COMMUNITYBANKER T H E O F F I C I A L P U B L I C A T I O N O F T H E M O N T A N A I N D E P E N D E N T B A N K E R S A S S O C I A T I O N SPRING 2022 MIB CONVENTION & TRADE SHOW WHITEFISH LAKE LODGE JULY 27-29, 2022 It’s Time —
ContentsS P R I N G 2 0 2 2 6 8 18 2022 MIB BOARD OF DIRECTORS Mark Anderson Farmers State Bank, Victor Amber Brown Peoples Bank of Deer Lodge Laura Clark Opportunity Bank, Helena Bill Coffee Stockman Bank, Miles City Daniel Day Bank of Montana, Missoula Shawn Dutton First Security Bank of Roundup Clinton Gerst Bank of Bozeman, Bozeman Brice Kluth First State Bank of Shelby Kenny Martin First Montana Bank, Helena Scott Mizner American Bank, Bozeman Mike Moore Stockmens Bank, Cascade Joel Rosenberg Three Rivers Bank of Montana, Kalispell Phil Willett Pioneer Federal Savings and Loan, Dillon Andrew West, President Eagle Bank, Polson awest@eaglebankmt.com Adam McQuiston, Vice President First Montana Bank, Missoula amcquiston@firstmontanabank.com Loren Brown, Secretary Ascent Bank, Helena lbrown@ascentbank.com Tim Schreiber, Treasurer Farmers State Bank, Florence tims@farmersebank.com Tom Christnacht, Immediate Past President First Security Bank of Deer Lodge tomc@1stsecuritydl.com Pete Johnson, ICBA State Director Opportunity Bank, Helena pjohnson@oppbank.com Jim Brown Executive Director Montana Independent Bankers jbrown@mibonline.org MIB STAFF 2022 MIB EXECUTIVE OFFICERS ©2022 Montana Independent Bankers | The newsLINK Group, LLC. All rights reserved. The Community Banker is published four times each year by The newsLINK Group, LLC for the Montana Independent Bankers 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 Montana Independent Bankers, 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 Banker is a collective work, and as such, some articles are submitted by authors who are independent of the Montana Independent Bankers. While the Community 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. 406.449.7444 jbrown@mibonline.org mibonline.org Montana Independent Bankers 1812 11th Ave P.O. Box 4893 Helena, MT 59604-4893 The Community Banker 1 2 President’s Message 4 Executive Director’s Message 6 From the Top 7 Flourish 8 Featured Associate Member — BHG Financial 10 Rising Tide Bonds To Own for a Rate Hike Environment 12 How Financial Institutions Can Support Financial Inclusion 14 Compliance Q&A Spring 2022 17 Remember to Connect “Early and Often” with New Employees 18 It’s Time to Dust Off Your Economics Textbooks and Develop a Marginal Cost of Funds Culture 20 ICBA Announces 2022-23 Executive Committee 21 MIB News: Helena Area Chamber Names Opportunity Bank 2021 Business of the Year 23 MIB News: MIB Outstanding Young Banker Award & Renee Miller Retires 24 MIB News: Eagle Bancorp Montana Announces Executive Management Succession Strategy 25 Montana Independent Bankers Convention &Trade Show 28 2022 MIB PAC Silent Auction 29 Five Important Financial Tips to Teach Your Kids 30 ICBA Live 2022 32 NeighborWorks Montana 34 2022 MIB Membership Directory 35 MIB Associate Member Resource Guide
AndrewWest PRESIDENT’S MESSAGE It’s April Fool’s Day today, and I cannot help but think about how crazy the world has become in a relatively short time. I’m not quite sure who the fools are, but I may have some idea! One thing I do know is that my time as MIB President is winding down, and it would be foolish not to reflect on the past few years and see what I can glean from my time as the MIB President. When I found myself occupying the President’s seat, I wondered how things might go during the next couple of years. I had high hopes of possibly traveling and meeting more MIB bankers and perhaps recruiting some new ones. I love a good road trip, and with the distance between Montana’s independent banks and their towns, I was sure I would get to see much of this beautiful state. I didn’t anticipate that a worldwide pandemic would shut everything down and keep us all close to home for the better part of two years. Oh, how the turntables turned! So, my dream of gallivanting all over Montana recruiting new members and shoring up old relationships kind of went up in smoke or maybe died behind a surgical mask, so to speak. In the end, we did what we could at the MIB to keep the association working on behalf of all Montana independent banks. We launched a new digital advertising campaign designed to bring community bank awareness to all Montanans. We all believe we bring something special to our communities in the way of financial support and community involvement. It is imperative we continue to beat this drum so the people of this great state – and the nation, for that matter – don’t forget they have an ally in community banks. The MIB tirelessly fights the good fight and works with our national affiliate, the ICBA, to pressure lawmakers to do the right thing on behalf of community banks in Montana. We also keep a very close eye on the state legislature to ensure they act in the best interest of all Montanans and particularly those who rely so much on independent community banks. Most small Montana towns have an independent bank that is a vital community partner. So, the MIB is ever vigilant, ensuring we can do what we do unencumbered without unnecessary or overreaching laws. We believe in the mission of service and the importance of community banking in Montana. As I look back on my tenure as MIB President, one thing remains abundantly clear. The bankers of Montana are some of the best people I’ve ever met. While we are technically competitors, I’ve never felt a greater sense of camaraderie than I have when a bunch of community bankers gathers. We all are passionate about what we do, and the unity behind the cause supersedes any hint of rivalry. We all want the same thing, and we all are willing to work for it. I am continually astounded at the quality of the folks encountered as I attend various functions. Bankers are just genuinely nice people who like to help others. I’m very proud to be a part of such a magnanimous group. While my time as the MIB President is winding down, I will certainly remain on the Board and continue to devote my energies to supporting community banking generally and the MIB specifically. I would urge all of you to get involved with the association on some level and to encourage any of your non-member banker friends to join up. The benefits of a strong organization cannot be overstated. Plus, the absolute fun you can have hanging out with MIB bankers must be seen to be believed. You may even get a tabletop skiing lesson in the bar if you stay up late enough! (If you know Tom, you know!) Overall, I cannot say enough positive things about the Montana Independent Bankers. I would like to also mention our distinguished and exceptionally competent Executive Director, Jim Brown. Jim has been a constant at the MIB for a long time, and I want to take a moment to publicly thank him for his guidance and friendship. He is a rock and a rock star that adds immeasurably to the credibility of the organization. We appreciate you! Lastly, to all the people who have become my friends throughout the years and who have been supportive during my time as MIB President, I would like to thank you as well. This time has been a great honor for me professionally, and I am grateful for the opportunity. I have learned so much and benefitted greatly from the MIB and the people behind it. You are all the best! Get involved, make some new friends, and you might be surprised how saying yes positively affects your life. It’ll be worth your time, I promise. 2 The Community Banker mibonline.org
Keith Gruebele, EVP, Institutional Relationship kGruebele@bhgbanks.com • (954) 737-5318 BHGLoanHub.com/MTIBA WA FICO: 734 WA Income: $287,000 Avg Loan Size: $109,000 WA Years in Industry: 20 WA DSCR: 2.6 2021 BHG borrower: High-quality borrowers on demand. To learn more about BHG, please contact: WA = Weighted Average
James E. Brown EXECUTIVE DIRECTOR’S MESSAGE Montana is now well into the Spring months. Having grown up in Montana, this is one of the best times of the year to be a resident of the Treasure State. Spring sees the leaves returning to the trees, the grasses are greening up, bears are coming out of hibernation, and the roads into Glacier National Park are being plowed open. Spring 2022 finds MIB preparing to host its largest member benefit — the Annual MIB Convention and Tradeshow. The MIB Convention is slated for July 27 through July 29. The venue is the scenic Whitefish Lake Lodge located in Whitefish. We will be celebrating the Association’s 55th year. The theme of this year’s convention is “One Mission, Community Banks®,” a tagline used with permission from our national organization, ICBA. I cannot think of a more appropriate theme for our convention as the slogan reflects the reality that MIB is the only trade organization in Montana whose sole focus is to represent Montanabased community banks. MIB was formed in the late 1960s by Montana community bankers to promote the health of Montana’s community banks and enhance the welfare of Montana’s communities. MIB has successfully carried out that mission for over six decades. The importance of MIB’s work is being reinforced by events taking place on the national level; such events demonstrate on an almost daily basis there is a major distinction between the too-big-tofail banks and community banks. Since the financial crises of 20072009, the assets controlled by the largest 25 banks have grown by more than $5 trillion, resulting in a renewed threat to the soundness of our nation’s financial system. The federal government’s regulatory efforts to slow down the growth and influence of these institutions have had the perverse effect of imposing greater hardships on community banks, like yours, that were not the cause or source of the financial meltdown. I reference the federal government’s too-big-to-fail policies in this article discussing MIB’s state convention because such policies highlight the continued need for and importance of state community banking organizations, like MIB and its member banks. Community banks serve as the bulwark against dangerous over-concentration in the financial industry and as the frontline for maintaining consumer faith in the industry. To this end, our state convention continues to serve as the best opportunity for you to showcase your important services and find the strength to stand under regulatory pressure. We at MIB recognize what it means to be a Montana community bank and the pride you take in exemplifying Montana values. That is why we have always chosen to host MIB’s state convention at a location within Montana that is easily accessible to our member banks, our associate members, and our vendors. This year, as noted, the MIB convention will take place in Whitefish. Our convention program will focus on what makes Montana’s community banks unique. Because cryptocurrency training and information has been identified as one of MIB’s top needs, speaker Dr. Anthony Crawford will present on this topic. What is more, the Association is excited to announce that ICBA’s new chairman, Brad Bolton, will be joining us at the convention. This presents an opportunity for you to hear about what is happening at the federal level directly from the person who oversees ICBA’s policy and regulatory decision-making. In addition, the Association expects our trade show participation to be the largest it has ever been. This means that you and your banking staff will have ample opportunity to interact with a variety of service providers and to review the specialized services that help make your institution relevant and profitable. As usual, the convention activity favorites of golfing and whitewater rafting are available. The annual golf tournament will be held at Whitefish Lake Golf Club. The Middle Fork of the Flathead River will serve as the venue for your rafting adventure. And, of course, MIB will once again host the opening night cocktail reception, the ever-favorite Vendor Cocktail Reception, and the MIB-PAC Silent Auction. These events are designed to give you multiple opportunities to network with your peers in a professional and casual setting. We are pleased with the program we have put together for this year’s state convention. The Association has done its best to ensure that the event will offer you the timeliest education, relevant information, and beneficial trade opportunities possible. We have also made it easier to register for the convention, which can be done online at mibonline.org/convention. The MIB Board and staff look forward to seeing you in late July. We particularly look forward to renewing and strengthening MIB’s relationship with you, as such relationships help us carry out MIB’s sole mission — serving Montana’s community banks. 4 The Community Banker mibonline.org
GET THE SHIELDCANNABISBANKINGPLAYBOOK: ShieldBanking.com/cannabis-banking-playbook To ensure the processes, procedures, technology, and trained staff are in place to serve this industry, bankers need to start with a plan. Having a clear understanding of what is required to serve cannabis businesses and minimize risk to the financial institution will help bankers prepare for the upfront costs associated with cannabis banking and develop the policies and procedures needed to hit the ground running. With regulations varying from state to state, it’s a complex industry with high costs, requiring a considerable investment of time and energy. Compliant banking operations require continuous enhanced due diligence to help guard against risks such as: A Robust Illegal Market. According to New Frontier Data, the legal cannabis market in the U.S. is expected to reach $41 billion by 2025. Unfortunately, the illicit market, valued at $65 billion by some estimates, is shrinking at a slower pace. Financial institutions must ensure that funds coming through their doors are from legal channels. Bad Actors. To ensure bad actors are not attaching themselves to good businesses, enhanced due diligence conducted around underlining beneficial owners will continue to be at a heightened level for the foreseeable future. Legacy Cash. Because the cannabis market existed as a cash business long before legalization and because the industry continues to operate largely as a cash business, a strong BSA/AML programwill help ensure that funds coming into the financial institution are from legal cannabis operations. While the added burden and cost associated with serving this industry may limit the total number of participants in the short term, we expect competition from financial institutions to steadily increase as more states launch legal programs and we get closer to federal recognition. Financial institutions that invest in technology to improve efficiencies and lower costs today will be able to scale as the industry grows and have a competitive advantage when the economics of the industry change over time and new banks and credit unions enter the market. Informed by the experiences of pioneering bankers across a growing number of states with legal medical and adult-use programs, the Shield cannabis banking playbook defines a path forward for financial institutions to serve cannabis-related businesses compliantly while benefiting from the financial rewards of this market. The emerging legal cannabis industry brings significant growth potential, alongwith challenging operational demands and complex regulations. But cannabis banking does not have tomean high-risk banking. Build aWinning Cannabis BankingProgram Cannabis banking, simplified. Shield Compliance transforms how financial institutions manage risk, comply with regulations, and address the operational demands of the legal cannabis industry. Compliance management for financial institution daily operations, including case management and automated reporting. Informed account application process for underwriting and onboarding cannabis business accounts. Compliant mobile payment and payroll solutions to reduce cash transaction dependency. See how Shield Compliance is helping financial institutions earn the benefits of a compliant cannabis banking program. info@shieldbanking.com (425) 276-8235 GET IT TODAY GET THE GUIDE TO COMPLIANT CANNABIS BANKING
FROM THE TOP Connect with Brad Bolton, Chairman ICBA at @BradMBolton. My bank’s tagline is “Where dreams meet solutions,” and it serves as my guiding inspiration at the bank and, now, at the national level. As community bankers, our customers depend on us to keep their dreams alive. In today’s tumultuous environment, optimism is a skill worth cultivating. Thankfully, that glass-half-full attitude comes naturally for community bankers. So, as I take the helm as ICBA’s chairman, I do so with a healthy dose of positivity. My bank’s tagline is “Where dreams meet solutions,” and it serves as my guiding inspiration at the bank and, now, at the national level. As community bankers, our customers depend on us to keep their dreams alive. Think about the thousands of small businesses across the nation facing permanent closure at the beginning of the pandemic; we kept them afloat by working countless hours to secure Paycheck Protection Program loans. Or consider our work to stop the IRS reporting proposal; we went the extra mile to oppose that governmental dip into consumer and business privacy. We take these actions because we are community continuators. We’re more than just banks. Our success leads to the success of the communities we serve. As community bank leaders, the burden rests on our shoulders to make good decisions, so our banks can support the next generation of customers and employees. Thankfully, we have ICBA as a partner in this work. I became involved in the association precisely because I want to do my part to ensure every community in the U.S. has a community bank on which it can rely. I see three ways in which we can accomplish that goal: 1. Advocacy. We need to continue our regulatory wins. What’s more, we need to ensure agency heads and policymakers know and understand the difference between our business model and that of “too big to fail” banks, nonbank lenders and credit unions. They need to see the community bank difference. 2. Innovation. Technology is the great equalizer. Today, we can offer the same services as the largest institutions in the world, but we bring a high-touch relationship along with it. 3. Education. Community bankers have a never-ending quest for knowledge on behalf of our customers, but we also need to invest in the next generation. We must develop a strong lineup for the future of our businesses so our banks remain viable, thriving parts of our communities. These are big asks, but ones we can accomplish together. You have my commitment to be accessible, responsive and accountable. I ask that you continue to keep advancing your banks and communities. With our inherent drive and positivity as a guide, our efforts will ensure every community in America has a community bank in its corner now and in the future. My Top 3 Take these three steps to deepen your ICBA connection and strengthen your bank’s efforts: 1. Read and tweet NewsWatch Today. 2. Schedule a virtual visit to the ThinkTECH Accelerator. 3. Send your leaders to the LEAD FWD Summit (stay tuned for dates). 6 The Community Banker mibonline.org
FLOURISH This Community Banking Month, I invite you to try something new to spread your story. Share a new development, community project or initiative. Rebeca Romero Rainey, President and CEO, ICBA As community bankers, we know relationships matter. Our actions in support of local schools, nonprofits, businesses and other community institutions make a difference, and when our customers see our commitment to our communities, it deepens their connection with us. That strengthened engagement translates to stronger business as well. A 2015 Harvard Business Review study found that emotional connection is twice as valuable as customer satisfaction, and a 2017 Capgemini report concluded that emotional ties can drive a 5% increase in annual revenue. But when I think back on my days as a community banker, it’s not the dollars and cents that stick with me; it’s the customer stories I remember. I used to love collecting customer testimonials because I would hear stories of how, for example, a local business that opened a deposit account on the day the bank opened was now a community fixture being run by the second or third generation. In my experience, there’s nothing more gratifying than to see a local business thriving and know your bank was part of it. These are the stories worth telling, the ones that show our commitment to our communities and the people in them, and they extend far beyond the banking relationship. Consider Watermark Bank in Oklahoma City, Okla., and how it trained its team to serve as substitute teachers during a staffing shortage. Or look at our new chairman’s bank, Community Spirit Bank in Red Bay, Ala. Like many of your banks, it celebrates with the community — whether it’s chocolates on Valentine’s Day, tree trimmings at Christmas or pumpkin carvings at Halloween — and captures a snapshot of those activities on social media. Sharing our stories is as simple as documenting what we’re already doing. For example, as new customers are opening accounts, we can note why they chose our banks and use that feedback. When our teams are out at board meetings, service events or community gatherings, they can take pictures and post what they’re doing on social channels. We can also use employee surveys to learn how they support the community and empower them to recount those experiences. It’s about taking that next step to communicate how we engage. So, this Community Banking Month, I invite you to try something new to spread your story. Share a new development, community project or initiative. And tag ICBA in your social media posts by using the hashtag #BankLocally so we can help tell your story and further that message. Together, we will ensure the entire nation knows exactly what it means to be a community bank. Where I’ll Be This Month I’m headed to Memphis to meet with our state and regional partners, and then I’ll be engaging with the team at CRA Partners. The Community Banker 7
BHG Financial BHG Financial is transforming the financial industry — leveraging the power of data, analytics, and cuttingedge technology to become the number one source for professional loans and the creator of the largest community bank network in the country. In 2001, BHG Financial’s founders set out on a mission to provide professionals with a better lending experience — one that was simple, efficient, and catered to their unique needs. Built around the belief that hard work prevails, BHG Financial quickly grew from a team of three to over a thousand, including a specialized group dedicated to working with community banks. To date, BHG Financial has originated more than $10 billion in loan solutions to top-quality borrowers. What does a top-quality borrower entail? To BHG Financial, it means the following: • Weighted average FICO: 736 • Weighted average income: $287,300 • Average loan size: $108,300 • Weighted average years in the industry: 20 These exclusive top-tier loans can be accessed and purchased by community and midsize banks through a state-of-the-art loan delivery platform: the BHG Loan Hub. By purchasing loans through the company’s proprietary and web-based Loan Hub, community banks can diversify their portfolios and earn interest income. To date, the 1,400+ banks that make up the BHG Bank Network have earned nearly $1 billion in combined interest income on these top-quality professional loans. Since 2001, no bank has ever taken a loss on the BHG Core Loan portfolio. Building on two decades of innovation, the BHG Bank Network Membership offers a full suite of programs that include the following: • Commercial and consumer loans — Diversify your portfolio with BHG Financial’s time-tested and proven assets. More than $10MM in top-quality loans are available for purchase daily through the BHG Loan Hub. • Digital lending — Offer consumer financing to your customers online — with no additional risk on your FEATURED ASSOCIATE MEMBER 8 The Community Banker mibonline.org
balance sheet. Tap into BHG Financial for origination and marketing support, and earn 2% immediate revenue off the total funded loan amount. • SBA 7(a) loan referrals — Earn fee income with ease by referring small business customers to Fund-Ex Solutions Group, BHG Financial’s wholly-owned subsidiary. • Collection services — Reduce your accounts receivable while protecting your brand. CCMR3 takes an empathetic, consultative approach to collections that is proven to recover revenue. • Risk management services — Keep your bank ahead of regulatory and compliance changes by tapping into the experience of former regulators from the OCC, CFPB, FDIC, Fed, and more. RMSG provides an affordable suite of services to help your institution control risk. • Point-of-sale financing — Earn fee income by helping healthcare providers, home improvement contractors, and other merchants in your community grow their businesses with customizable financing tailored to their customers’ needs. Refer your network to NaluPay. Each of the above solutions was launched to solve a particular need in the financial community, and every service is built to support the growth of banks. Since the company’s launch, BHG Financial has worked hand in hand with financial institutions to help them increase their bottom lines. BHG Financial is neither a true fintech nor a traditional bank — it embodies the best of both with top-notch data, analytics, technology, marketing, underwriting, compliance, speed, and customer service. This combination has led to BHG Financial originating record volume from today’s high-earning borrowers with toptier credit scores. Carving its own niche as a financial quantitative service company, BHG Financial uses quantitative analysis to determine the performance potential of every borrower To learn more about BHG, contact Keith Gruebele, EVP, Institutional Relationships, at 954.737.5318 or kGruebele@bhgbanks.com. Or visit our website at bhgloanhub.com/keith. and the price risk. With data from over $50 billion in underwritten loans, the analytics team has gained unmatched insight into its borrowers’ industries, characteristics, and performance. Using this enormous amount of data, the analytics team works closely with BHG Financial’s full-service, in-house marketing department to develop highly targeted campaigns. This results in more than 43,000 professionals coming to BHG Financial each month looking for financing. And with BHG Financial, these clients receive a unique combination of loan features. The company provides large amounts, extended terms, fast funding, low monthly payments, and white-glove concierge service. With record growth year after year, BHG Financial continues to be recognized regionally and nationally, earning a spot on the Inc. 5000 for 14 years running and receiving accolades from Great Place to Work® and Fortune magazine, among others. BHG Financial is 49% owned by Pinnacle Bank (PNFP), a $38.5 billion asset bank, and has headquarters in both Davie, FL and Syracuse, NY. BHG Financial is constantly motivated to push the limits — and financial institutions — achieve success. As BHG Financial continues to grow as a company, they look forward to partnering with even more banks in the future. Their aim is to consistently build new solutions that support financial institutions as they diligently serve their local communities. To date, the 1,400+ banks that make up the BHG Bank Network have earned nearly $1 billion in combined interest income on these top-quality professional loans. The Community Banker 9
GUEST ARTICLE Community bankers are nothing if not predictable, and I mean that as a compliment. They are bright, enterprising, have a nose for the risk/reward dynamic and a sense of duty and loyalty to their customers and staff. They’re also deathly afraid of rising interest rates. The last is understandable, speaking as one who has: A) worked for a bank when overnight rates were double-digit; B) personally borrowed money for a home at 12%: and C) worked in financial services during the near-death of the thrift industry. We know how low rates can go. What we don’t know is how high they can go, nor for how long. But what’s a bit curious about this widespread fear is that by a number of measures, community banks in 2022 stand to profit from higher interest rates. This comes from banking regulators, interest rate risk modelers, and even bankers themselves. I suppose the notion of a bond portfolio losing four, five or six percent of its value drives some of this thought process. So, as we haven’t had to endure a rate hike scenario since 2018, we’ll use the rest of this column to remind ourselves which bonds stand a good chance of performing well if higher rates do indeed prevail in the near future. Old school Certainly, the bonds that fit the most traditional definition of a floater have very short reset periods, are indexed to money market RISING TIDE Bonds To Own for a Rate Hike Environment By Jim Reber, ICBA equivalents, and have large or no caps, both periodic and lifetime. The model for such security is a Small Business Administration (SBA) 7(a) pool. These securities float based on the prime rate, which is 100% correlated to fed funds. Most SBAs reset monthly or quarterly and have no caps — so wherever prime goes, so goes your yield. The rub on SBAs, at least from a risk standpoint, is that many of them come with large premium prices of 108, 109 or even higher. This exposes the investor to unwelcome prepayments. Still, the many benefits (have we mentioned 0% risk weighting?) make them attractive to short investors. It’s not uncommon for them to yield around prime minus 2.75%, which will beat fed funds by about 25 basis points (0.25%). They are true money market alternatives. Mortgage floaters These days there are few true mortgage-backed securities (MBS) floaters. The ones that do exist usually have an extended period of time with a fixed rate before they convert to adjustable. This “extended period” can be three, five, seven years, or more, so they’re really not floaters yet. However, one day they will adjust and help their market value stay relatively stable. Something new about these is that the Secured Overnight Financing Rate (SOFR) index is becoming more visible. SOFR is the U.S. alternative to London Interbank Offered Rate (LIBOR), and it has generally tracked fed funds so far. And, since these will have prices closer to par, the investor doesn’t 10 The Community Banker mibonline.org
Jim Reber (jreber@icbasecurities. com) is president and CEO of ICBA Securities, ICBA’s institutional, fixedincome broker-dealer for community banks. have to take a gigantic bite of prepaying risk. Starting yields are wholly dependent on the fixed-rate period and other variables, but they deserve a look. Clip coupons Even if you don’t own a floater, an easy-to-execute trade that will help limit your price volatility is “up-incoupon” securities. It doesn’t matter if they’re MBS, agencies, or munis: The bigger the stated interest rate, the greater the cash flow and the lower the duration. The best example of this strategy is a tax-free municipal bond that has a big stated interest rate, or “coupon.” It’s common to see a newly hatched security with a 4% rate that comes to market at an original issue price of 120 or more. This is a quality to be embraced. For one thing, the fact that the yield is tax-free makes the security less volatile than a taxable bond. If (and when it appears) interest rates rise, the large interest payments will further help keep the value of the bond from falling off the table. Do-it-yourself There’s another way to inject floating rate securities into your bond portfolio, and that ’s to build them yourself. It ’s a simple task to buy and own a collection of longduration municipal bonds — that ’s how they typically come to market. A recent innovation is the ability to execute an interest rate swap to instantly, or at some designated point in the future, turn the munis into floaters. Interest rate product providers are equipped to price out transactions whereby a community bank can convert a bond, a collection of bonds, or a subsector of your balance sheet into short-duration assets that will see their yields improve every time the Fed has a “policy adjustment.” Maybe the best news is that these transactions can now be executed in sizes that fit your community bank’s needs. How many rate hikes might we see this year? That’s the subject of myriad conversations around the board room, water cooler, and ALCOs. I’m pleased to report that investments built for rising rates can take on a variety of appearances and are fully accessible to your community bank. 35408 AD Community Bankers Association of Montana 2022_Craig_OT.indd 1 4/7/22 1:59 PM The Community Banker 11
GUEST ARTICLE More financial institutions are focusing on improving financial inclusion as the pandemic continues to expose inequalities in access to services. Some institutions have already worked underserved, and under-banked communities are actively engaged in solving the issue, but others might be wondering how to get started. The challenge is identifying how to best serve underbanked and underserved consumers to effectively meet their needs and build trust in a risk-responsible manner. Serving these markets often means filling a crucial role and providing a better alternative to existing services. In many under-banked markets, there is an accessibility issue. Many consumers do not have access to financial institutions’ branches and instead use check cashing and payday lender storefronts, which may be more common in their communities. And while their rates and fees are often exorbitant, these companies thrive by providing extended service hours and displaying clearly defined fee structures right at the counter or window. Financial institutions that can find ways to offer their services while avoiding barriers like extreme minimumbalance requirements and traditional banking hours will be much better positioned to connect with those who want — and need — equal access to financial institutions. Partnering for financial inclusion One strategy many financial institutions are now employing is partnering with fintech companies specializing in financial wellness and inclusion. In recent years, partnerships have been on the rise, with the financial institution placed in the forefront and the fintech company operating more behind the scenes. However, with many of the partnerships related to financial inclusivity or wellness, the roles are often reversed. A good example is the credit builder accounts offered by fintech company Chime. These accounts provide a credit card with initially limited capabilities that grow over time with the account holder, based on usage. Though there is an FDIC- or NCUA-insured financial institution behind these accounts, the service and card are provided — and branded — through Chime. While these partnerships can prove beneficial for both, there are obligations for each to consider, such as whether a product or service is the right fit for a particular customer or member. Most financial institutions have the expertise (and the data) to understand that even if a borrower is qualified for a loan or credit product, a wider view of other factors like asset and credit data could indicate that it may be too much of a debt burden for the applicant to handle responsibly. If not, fintech companies are only creating more of a burden on these underserved communities. Before considering a partnership with a fintech, it is important that financial intuitions have a very clear vision and understanding of their financial inclusion and wellness programs and what they hope to achieve. This means creating policies with well-defined, measurable goals and sticking to them. Financial institutions sometimes commit to a program without first defining goals or even what success How Financial Institutions Can Support Financial Inclusion By Terry Ammons, CPA, CISA, CTPRP, Partner, WipFli 12 The Community Banker mibonline.org
looks like and then attempt to implement procedures afterward. This often leads to a suboptimal outcome before it even starts, and the institution runs the risk of being accused of simply “virtue signaling” when it comes to its financial inclusion initiatives. Compliance, risk and regulatory concerns Financial institutions operate under specific regulatory standards, and fintechs must understand and appreciate these requirements because regulators can — and will — come for either of them if a problem occurs. Both should thoroughly vet potential partners to ensure they are in line with visions, expectations and compliance requirements needed for any program’s policy. This will make ongoing reporting and monitoring much easier for both sides because everyone will be aware of agreed-upon measurements (and who is accountable for what). For financial institutions, risk is always the major factor when it comes to loans and credit products. While all areas of banking have some level of inherent risk, most tend to be more frontloaded. For example, once a deposit account is confirmed and approved, it becomes only a profitability decision or concern (e.g., account limits/requirements, interest rates, fee and maintenance costs). This is not the case with lending or credit since the supporting financial institution will take on more risk with each new loan decision. Leveraging AI/ML technology Technology may be the answer for financial institutions wanting to be more inclusive in their decisions without drastically increasing their risk. Often, the best way to reach and serve today’s underbanked communities is through the right app or platform. Solutions that are quick with user-friendly interfaces and available anywhere, anytime can make banking much easier and much more accessible. When leveraged and monitored appropriately, technologies like artificial intelligence (AI) and machine learning (ML) solutions can further enhance banking experiences. These technologies can streamline lending processes for consumers while helping financial intuitions make better informed, more inclusive lending decisions. In most cases, the two fundamental questions regarding lending are “Can the borrower afford to pay it back?” and “Is this borrower an acceptable risk for the institution?” While traditional credit scoring has been the standard for years, fintech companies are increasingly helping to enhance and fill in the gaps often left open by this method. AI/ML technology that augments credit decisioning can help financial intuitions incorporate new, alternative credit data into these processes, allowing them to responsibly consider borrowers who may have lower credit scores but are still reasonable loan risks versus those who are not. However, these solutions come with some inherent risks that should be carefully considered prior to implementing them. They are designed from sophisticated decisioning models, leveraging proprietary algorithms, protocols and judgment to function. Unfortunately, this means they can be subject to bias, which could create problems — compromising a program’s intended purpose and/or function. It is vital that fintech companies offering these technologies are aware of the inherent risks and possible weak points for bias to creep in, while financial institutions must understand where and how much they are relying on these models for their financial inclusion programs. To ensure these platforms remain unbiased, financial institutions need to create comprehensive, stringent monitoring procedures to continuously assess these technologies. The scrutiny and demand for increased financial inclusivity are growing. Financial institutions and fintech companies are perfectly positioned to help close many of the financial inequality gaps that under-banked and underserved communities have faced for years. Financial institutions and their fintech partners that can step up and step in to reach out and meet the needs of these customers and members can establish themselves as trusted partners, creating deeper relationships and long-term opportunities for all sides. Often, the best way to reach and serve today’s under-banked communities is through the right app or platform. The Community Banker 13
COMPLIANCE Q&A By Bill Showalter, Senior Consultant, Young & Associates, Inc. SPRING 2022 Young & Associates provides banks and thrifts with support for their compliance programs, independent reviews, and in-bank training, as well as a full menu of management consulting, loan review, IT consulting, and policy systems. BSA. Q: We found that one of our customers is providing services that make it a money service business (MSB), but it is not registered. What should we do? A: The Financial Crimes Enforcement Network (FinCEN) states in its BSA Manual that registration with FinCEN, if required, and compliance with any state-based licensing requirements represent the most basic compliance obligations for MSBs. Therefore, it is reasonable and appropriate for a bank to require an MSB to provide evidence of compliance with such requirements, or to demonstrate that it is not subject to such requirements due to the nature of its financial services or its status exclusively as an agent of another MSB(s). FinCEN asserts that a bank should file a Suspicious Activity Report (SAR) if it becomes aware that a customer is operating in violation of the MSB registration or state licensing requirement. FinCEN also notes that there is no requirement in the BSA regulations for a bank to close an account that is the subject of a SAR. The decision to maintain or close an account should be made by bank management under standards and guidelines approved by its board of directors. HPA. Q: I am finding mixed messages as to whether the private mortgage insurance (PMI) disclosures are required for loans on investment rental properties. I have been going back and forth on this issue. Which is it? A: The Homeowners Protection Act (HPA) — there is no implementing regulation — covers only consumerpurpose loans (those for personal, family, or household purposes), so it does not apply to loans involving nonowner-occupied investment properties. A covered “residential mortgage transaction” is a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a singlefamily dwelling that is the principal residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling. TISA. Q: I’m comparing the fees disclosed on a Truth in Savings account disclosure to a monthly statement for the same deposit product. The account disclosure describes the fee as “A dormant account fee of $2.00 per month will be charged after three years of inactivity.” The description on the statement is “Service Charge.” Doesn’t the disclosed name of the fee have to be the same or similar enough for the consumer to determine what the fee is for? A: Yes, you are correct. The Official Staff Commentary on Regulation DD requires that financial institutions must use consistent terminology to describe terms or features required to be disclosed. The example given in the Commentary is that if an institution describes a monthly fee (regardless of account activity) as a “monthly service fee” in account-opening disclosures, the periodic statement and any change-in-term notices must use the same terminology that consumers can readily identify the fee. TILA. Q: We have a loan to a husband and wife, secured by their home. The wife is the only one on the deed and mortgage. However, our lending team gave both husband and wife rescission notices. But I thought it should be given only to one who is on the deed. Is this correct? 14 The Community Banker mibonline.org
Continued on page 16 A: Yes, that is the general understanding (though you might want to consult with the bank’s legal counsel to understand what is considered an ownership interest in your state). “Ownership interest” does not include inchoate rights such as dower (or curtesy, the male/ husband’s equivalent of dower) according to the Official Staff Commentary on Regulation Z. EFTA. Q: When crediting back an amount from an ACH dispute, we call the customer. If no contact is made, should a letter be sent? A: An attempted phone call does not “provide notice” to the customer. Yes, the bank is permitted to notify the customer either in writing or orally (other than if it finds no error), but the key is to notify them – not just try to notify them. Written notices (with copies to file) are generally a better way to document that a required notice was given. BSA. Q: We are in the process of developing an online account opening. We have a lot to do yet, but our core processor is making our go-live date next week. A: I am looking at the customer identification program (CIP) section of our BSA Policy and identification we require for in-person account opening. I am getting pushback about requiring secondary identification (ID), as it will slow the online opening process, and we are not sure if the product will even ask for a secondary ID. It initially will not be an issue because only existing non-business customers will be able to open accounts online, and the option to do so will be contained within online retail banking. We know the system will require a primary ID. But after we open the product up to new customers, it will be more crucial. I am trying to make the account opening process consistent across both channels. I am looking at the FFIEC BSA/AML Examination Manual, and it doesn’t require but does encourage banks to review more than one document for identification. Do you know how other banks are dealing with the secondary ID issue for online account opening? A: BSA requires a “risk-based” approach, and online account opening is generally considered a higher risk. As you noted, there are no specific guidelines for secondary ID requirements. Some banks require secondary IDs for online account opening and have not reported any issues. With respect to the online platform/system, the bank should ensure that it meets its CIP requirements. Before the bank opens this up to everyone, it may have to find a new way to do CIP. There are numerous companies out there that will do it electronically for the Closing SBA loans keeps doors open. Call 800.340.7304 to start www.holtandmon.com Your customers have never needed capital more than they do right now. Plus you need to offset narrowing margins by increasing noninterest fee income. SBA/USDA lending is the perfect answer. And ICBA recommends just one provider to make the process hassle-free: Holtmeyer & Monson. Give customers exactly what they need, at no net cost to your bank. Small businesses count on your expertise. You can count on ours. The Community Banker 15
Continued from page 15 If your bank does not have a formal preapproval program in place, this is a request for a prequalification. Preapprovals are reportable under HMDA, while prequalifications are not. bank, which can be used for online and offline account openings. The bank’s core processor can probably help find such a vendor. EFAA. Q: A customer brings in two checks to deposit into their account — one for $5,000 and one for $8,000. If we want to invoke a “large deposit” exception hold, does it apply only to the $8,000 check or the aggregated checks deposited on the same day? A: The latter, the “large deposit” exception, is applied to the aggregate of all checks deposited into a transaction account during a banking day. HMDA. Q: We have a request from a self-employed applicant who provided their tax returns but does not have a home lined up yet (no address). Is this considered a “preapproval” request? A: Maybe, depending on what your bank has in place. If you have a formal preapproval program that meets the criteria spelled out in the Official Staff Commentary on Regulation C, 12 CFR 1003.2(b), Comment 3. If your bank does not have a formal preapproval program in place, this is a request for a prequalification. Preapprovals are reportable under HMDA, while prequalifications are not. TILA/EFTA. Q: We would like to begin offering a reduced interest rate on consumer loans for automatic transfers for loan payments. This will not be a requirement for getting a loan but will be offered as an option for reducing the customer’s interest rate. We plan to discuss it with applicants, which will be disclosed in the note/disclosure. Are there any other regulations or disclosures we need to consider or provide? A: Two different federal regulations come into play here. One is Regulation Z. If the reduced interest rate will increase to its undiscounted level should the autopayment cease (due to consumer choice, insufficient funds, or some other reason), then this is considered a variable-rate loan and appropriate TIL variable-rate/ ARM disclosures must be given, even if the underlying interest rate is otherwise fixed. The other rule that could apply is Regulation E. If the automatic payment is to come from another financial institution, then the bank will need to obtain written permission from the consumer before beginning these auto-payments. While Regulation E exempts intrainstitutional transfers from this requirement (they are not considered “electronic fund transfers” under the regulation), many institutions go ahead and get written authorizations in this case, too. That way, lending personnel consider it just a routine part of the process regardless of payment source. Insider Credit. Q: An “insider” pledges collateral for a loan but will not be a borrower/ signer on the loan. Is this an “extension of credit” to the insider under Regulation O? Our exam team was hesitant to provide a definitive answer. A: The examiners may have been hesitant because the answer is, “It depends.” If the insider is merely putting up some collateral and will receive no benefit from the loan, then it is not an “extension of credit.” However, if the insider will benefit, then the “tangible economic benefit rule” in Regulation O comes into play, and the loan is considered an “extension of credit,” subject to all applicable Regulation O provisions (prior approval, nonpreferential terms, lending limits, etc.). Young & Associates provides banks and thrifts with support for their compliance programs, independent reviews, and in-bank training and a full menu of management consulting, loan review, IT consulting, and policy systems. 16 The Community Banker mibonline.org
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