHAIRMAN WELCOME 2023-2024 BOARD MEMBERS THOMAS PRUITT SEC/TREAS ISSUE 5 2023 Official Publication of the Community Bankers Association of Kansas
CONTENTS Issue 5 | cbak.com © 2023 Community Bankers Association of Kansas | The newsLINK Group, LLC. All rights reserved. In Touch is published six times each year by The newsLINK Group, LLC for the Community Bankers Association of Kansas 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 the Community Bankers Association of Kansas, 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. The Community Bankers Association of Kansas is a collective work, and as such, some articles are submitted by authors who are independent of the Community Bankers Association of Kansas. While In Touch 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. 4 FLOURISH By Rebeca Romero Rainey, President and CEO, ICBA 6 45TH ANNUAL CONVENTION & TRADESHOW 8 COMMUNITY BANKER APPRECIATION TAILGATE 10 RESULTS TECH TALK: CAN ENHANCED DUE DILIGENCE HELP YOUR BANK AVOID CYBERSECURITY RISK? By Mike Gilmore, Chief Compliance Officer, RESULTS Technology 12 DATA-DRIVEN STRATEGIES FOR BANKS: START HERE By Paula S. King, CPA, Abrigo 15 IS YOUR BANK READY TO ACCELERATE PAYMENTS WITH THE FEDNOW SERVICE? By Greg Aumann, CSI 16 ANNIVERSARIES 18 REMEMBER THE MUNIS: DON’T GO TO SLEEP ON A PROFITABLE BOND SECTOR By Jim Reber, ICBA Securities 19 ANNOUNCEMENTS 20 2022’S TOP THIRD‑PARTY SENDER AUDIT FINDINGS By Matthew Wade, AAP, APRP, CPA, EPCOR IN EVERY ISSUE: 23 BANK TRAINING WEBINARS 24 OFFICERS AND DIRECTORS 24 PRODUCTS AND SERVICES REFERENCE LIST 6 15 12 3 In Touch
FLOURISH As we enter budget season, the adage “You can’t save your way to prosperity” hits home. With regulatory and financial pressures, community banks face tough decisions as they allocate resources for 2024. I was just speaking with a banker who reiterated that it’s been a while since we’ve been in this interest rate environment, and its impacts on the cost of credit and renewals send us down a path of unknowns. So, when we begin budgeting, we have to find a meaningful way to anticipate what lies ahead. But with this uncertainty comes an opportunity to look at solutions with a new perspective. The current economic environment has bank management teams laser-focused on how we grow and create new revenue, all while managing expenses. The reality is that interest expenses will be significantly higher moving into the coming year, so we need to be asking, “What are we doing on the other side of the income statement to grow revenues?” Now’s the time to think outside the box to ensure we continue to grow. Whether it’s stories of banks continuing to increase deposit balances based on trusted relationships in the community or others who are introducing different types of deposit products or identifying continued loan growth despite economic challenges, so much of what we’ve seen in the last six months is banks doubling down on what they’re good at doing: helping their customers and communities in ways that nobody else can. Community banks are building on their tried-and-true relationship-based business models, exploring opportunities for new sources of revenue generation, whether of payment products, specialty or niche areas of finance, or seeking other solutions that speak to individual customer bases. So much of what we do in budget season is “put your head down, plug in the numbers and proceed forward.” But pulling out of the weeds allows us to see how we can take advantage of this time and think creatively about how we’re innovating for the future of our organizations. And we’re not in it alone; we have a network of community banks on which we can rely. In fact, ICBA has just launched ICBA Community (community.icba.org), a digital platform to help community bankers network and share information. I encourage you to use it to get insights into creative ways your peers are managing this budget cycle. Because, as community bankers, we have the benefit of learning from one another. Let’s leverage that connection to identify strategies to prosper, even as we’re faced with challenges. We are stronger together than we are individually, and that will serve us well as we prepare for what’s next. BY REBECA ROMERO RAINEY, PRESIDENT AND CEO, ICBA So much of what we’ve seen in the last six months is banks doubling down on what they’re good at doing: helping their customers and communities in ways that nobody else can. Connect with Rebeca on X @romerorainey. 4 In Touch
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45th ANNUAL CONVENTION & TRADESHOW The Community Bankers Association of Kansas held their 45th Annual Convention & Tradeshow July 19-21 in Overland Park, KS. Attendees enjoyed hitting the green at Topgolf and had some family fun at Chicken N Pickle. Event speakers talked about an array of educational topics and everyone had a good time catching up with old friends and making new ones. The event closed with the Chairman’s Reception, dinner and a live auction. A big thanks to our sponsors. We hope to see you at our next event. 6 In Touch
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5897 SW 29th Street • Topeka, Kansas 66614 • Phone: 785.271.1404 • Email: info@cbak.com • www.cbak.com COMMUNITY BANKER APPRECIATION TAILGATE October 28, 2023 KSU vs. HOUSTON Please Be OurGuest! Join us for complimentary food & beverages starting 3 hours before kickoff. NEW LOCATION: The CBA tent will be located on the lawn of the Rowing Center (Kimball Avenue between Gate 8 and Gate 9 on Olympic Drive) RSVP for the CBA Tailgate Register online at www.cbak.com or Complete this form and email to nikki@cbak.com. Please note you do not have to have game tickets to attend the Tailgate. (To purchase tickets contact KSU) REGISTER to attend the Tailgate below – Deadline is October 6th Name(s): City: Bank: Email:
IT COMPLIANCE & SECURITY FOR COMMUNITY BANKS Watch our video! www.resultstechnology.com/bank-solutions/ Managed IT Cybersecurity Backup & Business Continuity Audit & Exam Support IT Planning & Budgeting Security Awareness Training RESULTS Technology is a family-owned, award-winning provider of managed IT compliance, infrastructure & cybersecurity services for banks. We have been helping banks reduce risks and achieve operational efficiency for more than 20 years. RESULTS Technology | 12022 Blue Valley Parkway, # 524, Overland Park, Kansas 913.928.8300 | info@resultstechnology.com www.resultstechnology.com
BY MIKE GILMORE, CHIEF COMPLIANCE OFFICER, RESULTS TECHNOLOGY CAN ENHANCED DUE DILIGENCE HELP YOUR BANK AVOID CYBERSECURITY RISK? RESULTS TECH TALK Endorsed Partner Just as you have to complete due diligence before you buy a home, due diligence for banking vendors can make or break a partnership. Not completing enhanced due diligence (EDD) is like buying a house sight unseen and without doing an inspection! You never know what you might find. It only takes one cyberattack to cause serious damage to both the financial health of your bank and its reputation. That’s why cybersecurity for community banks, including proper due diligence and enhanced security measures, should be taken when evaluating vendors that provide services such as payment processing or loan origination technology. Let’s dive deeper into EDD and why it should be a priority when it comes to cybersecurity for community banks. What Is Enhanced Due Diligence? Enhanced due diligence is a process that goes beyond the standard due diligence of reviewing a vendor’s track record and financial information. It involves looking at certain activities or indicators that could pose additional risk to your institution, such as: • Strategies and goals • Legal and regulatory compliance • Financial condition • Business experience and reputation • Risk management • Information security When evaluating a vendor, it’s essential to be mindful of red flags that could indicate potential risk. Let’s work with the house analogy a bit more. If you have an inspection done and the results come back showing there are cracks in the foundation, you’re able to make a more informed decision about going forward with that property. 10 In Touch
Mike Gilmore is the Chief Compliance Officer of RESULTS Technology and a Certified Information Systems Auditor (CISA) with more than 30 years of experience in the banking industry. RESULTS Technology provides IT services to community banks across the Midwest. In his role as CCO, Mike provides compliance and risk assessments, audit and exam support, and policy documentation. He can be reached at mgilmore@resultstechnology.com. If you find a red flag about a potential vendor, you can make a better decision about partnering with that vendor or even look for a different one. Cybersecurity for community banks relies on a clear EDD policy. Who Needs To Do Enhanced Due Diligence? Any bank or financial institution that works with vendors should consider doing enhanced due diligence. This is especially true for community banks, which are often at higher risk of cyberattacks due to their smaller size and limited resources. To protect customer information and ensure regulatory compliance, your institution needs a comprehensive security program in place. Performing a proper EDD on vendors will help in that security program. 5 Ways Enhanced Due Diligence Helps You Eliminate Risk The bottom line of enhanced due diligence is finding ways to protect your customers. Here are the most important benefits of making EDD a part of your cybersecurity. 1. Improved Security Enhanced due diligence allows you to identify potential security vulnerabilities and take steps to mitigate them. This could include additional controls such as encryption or multi-factor authentication. 2. Increased Transparency Performing enhanced due diligence helps create a more transparent relationship with your vendors, which improves communication and trust between the two parties. 3. More Comprehensive Assessments EDD helps you go beyond the standard assessment process and get a snapshot of potential risks that may not be visible on the surface. 4. Easier Compliance With enhanced due diligence, it’s easier to stay compliant with federal regulations such as state laws. 5. Better Reputation Enhanced due diligence helps protect your banking institution’s reputation by reducing risk and ensuring that you’re taking all the necessary steps to keep customers’ data safe. Are There Specific Enhanced Due Diligence Requirements for Banks? Yes, according to the Federal Financial Institutions Examination Council (FFIEC), when it comes to enhanced due diligence, banks should: • Perform due diligence on all third-party vendors • Conduct regular risk assessments and monitor ongoing activities with the vendor • Review contracts and agreements related to the vendor • Monitor customer activity related to the third-party vendor By following these guidelines, banks can ensure that they’re doing all they can to protect customer information and maintain a secure banking environment. Enhanced due diligence is an important part of any bank’s security program, so make sure it’s on your list of priorities. With the right processes in place, you can eliminate potential risks and improve the cybersecurity of your community bank. Are You Ready to Get Started on Enhanced Due Diligence? RESULTS Technology specializes in cybersecurity for community banks nationwide to help them stay compliant and secure. Our team of dedicated professionals will provide the training, tools and resources you need to keep your community bank secure so that you can keep your customers safe and protect your reputation. Schedule a call today to learn more about how we can help! 11 In Touch
DATA-DRIVEN STRATEGIES FOR BANKS: START HERE BY PAULA S. KING, CPA, ABRIGO Practical advice for using data to develop and support institution goals. Answering three questions ahead of strategic development discussions can ensure data drives your financial institution’s efforts. How To Develop Banking Strategies Using Your Data Everywhere bank leaders look, it seems, someone is talking about how financial institutions should leverage their data and analytics to develop strategies for leapfrogging competition and reducing risk. So why aren’t more financial institutions already using their abundant data about customers and products to drive new offerings or deals, influence pricing and serve customers better? Three areas that are vital for using data to inform and execute winning business strategies often become roadblocks to success: • First, clearly identifying what information is needed to support and achieve the institution’s goals is essential. • Second, efficiently generating those insights from your data is a requirement for a sustainable process. • Finally, periodically assessing performance against institutional strategies creates a method for measuring success so leaders can pivot or seek more insight before plans get off track. Financial institution leaders can use their answers to the following three questions to clear potential barriers and ensure a data-driven approach to strategic planning. 3 Questions To Foster Data-Driven Strategies (1) What are your short- and long-term strategies, and what questions must you answer to support and achieve those strategic goals? Creating data analytics and reports alone are not the strategies; rather, they are the critical inputs to assist decision-makers in developing and executing those strategies. Staff producing the reports must communicate with management and inquire about what management wants to glean or achieve from the data insights. A pertinent question could be, “What critical questions do you need to answer?” Then, determine which reports/insights can answer those questions and better inform decisions. The goal isn’t the production of reports but producing insights and information that are critical to developing and executing strategy. It’s providing the decision-makers with meaningful insights so they can execute appropriately. For example, say your management and board’s strategy for the upcoming year is to grow the CRE loan portfolio by 10%, and the institution needs to consider expanding into new markets to achieve this goal. Before finalizing this goal, management should consider the following: • Historical trends • Current CRE concentrations • Market analysis • Loan pricing considerations • Real estate industry performance • Peer comparisons. 12 In Touch
Reports, insights and data analytics that will assist management in determining whether this is a viable strategy include: • Historical CRE growth trends over the last five years, further segmented by industry, collateral type and location: Analyzing this data will set the stage for the institution’s expectations for the 10% growth (e.g., is past performance a good indicator of future performance, and what needs to be adjusted if growth has not met expectations historically?) • CRE Concentration Report: Analysis should be performed on concentrations, as a percentage of capital, in terms of: 1. Collateral type such as multifamily, retail, office, etc.; 2. Owner versus non-owner occupied; and 3. Individual or related group of borrowers. This analysis will identify CRE types where the institution may be already bumping up against its in-house policy concentration limits. Management may need to adjust its strategy to grow within areas where there is still room for growth without jeopardizing these limits. • CRE geographic heat map: Where are the majority of your borrowers and collateral located, and where should the institution concentrate its marketing efforts? • CRE portfolio credit attributes: These should include historical interest rate and credit performance trends (e.g., how has this portfolio performed over time, and has the pricing reflected the risk taken?). • Industry borrower data: How has the commercial real estate market performed, and how is it performing today by collateral type in your region/market? Decisions that can be gleaned from industry data include areas in which to focus your growth as well as loan decisioning, such as loan pricing, based upon industry performance and level of risk determined by a review of this information. It’s not enough to produce the above analyses. The institution should prepare a formal written report that interprets the above insights and compares these insights to the growth strategy. The report should include a conclusion as to if this CRE growth strategy is viable AND how management plans to achieve this growth. Consider Interrelated Goals to Fine-Tune Strategy Using Data Another constructive approach for ensuring you have the right data insights to identify and support strategic initiatives is to evaluate the financial institution’s goals/issues as a whole by ranking them and considering how they are interrelated. This exercise may reveal the need for bigger-picture data analysis. Start with an inventory of your goals/issues and rank them in descending order. Identify any interrelated goals or issues, then determine the data analytics that will provide the insights. For example, your top goal for next year might be to expand your lending geographic footprint. Be very specific regarding this goal, including the targets for particular percentage growth, loan types, industries, and locations. Another goal that should go along with this goal to expand is to identify funding sources (e.g., add the FHLB or focus on certain types of deposits and/or on the depositor base by offering deposit incentives). Obviously, these two goals are interrelated — without excess liquidity, the institution will need to provide additional funding to meet the target to expand the lending footprint. So, in this situation, the institution will add reports showing the makeup of deposits (e.g., core vs. non-core, migration of deposits from core to transactional accounts, any trend in movement of funds out of the institution, top 10-20 depositors and associated volatility, borrowers without deposit relationships, etc.). From these reports, the institution can determine whether it makes more sense to gather deposits and how to do it through incentives or better technology, for example, or whether the institution needs to target alternative funding sources. (2) Do you have the right technology? The biggest hurdle in gaining data insights and making informed decisions is not having the right technology for efficiently and accurately reporting and monitoring data insights and, ultimately, making better strategic decisions, which will not only impact enterprise risk but can support growth and revenue recognition. Even today, for example, financial institutions may piecemeal their data insights, typically cobbling data from a variety of data systems and reports (e.g., core-generated, less-than-ideal core report writers and third parties) and ultimately, transferring the data into Excel for board and management reporting. Evaluating Business Intelligence Options Here are several questions to consider when evaluating the technology used for reporting and monitoring data insights: • Is it easy to use, or must staff be technically well-versed in order to use it? Ease of use is a must, particularly in banks with limited staff and bandwidth. Look for a solution with a natural language slant — one that uses straightforward data field names and keywords to generate data insights. Included artificial intelligence (AI) capabilities allow the data solution to learn a user’s interest in certain types of data insights and can suggest bank data analytics based on that user’s patterns. • Is the majority of your institution’s data housed in the solution or data platform? Will you have the option to bring in other data sources to get a fuller, bigger picture, or are insights constrained by the limited data housed with the provider? • Are the insights derived from the tool reflective of up-todate or real-time data? Historical data serves a purpose and can tell a financial Institution where they have been and how they have historically performed (e.g., in CECL calculations and loan performance), but stale information is not the best to use for strategic planning. A solution that can provide insights based on the most recent available data that you can provide is better. • Does the solution provide dynamic insights? Is there a drill-down feature to gain a more granular understanding of the data? For example, in analyzing a loan portfolio, can you easily and quickly drill down into a geographic concentration, then further identify the most significant loan type, and then further, the FICO score distribution within that loan type and within that geography? This allows for immediate insight to make better decisions as well as reporting to your board of directors on how to move forward with the loan portfolio focus. Using technology to 13 In Touch
access in minutes what might have previously taken you hours or days to gather fosters nimble decision-making. • Does the solution provide dashboards customized to specific groups within the financial institution (e.g., a lender performance dashboard that automatically updates as the financial institution uploads its data)? • In addition to reports, does the solution have the ability to monitor and alert staff when actual data metrics within the financial institution fall out of range with policy thresholds, minimum/maximum KPIs, concentration or other limits set? • Does the solution provide access to peer and industry data for creating visual comparisons and providing loan decisioning insights? • Finally, does the solution provide quick and easy options for accessing the data (e.g., emailing, uploading to other documents, creating PDFs and presentation features that allow for direct presentation to management and board groups)? A business intelligence solution that transforms the financial institution’s raw data into the insights leaders need without expensive data scientists or complex technical infrastructure supports timely strategic decisions. (3) How is your strategy working out based on your performance? Finally, banks should monitor performance against strategy using the reports and insights identified above at least quarterly. Findings should be reported to the board of directors at least quarterly, too. This periodic monitoring can provide the understanding necessary to regroup if falling behind on your strategy or to consider whether a strategy change is needed. Data-Driven Strategies in Changing Times Effectively planning for a financial institution’s growth, risks, and regulatory exams or reporting depends on quality data and analysis. The importance of data-driven strategies is magnified when circumstances are changing or are bound to change (such as with the eventual shift from higher interest rates to decreasing interest rates). However, many financial institutions, especially smaller banks, lack BI or business intelligence staff and complex technical infrastructures associated with “big data” options. Nevertheless, financial institutions of all sizes can execute plans developed using data (much of it already in their various systems) by identifying the relevant information, utilizing the right technology, and periodically comparing performance with strategic goals. Paula S. King, CPA, is Senior Advisor for Abrigo Advisory Services, assisting financial institutions with CECL, credit processes, model validations, and recently, the SBA’s Paycheck Protection Program forgiveness process. A former banker and bank cofounder, she has held executive positions (CFO, Chief Risk Officer and Chief Compliance Officer) and has more than 25 years’ experience across all aspects of banking including financial and asset/liability management, credit, services and product development and director responsibilities. 14 In Touch
Associate Member IS YOUR BANK READY TO ACCELERATE PAYMENTS WITH THE FEDNOW SERVICE? BY GREG AUMANN SUBMITTED BY CSI The Federal Reserve’s FedNow® Service, which launched July 20, 2023, promises to revolutionize money movement by enabling more banks to process instant payments and provide unparalleled convenience to consumers and businesses alike. Unlike traditional payment methods that can take hours or even days to complete, real-time payments process within seconds and allow payment recipients to access funds right away. This article explores the benefits of FedNow instant payments and the steps banks can take to participate. Benefits of the FedNow Instant Payments The FedNow Service is an instant payment network designed to allow individuals and businesses to send and receive payments in real time, 24/7. FedNow introduces an alternative to existing payment systems. The resulting competition will encourage technological advancements, lower transaction costs and foster a more robust and modern payment ecosystem. The primary benefit of the FedNow Service is the ability to process payments instantly, which enables financial institutions to stay competitive in a rapidly evolving market. With the reliance on digital banking, consumers expect their transactions to be quick and seamless. By offering instant payments, banks can attract and retain customers who prioritize convenience and speed. With the FedNow Service, financial institutions can also eliminate the need for costly intermediaries and streamline their payment processes. By processing payments in real time, banks can minimize the need to hold onto funds for extended periods, resulting in lower operating costs and improved liquidity. In addition, to mitigate the risk of fraud and errors that are often tied to traditional payment processing methods, the FedNow Service integrates robust security measures. Real-time payment monitoring and validation systems allow for instant detection of suspicious activities, facilitating immediate action to prevent and rectify instances of fraud. Preparing to Participate in the FedNow Service As the FedNow Service continues to gain traction and expand its reach, financial institutions should embrace this transformational technology to stay ahead in the market. The era of instant payments has arrived, bringing numerous opportunities for institutions to enhance their services, drive innovation and deliver exceptional value to their customers. Here are a few ways banks can prepare to participate in the national instant payment network from the Federal Reserve: • Upgrade Technological Infrastructure To leverage the benefits of the FedNow Service, banks must ensure they have the necessary technological infrastructure in place. This includes upgrading existing payment systems to handle real-time processing and integrating with the FedNow network. To that end, banks should assess their current infrastructure, identify any gaps and work toward enhancing their capabilities. • Provide Customer Education Introducing FedNow Instant Payments to customers will require proactive education and communication efforts. Banks should familiarize customers with the new system’s benefits and functionality. Education and communication will build trust and encourage adoption, so it should be provided through various channels, including websites and digital banking platforms. • Explore Collaboration and Partnership Opportunities The successful implementation of the FedNow Service will require collaboration 15 In Touch
ANNIVERSARIES Congratulations to the banks celebrating September and October anniversaries as chartered institutions! September 136 years, est. 1887 State Exchange Bank — Mankato 125 years, est. 1898 Peoples Bank & Trust Co. — McPherson 123 years, est. 1900 First State Bank — Ransom 94 years, est. 1929 Farmers State Bank — Fairview October 127 years, est. 1896 Elk State Bank — Clyde 120 years, est. 1903 Haviland State Bank — Haviland 117 years, est. 1906 Stockgrowers State Bank — Maple Hill 117 years, est. 1906 Grant County Bank — Ulysses 117 years, est. 1906 Bank of Commerce & Trust Co. — Wellington 113 years, est. 1910 Union State Bank — Olsburg 39 years, est. 1984 Community National Bank — Seneca 35 years, est. 1988 Bankers’ Bank of Kansas — Wichita 31 years, est. 1992 The Trust Company — Manhattan among banks, payment processors and technology providers. Banks should partner with financial technology providers specializing in real-time payments, leveraging their expertise and infrastructure. Collaborative efforts will accelerate the integration process and provide customers with seamless experiences. How Financial Technology Partners Can Help Prepare Banks for the FedNow Service In the fast-paced world of financial technology, banks often rely on partnerships to enhance their capabilities and stay ahead of industry developments. Regarding the FedNow Service, banks can significantly benefit from the support and expertise of their core banking technology partners. Banks should work with their core banking partner to ensure seamless integration of their existing systems with the FedNow network. This involves developing and implementing necessary APIs to facilitate real-time payment processing. By collaborating on technical integration, financial technology partners can help institutions minimize disruptions and streamline the adoption of the FedNow instant payments. Technology partners should also collaborate with banks to enhance the user experience for their customers using FedNow Instant Payments, including developing intuitive and user-friendly interfaces and payment platforms that enable customers to send and receive real-time payments seamlessly. Technology partners should stay at the forefront of technological advancements and market trends to offer innovative solutions that help banks leverage the full potential of the FedNow Service. The New Era of Instant Payments The FedNow Service’s real-time capabilities empower banks to provide their customers with faster, more efficient services while driving economic growth and innovation. By preparing their technological infrastructure, focusing on security and compliance, educating customers and fostering collaborations, banks can ensure a smooth transition to the new era of instant payments, meet the growing consumer demand and encourage competition and innovation in the payment industry. Gain additional insight into bankers’ thoughts on real-time payments and where they ranked on their list of priorities by downloading CSI’s 2023 Banking Priorities Executive Report at www.csiweb.com/bp23. Greg Aumann is a Sr. Product Manager for ACH, Wire and FedNow. He is responsible for ensuring the applications remain competitive and compliant in today’s rapidly evolving payments landscape. Greg also holds accreditations as an AAP — Accredited ACH Professional and CTP — Certified Treasury Professional. In addition, Greg is an active participant in payment industry work groups working to help advise the industry on the future of payments. Greg is also a member EPCOR’s Education Committee working to help provide guidance, direction and support for EPCOR’s Payments Education offerings. 16 In Touch
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 ICBA Securities 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
REMEMBER THE MUNIS Don’t Go To Sleep on a Profitable Bond Sector BY JIM REBER, PRESIDENT AND CEO, ICBA SECURITIES Being one who can empathize with the late, great humorist Ms. Bombeck, I thought it might be interesting to discuss a segment of the fixed-income universe that has served community banking well over the decades. It’s been many months since I’ve covered it for two practical reasons. The first is that it doesn’t present relative value in the current cycle, and the second is that, because of the first, portfolio managers haven’t been buying many of them recently. I’m speaking of the municipal bond market. It is a maxim of community banking that the more munis a bank owns, the higher performing the portfolio will be. This has been true for decades and in whatever part of the rate cycle we’re currently residing. But since we haven’t visited muni-land for a while, now is a perfect time for a sector update, complete with reminders about nuances and opportunities with state and local government bonds. Value Measures Tell me if you’ve heard this: The interest rate curve is inverted. It’s now been 16 months and counting since we’ve had a positively sloped curve and that includes the muni sector. A buyer has to invest in a 12-year or longer muni to get a higher yield than a one-year bond. Also, the retail sector continues to gobble up the majority of supply, which is barely running in place. A number of governmental borrowers in 2023 have delayed issuance, probably hoping for some relief on rates. Mom-and-pop investors will typically have higher marginal tax brackets than corporations, and that translates into higher tax-equivalent yields — hence the retail demand. The current impact is such that on the short end of the curve (i.e., 10 years and in), munis produce lower tax-equivalent yields than comparable maturity treasuries. In bond-speak, this is known as “trading through the curve.” Although this is an anomaly, it has persisted for most of 2023. Hence, the relative value, or lack thereof. Still the Favorite Notwithstanding the preceding paragraph, a hallmark of a highperforming bond portfolio remains a high allocation of munis, although that’s changing some. According to Stifel, top-quartile portfolios had 31% of their dollars in munis in June 2023, compared to 42% a year earlier. Interestingly, the top quartile also had a dramatic drop in its effective duration year-over-year from 5.3 years to 4.2. The shape of the curve again has played a role, as the dollars reallocated out of the munis space went into short-duration taxables such as treasuries, agencies and Small Business Administration (SBA) floaters. Still, in spite of the conundrums facing portfolio managers in 2023, the muni market remains fundamentally attractive. The curve will one day regain its positive slope. It’s expected that muni supply will again begin to increase as COVID stimulus money is spent and populations grow. And credit quality remains solid; there have been far more credit rating upgrades than downgrades, and even perennial whipping boys New Jersey and Illinois have been awarded upticks by the ratings agencies. Buy Cheap, Sell Dear I wouldn’t be doing my job if I didn’t offer some suggestions. If you agree that the municipal bond market is indeed expensive, then perhaps you may consider a sale of some of your holdings. The three- to five-year sector may actually produce lower take-out yields than shorter maturities. It’s also becoming more evident that the banking industry is having a solid earnings year in spite of margin compression, so a loss-earnback extension swap may have some interest. Recall, too, that the TEFRA penalty (remember that little acronym?) will start to take a bigger bite out of your taxequivalent yields as your cost of funds continues to rise. This is especially true for your General Market bonds, which have a much higher TEFRA hit than Bank Qualified munis. It’s déjà vu all over again and could be more reasons to at least temporarily allocate out of some tax-free bonds. On the other hand, 6%+ tax-equivalent yields are available now for those S Corps willing to invest for 20 years or so. Ultimately, the message of this column is that “munis matter.” If you’ve put that sector on autopilot because of perceived lack of value in the new issue market, take a look at your portfolio and ask your brokers for some bids on shorter maturities. You may find an inexpensive source of liquidity. “As you get older, three things happen: the memory goes, and I forget the other two.” — Erma Bombeck Endorsed Partner 18 In Touch
ANNOUNCEMENTS Citizens Bank of Kansas (CBK) is pleased to announce the addition of a student-run branch located at Circle High School (CHS) in Towanda, Kansas. Modeled after the highly successful branch at Derby High School, the CHS branch will offer a special account for Thunderbird students and accounts for Circle teachers and staff. The CBK-CHS branch will also provide deposit services and cash transactions. Two student interns have been selected from many applicants for the new branch, Evelynn Stierwalt and Chloe Foster. Shawn Lehecka, a business education teacher at Circle High School, has been hired to serve as the Education Manager for the CBK-CHS branch in addition to his teaching duties at CHS. Now that we’re refreshed on some of the finer points of municipal bonds, I’m thinking of Mark Twain’s observation: “A clear conscience is a sure sign of a bad memory.” Jim Reber (jreber@icbasecurities.com) is President and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks. Balance Sheet Academy Registration Open ICBA Securities and its exclusive broker Stifel will present the 2023 Balance Sheet Academy on October 16-17 in Memphis, TN. Up to 12 hours of CPE are offered through this intermediate-level course. To register, visit https://www.icba.org/icba-securities. Economic Insight Live Dr. Lindsey Piegza, Stifel’s Chief Economist, presents her next quarterly economic outlook webcast on October 12 at 12 pm central. For more information, contact your Stifel sales rep or Jim Reber. 19 In Touch
the risk assessment and/or its role in the overall ACH risk management program for the organization was also noted. #3 Failure To Establish an ACH Risk Management Program Another frequent audit finding was the failure of the TPS to establish an ACH risk management program. This requirement also comes from Subsection 1.2.4 and goes hand-in-hand with the first two audit findings already discussed. Generally, an ACH risk management program is defined as a set of policies, procedures, limits, assessments, reviews (audits) and reporting protocols that govern the overall ACH activities of the TPS. While TPSs have a large degree of flexibility in the composition of their ACH risk management program, the general objectives of the program should include: • Assessing the risks of the activity (risk assessment); • Creating comprehensive know-yourcustomer (KYC) and onboarding due diligence (policies/procedures); • Establishing controls over Originator and Nested TPS activity (limits); • Setting up monitoring and reporting systems (reporting); and • Providing for periodic audits. Specifically, Subsection 2.2.3, ODFI Risk Management (which also applies to TPSs), requires the TPS to perform due diligence on each Originator (and Nested TPS) to assess the nature of the Originator or Nested TPS’s ACH activity implement and enforce exposure limits for each Originator or Nested TPS, and monitor ACH Return activity. All these duties are to allow the TPS to determine that the Originator or Nested TPS has the capacity to perform its ACH Rules obligations. #4 Failure To Maintain Proper Agreements A fourth audit finding that is frequently noted is noncompliance with Subsection 2.2.2.2, ODFI Must Enter Origination Agreement with TPS of the ACH Rules. Specifically, it is 2.2.2.2(h) and (i) that are of paramount importance to the TPS. Letters (h) and (i) of Subsection 2.2.2.2 require the TPS to enter into ACH Origination Agreements with each Originator, or Nested TPS, respectively. While audits almost always determine that TPSs have contractual agreements with the client Originators and/or Nested TPSs, what is often discovered is that the agreements fail to include the specific minimum ACH provisions found in Subsection 2.2.2.1(a-f) of the ACH Rules. Nacha provides some leniency on this Rule in that old agreements without the required minimum provisions are permitted to be carried forward. However, as agreements are revised or repapered, the TPS should ensure the agreement provisions detailed in Subsection 2.2.2.1 are properly included. Such flexibility Per the ACH Rules, just like participating financial institutions, Third-Party Senders (TPS) are required to conduct an annual ACH Compliance Audit. The EPCOR Audit team performs TPS audits each year, which often result in repeated findings and recommendations from one audit to the next. In this article, we will look at the audit issues we most often encountered throughout 2022 and the corresponding recommendations to assist TPSs in developing a strong ACH risk management program and promote ongoing ACH Rule compliance. #1: Failure To Perform an ACH Audit Easily, our number one audit finding is the failure of the TPS to perform an ACH Compliance Audit each of the past six years. As already stated, the ACH Rules require a TPS to have an ACH Compliance Audit conducted annually, and per Subsection 1.2.2.2, Proof of Completion of Audit, a TPS must retain proof of its annual audit for six years from completion of the audit. If the TPS was being audited for the first time in 2022 or had only begun its audit regiment a few years prior to 2022, the TPS was not able to exhibit proof of completion of prior audits for each of the past six years. EPCOR TPS audit reports for these TPSs gently remind the TPS to have the audit performed every year and to retain such documentation in accordance with Subsection 1.2.2.2. #2 Failure To Conduct an ACH Risk Assessment The second most frequent audit finding/ recommendation was the failure of the TPS to conduct an ACH risk assessment. Even before Nacha added TPSs to the risk assessment requirement in Subsection 1.2.4, Risk Assessments, EPCOR auditors have advised TPSs to perform an ACH risk assessment as part of creating an overall ACH risk management program for their organization. With the formal amendment to the ACH Rules found in Supplement #3-2021, Nacha placed the explicit requirement for TPSs to conduct an ACH risk assessment and added the effective date of Sept. 30, 2022. During 2022, EPCOR noted that the majority of TPSs had not established an ACH risk assessment. The primary reason for this omission was a lack of awareness of the requirement (ODFIs, you should be educating your TPS clients). However, a failure to understand the purpose of 2022’S TOP THIRD‑PARTY SENDER AUDIT FINDINGS BY MATTHEW WADE, AAP, APRP, CPA, EPCOR 20 In Touch
FMSI www.fmsiconsulting.com 913.955.3355 FMSI is a small business founded and located in Kansas, specializing in assisting community banks to succeed, a mission consistent with core CBA values. We have partnered with community banks for nearly 25-years providing core advisory services including asset/ liability, investment, and liquidity management. FMSI advisors actively assess market conditions and bank balance sheets of different size, mix, and capital levels. Market conditions are constantly changing presenting opportunities and challenges for CBA member banks. Interest rates are increasing for the first time in nearly a decade and now is a perfect time to partner with a trusted, industry leader. Establishing an FMSI relationship provides confidence your bank is optimizing the balance sheet, deploying necessary strategies, maximizing profitability, and managing balance sheet risks. FMSI is a Kansas CBA Endorsed Provider aside, it has been EPCOR’s audit recommendation for the TPS to add the required provisions as soon as possible. We often suggest creating an “ACH Addendum” that can be added to the existing agreements without a complete repapering project. Notable Mention Findings Other less frequently cited audit findings still worth noting for TPSs include: • Failure to establish exposure limits; • Failure to act on Notifications of Change (NOCs); • Incorrect assignment of Standard Entry Class (SEC) Codes; • Inadequate authorization language; • Lack of monitoring of Originator Return Rates; and • Best practice suggestions for the establishment of a formal ACH Management Policy and the establishment of procedures to acquire authorizations or other ACHrelated documents from Originators and/or Nested TPSs. If you work for an ODFI and are reading this article, I hope this has given you some insight into deficiencies some of your TPSs may have regarding ACH Rules compliance. It is highly recommended that you request confirmation of an annual ACH Compliance Audit from your TPS client and even go further to request the ACH audit report so you can supplement your due diligence process and see what compliance issues your TPS may be experiencing. The information presented may highlight some ACH compliance topics/issues that you aren’t aware your TPS needed to follow. If you’re a TPS, I hope this article has been thought-provoking and opened your eyes to potential issues and areas to consider making changes to ensure you are compliant with the ACH Rules. Just remember your financial institution is your ally. If you feel like you need additional education or guidance from them, reach out and work together to come up with a solution that works for everyone. Matthew travels throughout EPCOR’s footprint to conduct consulting, audit and risk assessment engagements related to ACH, Wire Transfer, Third-Party and other paymentsrelated services. As part of these services, Matthew provides recommendations related to compliance with ACH Rules, payments-related regulations and regulatory guidance. Matthew also provides education and shares best practices with financial institutions and Third-Party Senders to support their efforts towards maintaining compliance, improving operational processes and mitigating risk and fraud. Matthew graduated from the University of Kentucky in 1997 with a Bachelor of Science in Accounting and Management. Matthew has 23 years of professional experience, including 15 years in the financial services industry with a strong emphasis in audit, ACH and financial analysis. 21 In Touch
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BANK TRAINING WEBINARS x www.fin-ed.info/cbak www.fin-ed.info/cbak 3 - O C T 4 - O C T 5 - O C T 1 0 - O C T 1 1 - O C T 1 2 - O C T 1 6 - O C T 1 8 - O C T 1 9 - O C T 2 4 - O C T 2 5 - O C T 2 6 - O C T 3 0 - O C T Fighting Fraud: Recognizing Red Flags & Assisting Accountholders Traditional & Roth IRAs Part B: Distributions, Taxation, Withholding & Penalties TRID Breakdown Part 1: Loan Estimate for Fixed-Purchase, Variable-Refinance & Construction-Perm 20 Common Mistakes in Consumer Collection HMDA Part 2: Demographic Collection Stress Testing Your Loan Portfolio Junk Fees: Identifying, Eliminating & Compliance Action Plan Annual MLO Requirements & SAFE Act Compliance When a Borrower Dies: Next Steps Commercial Lending Basics: Risks, Scrutiny, Safeguards, Collateral & More Accurately Completing the W-9, W-8BEN, 1099-INT & 1042-S HMDA Part 3: Commercial Loans Banking Legal Marijuana Businesses 1 - N O V 2 - N O V 8 - N O V 9 - N O V 1 3 - N O V 1 4 - N O V 1 5 - N O V 1 6 - N O V 2 1 - N O V 2 8 - N O V 2 9 - N O V 3 0 - N O V UDAAP & Debt Collection Robbery: Prevention, Safety & Current Threats Form 1099 Reporting: Third-Party Vendors, Foreclosures, Debt Forgiveness & More TRID Breakdown Part 2: Closing Disclosure for Fixed-Purchase, VariableRefinance & Construction-Perm Security Officer Reports to the Board: Timing, Contents & Requirements Overdraft Risks & Five Best Practices Opening NRA Accounts Notary Essentials, Virtual Notarizations & Legalities Writing Effective Credit Memos & Loan Narratives IRA Year-End Update: New & Important IRA Issues & Answers A Year in the Life of a Compliance Officer BSA for Lenders 23 In Touch
ABSTRACTING Security 1st Title Wichita, KS . . . . . . . . 316-267-8371 ACCOUNTING/TAX RETURNS Allen, Gibbs & Houlik, L.C. Wichita, KS . . . . . . . . 316-267-7231 Varney & Associates, CPAs, LLC Manhattan, KS . . . . . . . 785-537-2202 ACH *SHAZAM Johnston, IA . . . . . . . . 515-288-2828 ADVERTISING SPECIALTIES *Works24 Brian, Edmond, OK . . . . . 800-460-4653 ALARMS & SECURITY PRODUCTS Federal Protection Springfield, MO . . . . . . .800-299-5400 Oppliger Banking Systems, Inc. Lenexa, KS . . . . . . . . .800-487-7875 ARTIFICIAL INTELLIGENCE *Agent IQ Michael, Austin, TX . . . . . 512-565-4489 ASSET LIABILITY MANAGEMENT *Financial Management Services, Inc. (FMSI) Chuck, Overland Park, KS. . . ..913-955-3355 *QwickRate Dan, Marietta, GA . . . . . . 800-285-8626 ATM EQUIPMENT (NEW/USED) Federal Protection Springfield, MO. . . . . . . .800-299-5400 Oppliger Banking Systems, Inc. Lenexa, KS . . . . . . . . . 800-487-7875 AUCTION Purple Wave Manhattan, KS . . . . . . . 785-537-7653 BACK ROOM SERVICE Modern Banking Systems Ralston, NE . . . . . . . . . 800-592-7500 BALANCE SHEET CONSULTING *Financial Management Services, Inc. (FMSI) Chuck, Overland Park, KS . . . 913-955-3355 BANK OPERATIONS The Baker Group Oklahoma City, OK . . . . . 800-937-2257 *QwickRate Dan, Marietta, GA . . . . . . 800-285-8626 BANK/PEER PERFORMANCE *QwickRate Dan, Marietta, GA . . . . . . 800-285-8626 BANKRUPTCY Spencer Fane, LLP Overland Park, KS . . . . . .800-526-6529 BANK STOCK LOANS & LOAN OVERLINES Commerce Bank Kansas City, MO . . . . . . . 800-821-2182 *S&P Global Stacy, Charlottesville, VA . . . 434-951-4419 BOND ACCOUNTING First Bankers Banc Securities Overland Park, KS . . . . . . 913-469-5400 *ICBA Securities Corporation Jim, Memphis, TN . . . . . . . . . . . .800-422-6442 COMPLIANCE ASSISTANCE/REVIEWS *Advanced Business Solutions (ABS) Sandy, Olathe, KS . . . . . . 913-340-7041 Allen, Gibbs & Houlik, L.C. Wichita, KS . . . . . . . . 316-267-7231 *BHG Bank Group Tom, Syracuse, NY . . . . . . 315-372-4510 *MPA Systems David, Fort Worth, TX . . . . 888-233-1584 Purple Wave Manhattan, KS . . . . . . . 785-313-2094 Varney & Associates, CPAs, LLC Manhattan, KS . . . . . . . 785-537-2202 Young & Associates, Inc. Kent, OH . . . . . . . . . 800-525-9775 Products and Services Reference List Joe Rottinghaus Chairman Conway Bank Tanner Johnson Chairman-Elect Swedish-American Bank Tom Pruitt Secretary/Treasurer Peoples Bank & Trust Company Irv Mitchell Immediate Past Chairman Wilson State Bank DIRECTORS Josh Bailey Security State Bank Kent Culbertson First National Bank and Trust Cheri Fahrbach First National Bank of Hutchinson Brandon Lee Union State Bank Margaret Nightengale Grant County Bank Jack Rowden Citizens State Bank Steven Suellentrop Legacy Bank Jim Wayman ESB Financial Michele C. (Mickey) Lundy Past Chairman Tampa State Bank STATE ICBA DIRECTOR Blake Heid First Option Bank CBA STAFF Shawn Mitchell President and CEO shawn@cbak.com Nikki Dohrman Senior Vice President/ Executive Director nikki@cbak.com Yvonna Hansen Vice President of Member Services yvonna@cbak.com Stuart Little Little Government Relations, LLC 2023 CBA OFFICERS AND DIRECTORS Officers and Directors The following CBA Associate Members are ready to serve you when you need them. Please keep this list handy, and the next time you're looking for a specific service, you'll know where to look first! Remember, this is just a sampling of what each company provides. The “*” represents an agreement for a specific endorsed product with that company. Not all products that these companies offer are endorsed by CBA. To see a detailed list and explanation of endorsements, visit CBA at www.cbak.com. Keep in mind that the services listed by each company on this page may only be a sampling of the many services they offer. By their CBA Associate Membership, these companies have shown their commitment to serving community banks. Please look to these companies first, whenever possible, to meet your banking needs. 24 In Touch
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